**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 September 30, 2006





OR





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





For
      the
      transition period to .





**Commission
      file number 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  
o 
Non-accelerated
      filer   x




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





As
        of
        November 10, 2006, there were 29,022,979 shares of the registrant's
        common stock, $.001 par value, outstanding.













**INDEX**




**Page****PART
                I**
            **FINANCIAL
                INFORMATION**
            2Item
                1.
            Unaudited
                Condensed Financial Statements
            2Unaudited
                Condensed Balance Sheets
            2Unaudited
                Condensed Statements of Operations and Comprehensive Loss
            3Unaudited
                Condensed Statement of Changes in Stockholders' Equity
            4Unaudited
                Condensed Statements of Cash Flows
            5Notes
                to Unaudited Condensed Financial Statements
            6Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            15Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            22Item
                4.
            Controls
                and Procedures
            22**PART
                II**
            **OTHER
                INFORMATION**
            23Item
                1.
            Legal
                Proceedings
            23Item
                1A.
            Risk
                Factors
            23Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            23Item
                3.
            Defaults
                Upon Senior Securities
            23Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            23Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            23Signatures
            24Index
                of Exhibits Filed with this Report
            25












**Forward-Looking
      Statements**




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





· the
      development of our drug candidates;




· the
      regulatory approval of our drug candidates;




· our
      use
      of clinical research centers and other contractors;




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




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




· our
      ability to market any of our products;




· our
      history of operating losses; our ability to compete against other companies
      and
      research institutions;




· our
      ability to secure adequate protection for our intellectual property; our ability
      to attract and retain key personnel;




· availability
      of reimbursement for our product candidates;




· the
      effect of potential strategic transactions on our business; our ability to
      obtain adequate financing; and




· the
      volatility of our stock price.




These
      statements are often, but not always, made through the use of words or phrases
      such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe” “intend” and similar words or phrases. Accordingly, these
      statements involve estimates, assumptions and uncertainties that could cause
      actual results to differ materially from those expressed in them. Discussions
      containing these forward-looking statements may be found throughout this Form
      10-Q, including Part I, the section entitled “Item 2: Management's Discussion
      and Analysis of Financial Condition and Results of Operations.” These
      forward-looking statements involve risks and uncertainties, including the risks
      discussed below in Part II, Item 1A ** “Risk
      Factors,” that could cause our actual results to differ materially from those in
      the forward-looking statements. We undertake no obligation to publicly release
      any revisions to the forward-looking statements or reflect events or
      circumstances after the date of this document. The risks discussed below in
      Part
      II, Item 1A “Risk Factors” and elsewhere in this report should be considered in
      evaluating our prospects and future financial performance.




1





**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Unaudited Condensed Financial Statements**





**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      BALANCE SHEETS**




**September
                  30,**
              
              **December
                  31,****2006**
              
              **2005****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              33,326,069
              
              $
              17,082,521Short-term
                  investments
              
              
              6,620,574
              
              
              472,000Prepaid
                  expenses and other current assets
              
              
              174,723
              
              
              74,729Total
                  current assets
              
              
              40,121,366
              
              
              17,629,250Property
                  and equipment, net
              
              
              453,389
              
              
              76,496Other
                  assets
              
              
              -
              
              
              20,453Restricted
                  cash
              
              
              125,000
              
              
              -Total
                  assets
              
              $
              40,699,755
              
              $
              17,726,199**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              1,490,925
              
              $
              671,491Accrued
                  expenses
              
              
              2,483,558
              
              
              865,135Total
                  liabilities
              
              
              3,974,483
              
              
              1,536,626Commitments
                  and contingenciesStockholders'
                  equity:Common
                  stock; $0.001 par value 100,000,000 shares authorized; 28,983,273 and
                  22,348,655 shares issued and outstanding at September 30, 2006
                  and
                  December 31, 2005, respectively
              
              
              28,983
              
              
              22,349Additional
                  paid-in capital
              
              
              89,913,941
              
              
              34,400,345Accumulated
                  other comprehensive loss
              
              
              (112,000
              )
              
              (164,000
              )Deficit
                  accumulated during the development stage
              
              
              (53,105,652
              )
              
              (18,069,121
              )Total
                  stockholders' equity
              
              
              36,725,272
              
              
              16,189,573Total
                  liabilities and stockholders' equity
              
              $
              40,699,755
              
              $
              17,726,199




See
      accompanying notes to unaudited condensed financial
      statements.











2







**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**


**(Unaudited)**




**Three
                      Months
                      Ended**
                    **September
                      30,**
                  
                  **Nine
                        Months Ended****September
                      30,**
                  
                  **Cumulative**
                          **Period
                            from**
                          **December
                            6,**
                          **2002
                            (date of**
                          **inception)
                            to**
                          **September
                            30,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**
                  
                  **2006**Operating
                      expenses:Selling,
                      general and administrative
                  
                  $
                  3,440,436
                  
                  $
                  959,199
                  
                  $
                  7,000,719
                  
                  $
                  2,629,682
                  
                  $
                  13,834,301Research
                      and development
                  
                  
                  7,918,422
                  
                  
                  776,350
                  
                  
                  28,864,928
                  
                  
                  3,648,522
                  
                  
                  40,279,024Total
                      operating expenses
                  
                  
                  11,358,858
                  
                  
                  1,735,549
                  
                  
                  35,865,647
                  
                  
                  6,278,204
                  
                  
                  54,113,325Loss
                      from operations
                  
                  
                  (11,358,858
                  )
                  
                  (1,735,549
                  )
                  
                  (35,865,647
                  )
                  
                  (6,278,204
                  )
                  
                  (54,113,325
                  )Other
                      income (expense):Interest
                      income, net
                  
                  
                  507,347
                  
                  
                  36,012
                  
                  
                  892,099
                  
                  
                  86,074
                  
                  
                  1,090,880Other
                      expense, net
                  
                  
                  (46,291
                  )
                  
                  (9,440
                  )
                  
                  (62,983
                  )
                  
                  (19,577
                  )
                  
                  (83,207
                  )Total
                      other income
                  
                  
                  461,056
                  
                  
                  26,572
                  
                  
                  829,116
                  
                  
                  66,497
                  
                  
                  1,007,673**Net
                      loss**
                  
                  $
                  (10,897,802
                  )
                  $
                  (1,708,977
                  )
                  $
                  (35,036,531
                  )
                  $
                  (6,211,707
                  )
                  $
                  (53,105,652
                  )Net
                      loss per share, basic and diluted
                  
                  $
                  (0.38
                  )
                  $
                  (0.09
                  )
                  $
                  (1.37
                  )
                  $
                  (0.38
                  )Shares
                      used in computing net loss per share, basic and diluted
                  
                  
                  28,787,445
                  
                  
                  18,296,200
                  
                  
                  25,656,244
                  
                  
                  16,380,517Comprehensive
                      loss:Net
                      loss
                  
                  $
                  (10,897,802
                  )
                  $
                  (1,708,977
                  )
                  $
                  (35,036,531
                  )
                  $
                  (6,211,707
                  )Unrealized
                      gain (loss)
                  
                  
                  (16,000
                  )
                  
                  -
                  
                  
                  52,000
                  
                  
                  -Comprehensive
                      loss
                  
                  $
                  (10,913,802
                  )
                  $
                  (1,708,977
                  )
                  $
                  (34,984,531
                  )
                  $
                  (6,211,707
                  )


See
      accompanying notes to unaudited condensed financial statements.








3




**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





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


**(Unaudited)**





Nine
      months ended September 30, 2006


**Common
                    stock****Shares**
                
                
                **Amount**
                
                
                **Additional
                    paid-in capital**
                
                
                **Common
                    stock to be Issued**
                
                
                **Accumulated
                    other comprehensive income (loss)**
                
                
                **Deficit
                    accumulated during development stage**
                
                
                **Total
                    stockholders' equity**Balance
                    at January 1, 2006
                
                
                22,348,655
                
                $
                22,349
                
                $
                34,400,345
                
                $
                --
                
                $
                $(164,000
                )
                $
                (18,069,121
                )
                $
                16,189,573Issuance
                    of shares upon exercise of warrants, options and restricted
                    stock
                
                
                730,832
                
                
                731
                
                
                928,529
                
                
                --
                
                
                --
                
                
                --
                
                
                929,260Stock-based
                    compensation of employees
                  amortized
                    over vesting period of stock options
                
                
                --
                
                
                --
                
                
                6,277,914
                
                
                --
                
                
                --
                
                
                --
                
                
                6,277,914Proceeds
                    from registered direct placement,
                  net
                    of $2,881,857 in fees
                
                
                4,701,100
                
                
                4,701
                
                
                37,113,604
                
                
                --
                
                
                --
                
                
                --
                
                
                37,118,305Share-based
                    compensation to
                  nonemployees
                    for services
                
                
                17,050
                
                
                17
                
                
                421,474
                
                
                --
                
                
                --
                
                
                --
                
                
                421,491Issuance
                    of shares in partial
                  consideration
                    of milestone payment
                
                
                67,068
                
                
                67
                
                
                493,553
                
                
                
                
                
                --
                
                
                --
                
                
                493,620Inex
                    license agreement -
                  1,118,568
                    shares issued
                
                
                1,118,568
                
                
                1,118
                
                
                10,278,522
                
                
                --
                
                
                --
                
                
                --
                
                
                10,279,640Net
                    loss
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (35,036,531
                )
                
                (35,036,531
                )Unrealized
                    gain on marketable securities
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                52,000
                
                
                --
                
                
                52,000Balance
                    at September 30, 2006
                
                
                **28,983,273**
                
                $
                **28,983**
                
                $
                **89,913,941**
                
                $
                **--**
                
                **$**
                **(112,000**
                **)**
                **$**
                **(53,105,652**
                **)**
                $
                **36,725,272**


See
      accompanying notes to unaudited condensed financial statements.




4







**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**Cumulative****Period
                          from****Nine
                          Months
                          Ended****September
                        30,**
                    
                    **December
                        6, 2002**
                      ****(date
                        of inception)******to
                        September 30,****2006**
                    
                    **2005**
                    
                    **2006****Cash
                        flows from operating activities:**Net
                        loss
                    
                    $
                    (35,036,531
                    )
                    $
                    (6,211,707
                    )
                    $
                    (53,105,652
                    )Adjustments
                        to reconcile net loss to net cash used in operating
                        activities:Depreciation
                    
                    
                    69,503
                    
                    
                    22,799
                    
                    
                    141,489Loss
                        on sale of equipment
                    
                    
                    41,759
                    
                    
                    -
                    
                    
                    41,759Stock-based
                        compensation of employees
                    
                    
                    6,277,914
                    
                    
                    621,173
                    
                    
                    7,641,733Share-based
                        compensation to nonemployees for services
                    
                    
                    421,491
                    
                    
                    44,777
                    
                    
                    976,189Services
                        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
                    
                    
                    -
                    
                    
                    148,838
                    
                    
                    249,750Issuance
                        of shares in partial consideration for license agreement
                    
                    
                    10,279,640
                    
                    
                    -
                    
                    
                    10,779,640Issuance
                        of shares in partial consideration of milestone payment
                    
                    
                    493,620
                    
                    
                    -
                    
                    
                    493,620Changes
                        in operating assets and liabilities:(Increase)
                        decrease in prepaid expenses and other assets
                    
                    
                    (101,114
                    )
                    
                    (161,072
                    )
                    
                    (196,296
                    )Increase
                        (decrease) in accounts payable
                    
                    
                    819,434
                    
                    
                    (292,010
                    )
                    
                    1,490,925Increase
                        (decrease) in accrued and other current liabilities
                    
                    
                    1,618,422
                    
                    
                    (38,626
                    )
                    
                    2,483,558Net
                        cash used in operating activities
                    
                    
                    (15,115,862
                    )
                    
                    (5,865,828
                    )
                    
                    (28,754,840
                    )**Cash
                        flows from investing activities:**Purchase
                        of property and equipment
                    
                    
                    (490,916
                    )
                    
                    (6,856
                    )
                    
                    (639,398
                    )Proceeds
                        from sale of equipment
                    
                    
                    2,760
                    
                    
                    -
                    
                    
                    2,760Purchase
                        of equity securities
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (636,000
                    )Purchase
                        of marketable securities
                    
                    
                    (6,075,000
                    )
                    
                    -
                    
                    
                    (6,075,000
                    )Restricted
                        cash
                    
                    
                    (125,000
                    )
                    
                    -
                    
                    
                    (125,000
                    )Net
                        cash used in investing activities
                    
                    
                    (6,688,156
                    )
                    
                    (6,856
                    )
                    
                    (7,472,638
                    )**Cash
                        flows from financing activities:**Proceeds
                        from issuances of notes payable to stockholders
                    
                    
                    -
                    
                    
                    -
                    
                    
                    801,619Collection
                        of subscription receivable
                    
                    
                    -
                    
                    
                    -
                    
                    
                    4,000Repayment
                        of notes payable to stockholders
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (651,619
                    )Proceeds
                        from private placements of preferred and common stock, net
                    
                    
                    37,118,305
                    
                    
                    4,678,066
                    
                    
                    67,927,272Proceeds
                        from exercise of warrants and options
                    
                    
                    929,260
                    
                    
                    433,629
                    
                    
                    1,472,275Net
                        cash provided by financing activities
                    
                    
                    38,047,565
                    
                    
                    5,111,695
                    
                    
                    69,553,547Net
                        increase in cash and cash equivalents
                    
                    
                    16,243,548
                    
                    
                    (760,989
                    )
                    
                    33,326,069Cash
                        and cash equivalents, beginning of period
                    
                    
                    17,082,521
                    
                    
                    6,584,361
                    
                    
                    --Cash
                        and cash equivalents, end of period
                    
                    $
                    33,326,069
                    
                    $
                    5,823,372
                    
                    $
                    33,326,069Supplemental
                        disclosures of cash flow data:Cash
                        paid for interest
                    
                    $
                    1,577
                    
                    $
                    1,238
                    
                    $
                    41,030Supplemental
                        disclosures of noncash financing activities:Common
                        stock issued for repayment of debt
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    150,000Unrealized
                        gain/(loss) on marketable securities
                    
                    $
                    52,000
                    
                    $
                    -
                    
                    $
                    (112,000
                    )Common
                        stock issued to employees for services rendered in 2004
                    
                    $
                    -
                    
                    $
                    249,750
                    
                    $
                    -




See
      accompanying notes to unaudited condensed financial
      statements.


5








**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**








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





*Basis
      of Presentation*





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





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





*Use
      of Management's Estimates*




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





*Segment
      Reporting*




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





*Loss
      Per Share*





Basic
      net
      loss per common share is calculated by dividing net loss by the weighted-average
      number of common shares outstanding for the period. Diluted net loss per common
      share is the same as basic net loss per common share, since potentially dilutive
      securities from stock options, stock warrants, restricted stock and convertible
      preferred stock would have an antidilutive effect because the Company incurred
      a
      net loss during each period presented. The number of shares potentially issuable
      at September 30, 2006 and 2005 upon exercise or conversion that were not
      included in the computation of net loss per share totaled 6,380,137 and
      4,172,063, respectively.




*Cash
      and Cash Equivalents and Short-term Investments*




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




*Concentration
      of Risk*




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




**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**




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




6


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





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
      September 2006, the SEC’s staff issued Staff Accounting Bulletin (SAB)
      No. 108 “Considering the Effects of Prior Year Misstatements when
      Quantifying Misstatements in Current Year Financial Statements.” This Bulletin
      provides guidance on the consideration of the effects of prior year
      misstatements in quantifying current year misstatements for the purpose of
      a
      materiality assessment. The guidance in this Bulletin must be applied to
      financial reports covering the first fiscal year ending after November 15,
      2006. The Company is currently evaluating the guidance in this
      Bulletin.








**NOTE
      3. LIQUIDITY AND CAPITAL RESOURCES**





The
      Company reported a net loss of $10.9 million and $35.0 million, respectively,
      for the three and nine months ended September 30, 2006. The net loss from date
      of inception, December 6, 2002 to September 30, 2006 amounted to $53.1 million.
      The Company's operating activities have used $28.8 million in cash since its
      inception.





The
      Company has financed its operations since inception primarily through equity
      and
      debt financing. During the nine months ended September 30, 2006, the Company
      had
      a net increase of $17.1 million in cash and cash equivalents. This increase
      primarily resulted from net proceeds of $37.1 million raised through the sale
      of
      common stock in May 2006, and $0.9 million in proceeds from stock option and
      warrant exercises, offset by net cash used in operating activities of $15.1
      million and net cash used in investing activities of $6.7 million for the nine
      months ended September 30, 2006. Total cash and cash equivalents as of September
      30, 2006 were $33.3 million compared to $17.1 million at December 31,
      2005.





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





**NOTE
      4. STOCKHOLDERS' EQUITY**





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




In
      October 2003, the Company's Board of Directors approved and adopted the 2003
      Stock Option Plan (the “2003 Plan”). The 2003 Plan authorizes a total of
      1,410,068 shares of common stock for issuance. Following the adoption of the
      Company's 2004 Stock Incentive Plan (the “2004 Plan”) in September 2004, no
      grants or awards have been made under the 2003 Plan. The Company has no current
      intention of issuing future awards under the 2003 Plan. Instead, the
      Company intends to make equity incentive awards only under the 2004 Plan. At
      the
      May 9, 2006 Annual Meeting, the Company's Stockholders also ratified and
      approved the 2003 Plan.





7


In
      September 2004, the Company's Board of Directors approved and adopted the 2004
      Plan, which initially reserved 2,500,000 shares of common stock for issuance.
      On
      March 31, 2006, the Board approved, subject to stockholder approval, an
      amendment to the 2004 Plan to increase the total number of shares authorized
      for
      issuance thereunder to 4,000,000. At the May 9, 2006 Annual Meeting, the
      Company's Stockholders also ratified and approved the 2004 Plan and the
      amendment to the 2004 Plan.





At
      the
      May 9, 2006 Annual Meeting, the Company's Stockholders also ratified and
      approved the Company's 2006 Employee Stock Purchase Plan (the “2006 Plan”). The
      2006 Plan was adopted, subject to stockholder approval, by the Company's Board
      of Directors on March 31, 2006. The 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. There will be a maximum of 750,000 shares of common
      stock
      available for purchase under the 2006 Plan.




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




10,000
      restricted stock awards were granted to a Board member and vested immediately
      upon the approval of the award by shareholders during the Annual Meeting held
      on
      May 9, 2006.




484,887
      restricted stock awards were granted to the Company's Chief Executive Officer
      in
      2006. Of the restricted stock awards granted 85,000 shares vest in equal
      increments of 42,500 shares each on November, 1 2006 and November, 1 2007,
      325,000 shares vest in equal increments of 162,500 shares each on May 19, 2007
      and May 19, 2008 and 57,613 shares vest on January 1, 2007, 4,313 vest on
      February 15, 2007, 3,765 vest on February 26, 2007 and 9,196 vest on July 20,
      2007.





In
      2006
      the Board of Directors granted 22,000 restricted stock awards to the Company's
      senior vice president and Chief Medical Officer of which 11,000 shares vest
      on
      October 13, 2006 and October 13, 2007.




In
      2006
      the Board of Directors granted 7,377 restricted stock awards to the Company's
      vice president and Chief Business Officer of which 100% vest on January 1,
      2007.




A
      summary
      of the status of the Company's restricted stock awards as of December 31, 2005
      and changes during the nine months ended September 30, 2006 is as
      follows:




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




As
      of
      September 30, 2006, we estimate that there is $4.1 million in total,
      unrecognized compensation costs related to employee nonvested restricted stock
      awards, which is expected to be recognized over a weighted average period of
      1.37 years.




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




In
      applying the modified prospective transition method of SFAS No. 123R, the
      Company estimated the fair value of each option award is estimated on the date
      of grant using the Black-Scholes option-pricing model. As allowed by SFAS
      No. 123R for companies with a short period of publicly traded stock
      history, our estimate of expected volatility is based on the average expected
      volatilities of a sampling of five companies with similar attributes to our
      Company, including industry, stage of life cycle, size and financial leverage.
      As the Company has so far only awarded “plain vanilla options” as described by
      the SEC's Staff Accounting Bulletin No. 107, the Company used the “simplified
      method” for determining the expected life of the options granted. This method is
      allowed until December 31, 2007, after which the Company will be required to
      adopt another method to determine expected life of the option awards. The
      risk-free rate for periods within the contractual life of the option is based
      on
      the U.S. treasury yield curve in effect at the time of grant valuation. SFAS
      No. 123R does not allow companies to account for option forfeitures as they
      occur. Instead, estimated option forfeitures must be calculated upfront to
      reduce the option expense to be recognized over the life of the award and
      updated upon the receipt of further information as to the amount of options
      expected to be forfeited. Based on our historical information, the Company
      currently estimates that 10% annually of our stock options awarded will be
      forfeited. For options granted while the Company was a nonpublic entity, the
      Company applied the prospective method in which the awards that were valued
      under the minimum value method for proforma disclosure purposes will continue
      to
      be expensed using the intrinsic value method of APB 25.




8


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





*Share-based
      Compensation* .
      The
      Company currently awards stock option grants under its 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
      September 30, 2006 and changes in outstanding options in the nine months then
      ended, all of which are at fixed prices:




NUMBER
                  OF SHARES SUBJECT TO OPTIONS OUTSTANDING
              
              WEIGHTED AVERAGE
                  EXERCISE PRICE PER SHARE
              
              WEIGHTED
                  AVERAGE REMAINING CONTRACTUAL TERM
                (in
                  years)
              
              AGGREGATE
                  INTRINSIC VALUEOutstanding
                  January 1, 2006
              
              
              2,452,887
              
              $
              1.01Options
                  granted
              
              
              1,758,179
              
              
              5.72Options
                  cancelled
              
              
              (71,274
              )
              
              3.58Options
                  exercised
              
              
              (407,538
              )
              
              1.10Outstanding
                  September 30, 2006
              
              
              3,732,254
              
              
              3.17
              
              
              8.4
              
              $
              14,009,164Exercisable
                  at September 30, 2006
              
              
              1,212,971
              
              $
              1.34
              
              
              7.6
              
              $
              6,698,960





The
      total
      aggregate intrinsic value of stock options exercised during the three and nine
      months ended September 30, 2006 was $0.5 million and $3.2 million, respectively.
      Total stock-based compensation was approximately $3.6 million and $6.3 million
      of compensation cost related to employee stock options and restricted stock
      recognized in the operating results for the three and nine months ended
      September 30, 2006, compared to approximately $206,000 and $621,000 of
      share-based compensation expense recognized in the same periods for 2005. As
      of
      September 30, 2006, we estimate that there was $13.7 million in total,
      unrecognized compensation costs related to non-vested employee share based
      compensation arrangements, which is expected to be recognized over a weighted
      average period of 1.86 years.





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






**Number
                of Shares Subject to Options**
            
            
            **Weighted
                Average Remaining Contractual Life of Options**
            
            
            **Number
                of Options****Exercise
                Price**
            
            
            **Outstanding**
            
            
            **Outstanding**
            
            
            **Exercisable**$  
                0.07 - $ 1.69
            
            
            1,751,672
            
            
            7.74
                yrs.
            
            
            1,074,036$  
                2.17 - $ 4.75
            
            
            1,397,582
            
            
            8.85
                yrs.
            
            
            136,935$ 
                5.10 - $ 11.81
            
            
            583,000
            
            
            9.35
                yrs.
            
            
            2,000$
                0.07 - $ 11.81
            
            
            3,732,254
            
            
            8.4
                yrs
            
            
            1,212,971










9





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





**Three
                  Months Ended September 30, 2005**
              
              **Nine
                  Months Ended**
                **September
                  30, 2005**Net
                  loss, as reported
              
              $
              (1,708,977
              )
              $
              (6,211,707
              )Add:
                  Total stock-based employee compensation cost determined under intrinsic
                  value method for stock options granted under APB No.25
              
              
              126,255
              
              
              378,767Deduct:
                  Total stock-based employee compensation expense determined under
                  the fair
                  value method under SFAS No.123
              
              
              (253,093
              )
              
              (686,016
              )Pro
                  forma net loss
              
              $
              (1,835,815
              )
              $
              (6,518,956
              )Loss
                  per share of common stock:
              
              $
              (0.10
              )
              $
              (0.40
              )Basic
                  - as reported
              
              $
              (0.09
              )
              $
              (0.38
              )







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




**Three Months**
                **Ended September 30,
                  2006**
              
              **Nine Months**
                **Ended September 30,
                  2006**Research
                  and development
              
              
              1,590
              
              
              2,778Selling,
                  general and administrative
              
              
              2,051
              
              
              3,500Total
                  share-based compensation expense related to employee stock
                  options
              
              $
              3,641
              
              $
              6,278








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





**Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005*****Employee
                  stock options***Risk-free
                  interest rate
              
              
              5.01
              %
              
              3.5%
                  -4.50
              %
              
              5.01
              %
              
              4.5
              %Expected
                  life (in years)
              
              
              6.0
              
              
              8.0
              
              
              5.0
                  - 6.0
              
              
              8.0Volatility
              
              
              0.7
              
              
              1.04
              
              
              0.7
              
              
              0.87-1.06Dividend
                  Yield
              
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %***Employee
                  stock purchase plan***Risk-free
                  interest rate
              
              
              5.16%
                  - 5.24
              %
              
              -
              
              
              5.16%
                  - 5.24
              %
              
              -Expected
                  life (in years)
              
              
              0.5
                  - 2
              
              
              -
              
              
              0.5
                  - 2
              
              
              -Volatility
              
              
              0.67
                  - 1.10
              
              
              -
              
              
              0.67
                  - 1.10
              
              
              -Dividend
                  Yield
              
              
              0
              %
              
              -
              
              
              0
              %
              
              -





10


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





*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
      September 30, 2006, the Company had issued no shares under the 2006 Plan as
      the
      first purchase period commenced on July 1, 2006 and the first purchase under
      the
      plan will occur on December 31, 2006. For the three and nine months ended
      September 30, 2006, the total stock-based compensation expense recognized
      related to the 2006 Plan under SFAS 123(R) was $47,000.




*Non-EmployeeStock
      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 option pricing model to determine
      the fair value of such awards.  For the three and nine months ended
      September 30, 2006, the Company recognized $0.2 million of stock-based
      compensation expense related to stock options held by non-employee
      consultants.




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




NUMBER
                  OF
                SHARES SUBJECT
                TO
                  WARRANTS
                OUTSTANDING
              
              WEIGHTED-AVERAGE
                EXERCISE
                  PRICEWarrants
                  outstanding January 1, 2006
              
              
              2,448,982
              
              $
              3.31Warrants
                  exercised
              
              
              (313,294
              )
              
              1.85Warrants
                  cancelled
              
              
              (2,069
              )
              
              1.85Warrants
                  outstanding September 30, 2006
              
              
              2,133,619
              
              $
              3.53





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





On
      April
      22, 2005, the Company completed a private placement of 3,916,082 shares of
      its
      common stock at a price of $1.28 per share, resulting in gross proceeds of
      approximately $5.0 million. In connection with the private placement, the
      Company 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 the Company
      may, at the Company’s option, redeem the warrants after such time that the
      average closing price of its common stock exceeds $3.14 per share for a 30-day
      period, which condition was satisfied in August 2005.  Accordingly, the
      Company may, at its 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, the Company 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. The Company also
      incurred approximately $14,000 of legal expenses for the private
      placement.





11


During
      the three and nine months ended September 30, 2006, the Company issued 156,371
      and 730,832 shares of common stock, respectively, upon the exercise of warrants,
      stock options and restricted stock grants issuances. Of these shares issued,
      97,778 and 417,538 related to the exercise of stock options and vesting of
      restricted stock grants during the three and nine months ended September 30,
      2006, respectively including the issuance of 10,000 shares of common stock
      upon
      vesting. The exercises of these derivative securities resulted in aggregate
      net
      proceeds of $929,260.





*Common
      stock issuances* During
      the nine months ended September 30, 2006, the Company issued 1,202,686 shares
      of
      common stock as partial consideration for license agreements, milestone payments
      and transaction fees as follows:





·
            The
                Company issued 1,118,568 shares to Inex Pharmaceuticals for partial
                consideration of the $11.5 million upfront license fee related to
                the
                transaction on May 6, 2006. The Company paid Inex $10.0 million in
                cash
                and the remaining fee was paid in shares of common stock.





·
            The
                Company also issued 67,068 shares as partial consideration for a
                $1.0
                million milestone reached under the Inex license agreement in the
                third
                quarter of 2006. The Company paid Inex $500,000 in cash and the remainder
                was paid in shares of common stock.





·
            The
                Company also paid a financial advisor a fee of $300,000, of which
                $100,000
                was satisfied by issuing 17,050 shares of common stock, for services
                rendered in connection with the Inex
                transaction.





See
      Note 8 for further details on the issuance of these shares.




**NOTE
      5. SHORT-TERM INVESTMENTS**





On
      September 30, 2006, the Company had $6,620,574 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.





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. As of December 31, 2005, the market value
      of the securities was $472,000. The market value of these shares on September
      30, 2006, was $524,000 and for the nine months ended September 30, 2006, the
      Company had an unrealized gain of $52,000 and since the original purchase in
      October 2004, the Company has had an unrealized loss of $112,000.





At
      September 30, 2006, the Company had $6,096,574 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 September 30, 2006.





**NOTE
      6. RESTRICTED CASH**





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





**NOTE
      7. COMMITMENTS**





The
      Company entered into a written three year employment agreement with its
      President and Chief Executive Officer dated November 1, 2003. This agreement
      was
      amended in December 2005 to provide for an employment term that expires in
      November 2008. The aggregate amount of gross salary compensation to be provided
      over the remaining term of the agreement amounted to approximately $549,500
      at
      September 30, 2006.




The
      Company entered into a written two year employment agreement with its Vice
      President, Chief Business Officer on January 25, 2004. This agreement was
      amended in December 2005 and now provides for an employment term that expires
      in
      November 2008. The aggregate amount of gross salary compensation to be provided
      over the remaining term of the agreement amounted to approximately $400,000
      at
      September 30, 2006.





12


The
      Company entered into a written three year employment agreement with its Senior
      Vice President and Chief Medical Officer on October 21, 2004. This agreement
      was
      amended in October 2006 and now provides for an employment term that expires
      in
      November 2008. The aggregate amount of gross salary compensation to be provided
      for over the remaining term of the agreement amounted to approximately $708,000
      at September 30, 2006.





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 $1.6 million on September 30,
      2006. The Company will also make total cash payments of approximately $30,000
      for the three months remaining on a lease for the previous headquarters at
      400
      Oyster Point Boulevard in South San Francisco, California, which the Company
      has
      expensed and recorded in accrued liabilities as of September 30, 2006, due
      to
      the fact that the Company ceased to use the 400 Oyster Point property in the
      third quarter of fiscal 2006.


**NOTE
        8. INEX TRANSACTION**
 
 On
        May 6,
        2006, the Company entered into a series of related agreements with Inex
        Pharmaceuticals Corporation, a Vancouver, British Columbia-based biotechnology
        company. Pursuant to a license agreement with Inex, the Company received
        an
        exclusive, worldwide license to patents, technology and other intellectual
        property relating to three product candidates held by Inex: Marqibo (vincristine
        sulfate) Sphingosomal Injection, sphingosome encapsulated vinorelbine and
        sphingosome encapsulated topotecan. Under the license agreement, the Company
        also received an exclusive, worldwide sublicense to other patents and
        intellectual property relating to these product candidates held by the
        University of Texas M.D. Anderson Cancer Center, or MDACC. In addition, the
        Company entered into a sublicense agreement with Inex and the University
        of
        British Columbia, or UBC, which licenses to Inex other patents and intellectual
        property relating to the technology used in Marqibo, sphingosome encapsulated
        vinorelbine and sphingosome encapsulated topotecan. Further, Inex assigned
        to
        the Company its rights under a license agreement with Elan Pharmaceuticals,
        Inc., from which Inex had licensed additional patents and intellectual property
        relating to the three sphingosomal product candidates. The Company also acquired
        certain laboratory equipment having a fair value of approximately $153,000
        pursuant to an asset purchase agreement which were capitalized and are included
        in the Company’s property and equipment on the condensed balance sheet.
        Consistent with the Company’s policy, all acquired technology will be expensed
        in the period of the transaction unless the Company concludes that there
        is a
        possible alternative future use for the acquired technology in the Company’s
        R&D projects or otherwise.
  In
        consideration for the rights and assets acquired from Inex, the Company paid
        to
        Inex aggregate consideration of $11.5 million, consisting of $1.5 million
        in
        cash and 1,118,568 shares of its common stock. The number of shares of common
        stock issued was determined by dividing $10 million by $8.94, which was the
        weighted average price of the Company's common stock during the 20 trading
        days
        prior to the parties' March 16, 2006 letter of intent relating to the
        transaction.  Upon signing the March 16, 2006 letter of intent, the Company
        and Inex entered into an escrow agreement in which the Company deposited
        with the Escrow Agent $500,000 in cash and 111,857 shares of its common stock
        and Inex deposited with the Escrow Agent $200,000 in cash. The date of this
        escrow agreement was determined to be the commitment date for the Inex agreement
        as the Company considered the escrow agreement to be a performance commitment
        under EITF 96-18. Accordingly, the 1,118,568 shares given as partial
        payment for the license agreement were valued as the closing price of Hana
        common stock on March 16, 2006 of $9.19. Accordingly, the Company
        recorded an
        additional $280,000 of transaction expense, net of fixed assets acquired,
        as the
        fair market value of the share price on the commitment date was higher than
        the
        weighted average price of the Company's common stock during the 20 trading
        days
        prior to the parties' March 16, 2006 letter of intent relating to the
        transaction. The Company also agreed to pay to Inex a royalty on net sales
        of
        the licensed products as well as upon the achievement of specified development
        and regulatory milestones and up to a maximum aggregate amount of $30.5 million
        for all product candidates. At the Company's election, the future milestone
        payments may be paid in shares of our common stock.  In addition, the
        Company assumed all of Inex's royalty, milestone and other payment obligations
        owing to its licensors relating to the intellectual property underlying the
        three product candidates. The milestones and other payments may include annual
        license maintenance fees of up to $155,000, as well as $2.5 million in milestone
        payments.




In
        consideration for the services of a financial advisor in connection with
        this
        transaction, the Company paid the financial advisor aggregate consideration of
        $300,000, of which $100,000 was paid in cash and the remainder was paid by
        issuing 17,050 shares of common stock. The number of shares of common stock
        issued was determined by a value of $11.73 per share, which was the weighted
        average price of the Company's common stock during the 10 trading days prior
        to
        the closing date of the Inex license agreement on May 6, 2006. The shares
        were
        valued at the closing price on May 8, 2006 of $10.90 as this is the date
        that
        Canaccords performance obligation was satisfied, and the Company recorded
        $186,000 in expense for the issuance of the 17,050 shares of common stock
        to the
        financial advisor.
 
 On
        August
        23, 2006, the Company reached a milestone by dosing the first patient in
        a phase
        I trial for AlocrestTM *(vinorelbine tartrate liposomers injection),* one
        of
        the product candidates acquired in the Inex license agreement. Upon reaching
        the
        milestone, the Company paid to Inex (or its assignees) aggregate consideration
        of $1.0 million, consisting of $500,000 in cash and 67,068 shares of common
        stock. The
        number of shares of common stock issued was determined by dividing $500,000
        by
        $7.46, which was the weighted average price of the Company's common stock
        during
        the 20 trading days prior to the milestone date of August 23, 2006. The shares
        were valued at $7.36, which was the closing price on August 23, 2006, as
        this
        was the date to milestone performance obligation was satisfied, and the Company
        subsequently recorded $494,000 in expense for the issuance of the 67,068
        shares
        of common stock to Inex.





13


**NOTE
        9. SUBSEQUENT EVENTS**
 
 On
        October 11, 2006, the Company entered into a Research and License Agreement
        (the
“Agreement”) with the Albert Einstein College of Medicine of Yeshiva University,
        a division of Yeshiva University (the “College”). Pursuant to the Agreement, the
        Company acquired an exclusive, worldwide, royalty-bearing license to certain
        patent applications, and other intellectual property relating to topical
        menadione, a preclinical pharmaceutical product candidate being developed
        for
        the prevention and treatment of skin rash associated with the use of epidermal
        growth factor receptor inhibitors in the treatment of certain cancers. In
        consideration for the license, the Company agreed to issue to the College
        a
        number of shares of its common stock shares having an aggregate value of
        $150,000, valued at a per share price of $7.36, the closing price of the
        Company’s common stock on October 11, 2006. In addition, the Company also agreed
        to make a cash payment within 30 days of the date of the Agreement, and to
        pay
        annual license maintenance fees. Further, the Company agreed to make milestone
        payments in the aggregate amount of $2,750,000, payable in cash or stock,
        upon
        the achievement of various clinical and regulatory milestones, as described
        in
        the Agreement. The Company also agreed to make royalty payments to the College
        on net sales of any products covered by a claim in any licensed patent. The
        Company may also grant sublicenses to the licensed patents and the proceeds
        resulting from such sublicenses will be shared with the College.




14





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




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





**Overview**


We
        are a
        South San Francisco, CA-based biopharmaceutical company that acquires, develops,
        and commercializes innovative products to advance cancer care. We are committed
        to creating value by building a world-class team, accelerating the development
        of lead product candidates, expanding our pipeline by being the partner of
        choice, and nurturing a unique company culture.


We
      currently have seven products in development:





·
            *Zensana*TM*(ondansetron
                HCI) Oral Spray*-*Bioequivalent
                to 8mg Oral Zofran*®*Tablet
                with Multidose Convenience and Desirable Route of Administration.*We
                believe that Zensana, which we licensed from NovaDel Pharma, Inc.
                in
                October 2004, is the only multidose oral spray**product
                candidate currently in development which utilizes a micro mist spray
                technology to deliver full doses of ondansetron to patients**experiencing
                chemotherapy, radiation, and post-operative associated nausea and
                vomiting. Ondansetron, a selective blocking agent of the hormone
                serotonin, is a**Food
                and Drug Administration, or FDA, approved drug that is commonly used
                in
                tablet form to prevent chemotherapy- and radiation-induced**and
                post-operative nausea and vomiting. Many
                patients requiring antiemetic therapy experience dysphagia, a discomfort
                or difficulty swallowing tablets, due to mouth and throat sores,
                inflammation, or dry mouth. Hana believes that the convenience of
                drug**delivery
                via an oral spray may offer an attractive alternative to tablets
                and other
                forms of ondansetron.We**completed
                certain limited clinical trials of Zensana related to bioequivalence
                and
                bioavailability in early 2006, and in June 2006 we filed a**New
                Drug Application, or NDA, under Section 505(b)(2) of the Food, Drug
                and
                Cosmetic Act. Our NDA was accepted for review by the**FDA
                in August 2006. If approved by the FDA, we intend to commercially
                launch
                Zensana in the United States in
                2007.




·
            *Marqibo**Ò**(vincristine sulfate liposomes injection) - A Novel Targeted Anti-Cancer
                  Compound for Acute Lymphoblastic Leukemia and Non-Hodgkin’s
                  Lymphoma.*Marqibo, which we licensed from Inex Pharmaceuticals Corporation
                  in May
                  2006, is a novel, targeted sphingosome encapsulated formulation
                  of the
                  FDA-approved cancer drug vincristine. In August 2006, we initiated
                  a
                  multi-center Phase II clinical trial of Marqibo in patients with
                  relapsed
                  or refractory acute lymphoblastic leukemia, or ALL. The primary
                  objective
                  of this Phase II open-label study is to assess efficacy of weekly
                  doses of
                  Marqibo plus pulse dexamethasone as measured by complete response
                  rate.
                  Secondarily, this Phase II trial will also evaluate safety and
                  disease-free survival. We expect to enroll up to 44 patients in
                  this
                  trial.  Based on clinical trials in over 600 patients to date, as
                  well as the recently-initiated Phase II trial, we intend to request
                  regulatory authorization to commence a registrational clinical
                  trial of
                  Marqibo in hematological malignancies with a Special Protocol Assessment
                  (SPA) in the first half of 2007.
              .




·
            *Talvesta
                (talotrexin) - A Novel Antifolate for Solid and Hematological
                Malignancies.*Talvesta,
                which we licensed from Dana-Farber Cancer Institute, Inc. and Ash
                Stevens,
                Inc. in December 2002, is a novel antifolate drug candidate under
                development for treatment of various types of tumors. Talvesta has
                demonstrated enhanced antitumor activity in a broad spectrum of cancer
                models by targeting the enzyme DHFR to prevent DNA synthesis in tumor
                cells and inhibit tumor growth. Preclinical studies performed by
                the
                Dana-Farber Cancer Institute, Inc. and the National Cancer Institute
                suggest that Talvesta, as compared to methotrexate, the most widely
                used
                antifolate, enters into cells up to 10 times more efficiently and
                demonstrates 10- to 100-fold more potency in overcoming polyglutamation,
                a
                well-established mechanism of antifolate resistance. Talvesta also
                binds
                more tightly to its anti-tumor target DHFR, which we believe may
                further
                inhibit tumor growth. We commenced a Phase I clinical trial in solid
                tumors in February 2004, a Phase I/II clinical trial in non-small
                cell
                lung cancer (“NSCLC”) in March 2005, and a Phase I/II clinical trial in
                ALL in May 2005, of which the Phase II portion was started in October
                2006. In May 2006, the FDA approved our application for orphan drug
                status
                of Talvesta for the treatment of
                ALL.




15




·
            *IPdR
                (ropidoxuridine) - Oral Prodrug to Enhance Radiation Therapy for
                Brain and
                Other Cancers.*IPdR,
                which we licensed from Yale University and the Research Foundation
                of
                State University of New York in February 2004, is a novel oral prodrug
                of
                the radiation sensitizer IUdR. We have commenced a Phase I clinical
                trial
                assessing the safety, toxicity and pharmacokinetics of ropidoxuridine
                in
                patients with solid tumors undergoing radiation therapy. In June
                2006, the
                FDA approved our application for orphan drug status of ropidoxuridine
                for
                the treatment of glioblastoma, the most common type of brain
                cancer.




·
            *AlocrestTM
                (vinorelbine tartrate liposomers injection) - A Novel Targeted Anti-Cancer
                agent for Breast and Lung Cancer.*Alocrest
                is our proprietary product candidate, based on the widely used off-patent
                anticancer drug vinorelbine encapsulated in sphingosomes. Vinorelbine,
                a
                microtubule inhibitor, is FDA-approved for use as a single agent
                or in
                combination with cisplatin for the first-line treatment of unresectable,
                advanced NSCLC. In August 2006, we initiated a Phase I clinical trial
                for
                sphingosome encapsulated vinorelbine in patients with advanced solid
                tumors. This Phase I trial is designed to assess safety, tolerability
                and
                preliminary efficacy in patients with advanced solid tumors, including
                non-small cell lung and breast cancers.




·
            *Sphingosome
                Encapsulated Topotecan*is
                our proprietary product candidate comprised of the anticancer drug
                topotecan encapsulated in sphingosomes. Topotecan is FDA-approved
                for the
                treatment of metastatic carcinoma of the ovary after failure of initial
                or
                subsequent chemotherapy, and small cell lung cancer sensitive disease
                after failure of first-line chemotherapy. Following completion of
                additional preclinical development, we expect to file an IND in the
                second
                half of 2006 and to initiate clinical trials in
                2007.





·
            *Topical
                Menadione - A Topical Compound for Skin Rashes Associated with EGFR
                Inhibitors.*Menadione
                is a preclinical product candidate for the prevention and treatment
                of
                skin rash associated with the use of epidermal growth factor receptor,
                or
                EGFR, inhibitors in the treatment of certain cancers. EGFR inhibitors
                are
                currently used to treat non-small cell lung cancer, pancreatic,
                colorectal, and head & neck cancer. EGFR inhibitors develop
                significant skin toxicities presenting as acne-like rash on the face
                and
                upper body. Menadione, a small organic molecule, has been shown to
                activate the EGFR signaling pathway by inhibiting phosphatase activity.
                In
                vivo studies have suggested that topically applied menadione may
                restore
                EGFR signaling specifically in the skin of patients treated systemically
                with EGFR inhibitors. We licensed our rights to menadione from the
                Albert
                Einstein College of Medicine in October 2006. We expect to complete
                formulation of menadione by the first half of 2007 and to file an
                IND by
                the end of 2007.





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




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




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




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




16


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




**Critical
      Accounting Policies**





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





**Share-Based
      Compensation**





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





We
      adopted SFAS 123(R) using the modified-prospective-transition method. Under
      this
      method, compensation costs recognized as of September 30, 2006 include: a)
      compensation costs for all share-based payment awards granted prior to, but
      not
      yet vested as of January 1, 2006, based on grant-date fair value estimated
      in accordance with the original provisions of FAS 123, b) compensation costs
      for
      all share-based payment awards granted subsequent to January 1, 2006, based
      on the grant-date fair value estimated in accordance with the provisions of
      SFAS
      123(R) and c) compensation cost for share-based awards granted by the Company
      prior to becoming a public entity which are accounted for under the prospective
      transition method, and will continue to be expensed in accordance with the
      guidance of APB No.25. In accordance with the modified-prospective-transition
      method, our Financial Statements for prior periods have not been restated to
      reflect, and do not include, the impact of SFAS 123(R).





The
      compensation expense is calculated in accordance with the guidance in SFAS
      No. 123R, using the Black-Scholes option pricing model to estimate the fair
      value of the share based compensation. For the nine months ended September
      30,
      2006, share based compensation expense was approximately $6.3 million, which
      consisted entirely of the amortization of the fair value of employee stock
      options, the employee stock purchase plan and restricted stock granted in prior
      periods, or granted in the nine months ended September 30, 2006, over the
      vesting periods. We expect to record additional future share based employee
      compensation expense of $13.7 million over a weighted average period
      of 1.86 years for the portion of the share-based compensation that had not
      been recognized as of September 30, 2006. We have not recognized, and do not
      expect to recognize in the near future, any tax benefit related to employee
      stock-based compensation costs as a result of the full valuation allowance
      on
      the Company's net deferred tax assets and our net operating loss carryforwards.
      We expect quarterly stock-based compensation expense to increase for the
      remainder of 2006.





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




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





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




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





17


**Results
      of Operations**





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




*Selling,
      general and administrative expenses.* For the
      three months ended September 30, 2006, selling, general and administrative
      (“SG&A”) expense was $3.4 million as compared to $1.0 million for the three
      months ended September 30, 2005. For the three months ended September 30, 2006
      the increase in G&A of $2.4 million is due primarily to an increase in
      salaries, other employee benefits and personnel related costs of approximately
      $2.0 million, of which $1.9 million of the increase related to employee
      share-based compensation under SFAS 123R. For the three months ended September
      30, 2006, we also incurred an increase of approximately $0.3 million in
      accounting fees and outside services, mainly due to an increased costs of
      compliance with Sarbanes- Oxley and increased legal and accounting fees related
      to our public filings. We also had an increase of $0.1 million in other
      allocated costs including rent and insurance.





*Research
      and development expenses.* For the
      three months ended September 30, 2006, research and development (“R&D”)
      expense was $7.9 million as compared to $0.8 million for the three months ended
      September 30, 2005. For the three months ended September 30, 2006, the increase
      of approximately $7.1 million is due primarily to an increase of $4.8 million
      in
      expenses for the clinical development of our product pipeline, including a
      $1.9
      million increase in clinical costs for our three product candidates licensed
      from Inex Pharmaceuticals in May 2006, a $1.0 million milestone payment related
      to Alocrest achieved
      in the third quarter of 2006, a $2.6 million increase in clinical costs for
      IPdR, Talvesta and Zensana, including a $1.0 milestone payment to Novadel upon
      the FDA acceptance of the NDA filled for Zensana. The increase in clinical
      costs
      detailed above included the physical manufacturing of drug compounds, payments
      to our contract research organizations and legal expenses associated with our
      continued patent protection and other professional fees and outside services.
      For the three months ended September 30, 2006, the Company incurred increased
      salary, employee benefits and other personnel related costs of approximately
      $2.1 million as compared to the three months ended September 30, 2005,
      including an increase of $1.5 million in employee related stock-based
      compensation expense due to the implementation of SFAS No. 123R in 2006, and
      an
      increase of $0.6 million in salary and other benefits expense due to increased
      headcount. Other allocable operating expenses including travel, conferences
      and
      rent increased by approximately $0.3 million for the three months ended
      September 30, 2006 compared to the three months ended September 30,
      2005.





We
      anticipate that research and development expenses will continue gradually
      increasing in 2006 and substantially in subsequent years as we increase our
      research and development efforts and as our existing product candidates proceed
      through preclinical studies and more costly clinical studies. In particular,
      we
      expect our research and development expenses to increase through the later
      half
      of 2006 and beyond if Marqibo enters a registrational clinical trial in 2007.
      Actual expenses may vary considerably based upon timing of program initiation,
      study enrollment rates, and the timing and structure of any collaboration in
      which a partner may incur a portion of these expenses.





*Interest
      income, net.* For the
      three months ended September 30, 2006, net interest income was $507,347,
      compared to net interest income of $36,012 for the three months ended September
      30, 2005. The increase of approximately $471,000 resulted from increased cash
      balance in our interest bearing accounts due to our May 2006 financing which
      raised gross proceeds of $40.0 million, plus rising interest rates.




**Nine
      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,
      2005**




*Selling,
      general and administrative expenses.* For the
      nine months ended September 30, 2006, SG&A expense was $7.0 million, as
      compared to $2.6 million for the nine months ended September 30, 2005. For
      the
      nine months ended September 30, 2006 the increase of $4.4 million is due
      primarily to an increase in salaries, other employee benefits and personnel
      related costs of approximately $3.3 million, including an increase of $3.0
      million in employee related share-based compensation expense. For the nine
      months ended September 30, 2006, we also incurred an increase of approximately
      $0.6 million in accounting and consulting fees, mostly related to the cost
      of
      compliance with Sarbanes-Oxley and increased professional fees and outside
      services, and increased legal and accounting fees related to our public filings.
      We also incurred $0.4 million of increased allocated costs including rent,
      travel and insurance.





*Research
      and development expenses.* For the
      nine months ended September 30, 2006, R&D expense was $28.9 million as
      compared to $3.6 million for the nine months ended September 30, 2005. For
      the
      nine months ended September 30, 2006, the increase of approximately $25.3
      million is due primarily to an increase of $20.9 million related to the clinical
      development of our product pipeline, including $14.0 million in license,
      milestone and transaction service fees related to the our license agreements,
      including $11.9 million paid in license and transaction fees related to the
      Inex
      license agreement, and $1.0 million paid to Inex for a milestone related to
      the
      clinical development of Alocrest, and $1.0 million paid to Novadel for a
      milestone payment related to the FDA acceptance of the new drug application
      for
      Zensana. Also included in the increased clinical costs is an increase of $4.4
      million in clinical development expense related to IPdR, Talvesta and Zensana
      clinical progress, and an increase of $1.9 million in clinical costs for our
      three product candidates licensed from Inex Pharmaceuticals in May 2006. The
      increase in clinical costs detailed above included the physical manufacturing
      of
      drug compounds and payments to our contract research organizations. We also
      incurred an increase in legal expenses associated with our continued patent
      protection and other professional fees and outside services of $0.5 million.
      For
      the nine months ended September 30, 2006, we incurred increased salary, employee
      benefits and other personnel related costs of approximately $3.8 million as
      compared to the nine months ended September 30, 2005, including an
      increase of $2.5 million in employee related stock-based compensation
      expense, mostly due to the implementation of SFAS No. 123R and an increase
      of
      $1.3 million in salary, bonus and other benefit expenses due to increased
      headcount year over year. Other allocable expenses increased by approximately
      $0.5 million for the nine months ended September 30, 2006 compared to the nine
      months ended September 30, 2005, which includes travel and conference expenses,
      insurance and other costs.





18


We
      anticipate that research and development expenses will continue gradually
      increasing in 2006 and substantially in subsequent years as we increase our
      research and development efforts and as our existing product candidates proceed
      through preclinical studies and more costly clinical studies. In particular,
      we
      expect our research and development expenses to increase through the later
      half
      of 2006 and beyond if Marqibo enters a registrational clinical trial in 2007.
      Actual expenses may vary considerably based upon timing of program initiation,
      study enrollment rates, and the timing and structure of any collaboration in
      which a partner may incur a portion of these expenses.





*Interest
      income, net.* For the
      nine months ended September 30, 2006, interest income, net was $892,099,
      compared to interest income, net of $86,074 for the nine months ended September
      30, 2005. The increase of approximately $806,000 resulted from increased cash
      balance due to our May 2006 financing which raised gross proceeds of $40.0
      million, plus rising interest rates.





**Liquidity
      and Capital Resources**





From
      inception to September 30, 2006, we have incurred an aggregate net loss of
      $53.1
      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 September 30, 2006, we have raised a net
      increase in cash and cash equivalents of $33.3 million. This increase primarily
      resulted from net cash provided by financing activities of $69.6 million from
      inception through September 30, 2006, substantially all of which was derived
      from our five private placements which resulted in aggregate net proceeds to
      us
      of $67.9 million. The increase in cash provided by financing activities was
      offset by net cash used in operating activities of $28.8 million and net cash
      used in investing activities of $7.5 million for the cumulative period from
      inception to September 30, 2006.





Our
      continued operations will depend on whether we are able to raise additional
      funds through various potential sources, such as equity and debt financing.
      Through September 30, 2006, a significant portion of our financing has been
      through private placements of our common stock. 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 seven product candidates, including
      three to be developed under the Inex license agreement dated May 6, 2006, we
      anticipate that research and development expenses will continue to increase
      in
      2006 and substantially in subsequent years as we increase our efforts and as
      our
      existing product candidates proceed through preclinical studies and more costly
      clinical studies. In particular, because we plan to initiate a registrational
      clinical trial of Marqibo in hematological malignancies in 2007, we expect
      our
      research and development expenses to increase significantly in the last quarter
      of 2006 and beyond. We estimate that we will have sufficient cash on hand to
      fund clinical development into 2007. However, we may seek to raise additional
      capital before in order to fund our future development activities, likely by
      selling shares of our capital stock or other securities. There can be no
      assurance that such capital will be available to us on favorable terms or at
      all. In May 2006, we completed a private offering in which we sold 4.7 million
      shares of common stock which were part of the filed shelf registration, for
      gross proceeds of $40.0 million. In October 2006, we filed a shelf registration
      statement with the SEC, which provides for the offering of up to $100 million
      of
      our common stock.





***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.





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





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




19


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





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





***Current
      and Future Financing Needs.*** We have
      incurred negative cash flow from operations since we started our business.
      We
      have spent, and expect to continue to spend, substantial amounts in connection
      with implementing our business strategy, including our planned product
      development efforts, our clinical trials, and our research and discovery
      efforts. Given the current and desired pace of clinical development of our
      seven
      product candidates, over the next 12 months we estimate that we will need
      approximately $30 million in order to fund our research and development
      activities, including amounts to milestone payments that we expect to be
      triggered under the license agreements relating to our product candidates.
      The
      remaining amount of costs are devoted to salaries associated with those
      individuals in the research and development department as well as and the
      manufacturing and clinical trial costs for our seven product candidates. We
      estimate that we will have sufficient capital to fund our research and
      development activities through 2006 and into 2007.




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




· costs
      associated with conducting preclinical and clinical testing;




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




· costs
      of
      establishing arrangements for manufacturing our product candidates;




· costs
      of
      acquiring new drug candidates;




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




· costs,
      timing and outcome of regulatory reviews;




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




· costs
      of
      increased selling, general and administrative expenses.




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




20


***Plan
      of Operation***





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





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




· product
      development expenses, including the costs incurred with respect to applications
      to conduct clinical trials in the United States for our seven product
      candidates.





As
      part
      of our planned expansion, we intend to use clinical research organizations
      and
      third parties to perform our clinical studies and manufacturing. As indicated
      above, at our current and desired pace of clinical development of our seven
      product candidates, over the next 12 months we expect to spend approximately
      $30
      million on clinical development (including milestone payments of $6.3 million
      that we expect to be triggered under the license agreements relating to our
      product candidates), $1.9 million on general corporate and administrative
      expenses, and $600,000 on facilities and rent. We expect to have completed
      the
      remaining Phase I clinical trials in Talvesta. In addition we expect to initiate
      a Phase II clinical trial in relapsed or refractory gastric cancer as well
      as a
      Phase I clinical trial in pediatric solid tumors. In addition, we plan
      to initiate at least one registrational clinical trial for Marqibo in
      hematological malignancies. We also expect to complete our Phase I clinical
      trial in Alocrest, as well as IPdR, and with the potential launch of Zensana
      scheduled in the first half of 2007 we will continue to evaluate and manage
      our
      launch efforts.





**Research
      and Development Projects**





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





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





***Zensana
      (ondansetron HCl) Oral Spray.*** Since
      acquiring our rights to Zensana in October 2004, we have incurred $5.9 million
      of project costs related to our development through September 30, 2006, of
      which
      $1.3 million and $4.6 million was incurred in the three and nine months ended
      September 30, 2006 and $0.9 million was incurred in fiscal 2005. We completed
      our pivotal clinical trials of Zensana in early 2006, and filed an NDA under
      Section 505(b)(2) of the Food, Drug and Cosmetic Act in the second quarter
      of
      2006. If approved by the FDA, we intend to commercially launch Zensana in the
      United States in 2007. We estimate that we will need to expend at least an
      additional $6.0 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.





***Marqibo®.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Marqibo
      in May 2006 we have incurred $0.8 million in project costs related to our
      development of Marqibo through September 30, 2006. We plan to initiate a
      registrational clinical trial in the first half of 2007 and believe we will
      need
      to spend approximately $1.5 million in 2006 to fund our research and development
      efforts. We estimate that we will need to expend at least an aggregate of
      approximately $47 million in order for us to obtain FDA approval for Marqibo,
      if
      ever, which amount includes a milestone payment that would be owed to our
      licensor upon FDA approval.  We expect that it will take approximately
      three to four years until we will have completed development and obtained FDA
      approval of Marqibo, if ever.





***Talvesta*** . From
      inception through September 30, 2006, we have incurred $3.9 million of costs
      related to our development of Talvesta, of which $1.3 million, $1.0 million
      and
      $272,205 was incurred in fiscal 2005, 2004 and 2003, respectively. For the
      three
      and nine months ended September 30, 2006, we incurred $509,000 and $1,381,000,
      respectively, of costs in the development of Talvesta. We believe we currently
      have sufficient capital to fund our planned development activities of Talvesta
      through 2006. We estimate that we will need to expend an aggregate of
      approximately $65 million in order to complete development of Talvesta, should
      we opt to continue development. Costs incurred are a direct result of ensuring
      proper study conduct in accordance with local regulations. Should we choose
      to
      continue development we expect that it will take an additional four to five
      years before we complete development and obtain FDA approval of Talvesta, if
      ever.




***IPdR
      (ropidoxuridine)*** ***.*** Since
      acquiring our rights to IPdR in February 2004, we have incurred $1.7 million
      of
      project costs related to our development of IPdR through September 30, 2006,
      of
      which $834,900 and $656,251 were incurred in fiscal 2005 and **** 2004
      respectively. For the three and nine months ended September 30, 2006, we
      incurred approximately $12,000 and $168,000, respectively, of project costs
      related to the development of IPdR. Currently, we estimate that we will need
      to
      expend at least an additional $45 million until we receive FDA approval for
      IPdR, should we opt to continue development. Should we choose to continue,
      we
      expect that it will take an additional 5 or 6 years until we will have completed
      development and obtained FDA approval of IPdR, if ever. We believe we currently
      have sufficient capital to fund our development activities of IPdR through
      2006.





21





***AlocrestTM
      (vinorelbine tartrate liposomers injection)*** ***.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Alocrest
      in May 2006 we have incurred $1.7 million in project costs related to our
      development of Alocrest through September 30, 2006 which included a $1.0 million
      milestone payment. We initiated a Phase I clinical trial in August 2006. This
      Phase I 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 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 $451,000, respectively, in project
      costs
      related to our development of these drugs through September 30, 2006. Following completion of additional preclinical development, we expect to file
      an
      IND in the second half of 2006 and to initiate clinical trials in
      2007.As this
      drug is early in its clinical development, the registrational strategy is still
      being evaluated.




***Topical
      Menadione*** *.* We
      licensed our rights to menadione from the Albert Einstein College of Medicine
      in
      October 2006. We expect to complete formulation of menadione by the first half
      of 2007 and to file an IND by the end of 2007. As this
      drug is early in its clinical development, the registrational strategy is still
      being evaluated.





**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 September 30, 2006, and we have never
      held
      such instruments in the past.





**Item
      4. Controls and Procedures**




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




During
      the quarter ended September 30, 2006, there were no changes in our internal
      controls over financial reporting that have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting.











22





**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-Q for the quarter ended June
      30, 2006.




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


On
      August
      23, 2006, the Company sold 58,593 shares of its common stock pursuant to the
      exercise of an outstanding warrant at an exercise price of $1.57. The warrant
      was originally issued to an investor in the Company’s April 2005 private
      placement. The sale and issuances of the shares were made in reliance on the
      exemption from the registration requirements of the Securities Act of 1933,
      as
      amended, provided by Section 4(2) of such act and/or Rule 506 promulgated
      thereunder. The Company had a reasonable basis to believe that the purchaser
      was
      an accredited investor and/or had knowledge and experience in financial and
      business matters sufficient to evaluate the merits and risks of the
      investment.




On
        August
        23, 2006, the Company issued 17,050 shares of its common stock as partial
        consideration for services rendered to a financial advisor. The sale and
        issuance of these shares were made in reliance on the exemption from the
        registration requirements of the Securities Act provided by Section 4(2)
        thereof
        and Rule 506 promulgated thereunder as the financial advisor was an accredited
        investor.


On
      September 29, 2006, the Company issued 67,068 shares of its common stock to
      five
      intuitional investors pursuant to a milestone payment pursuant to the terms
      of
      the Company’s May 6, 2006 license agreement with Inex Pharmaceuticals
      Corporation. The Company relied on Section 4(2) and Rule 506 under the
      Securities Act in connection with this issuance, as it had a reasonable basis
      to
      believe each purchaser was an accredited investor and non general solicitation
      or other public offering was involved in the sale.







**Item
      3. Defaults Upon Senior Securities**





Not
      applicable





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





None


**Item
      5. Other Information**




None





**Item
      6. Exhibits**






**Exhibit
                No.**
            
            **Description**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).




23








**SIGNATURES**




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




**HANA
                BIOSCIENCES, INC.**Date:
                November 13, 2006
            By:
            /s/ Mark
                J. AhnMark
                J. Ahn
              President
                and Chief Executive Officer








Date:
                November 13, 2006
            By:
            /s/ John
                P. IparraguirreJohn
                P. Iparraguirre
              Chief
                Financial Officer




24








**Index
      to Exhibits Filed with this Report**









**Exhibit
                No.**
            
            **Description**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).









25