**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**




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





For
      the
      quarter ended June 30, 2007





OR





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





For
      the
      transition period __________ to __________.





**Commission
      file number 001-32626**





**Hana
      Biosciences, Inc.**


(Exact
      Name of Registrant as Specified in Its Charter)




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




**(650)
      588-6404**


(Registrant's
      Telephone Number, Including Area Code)





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




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




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




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


Yes o No x





As
      of
      August 9, 2007, there were 32,032,511 shares of the registrant's common
      stock, $.001 par value, outstanding.










**INDEX**




**Page****PART
                I**
            **FINANCIAL
                INFORMATION**
            
            3Item
                1.
            Unaudited
                Condensed Financial Statements
            
            3Unaudited
                Condensed Balance Sheets
            
            3Unaudited
                Condensed Statements of Operations and Other Comprehensive
                Loss
            
            4Unaudited
                Condensed Statement of Changes in Stockholders' Equity
            
            5Unaudited
                Condensed Statements of Cash Flows
            
            6Notes
                to Unaudited Condensed Financial Statements
            
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            16Item
                3.
            Quantitative
                and Qualitative Disclosure About Market Risk
            
            27Item
                4.
            Controls
                and Procedures
            
            27**PART
                II**
            **OTHER
                INFORMATION**
            
            28Item
                1.
            Legal
                Proceedings
            
            28Item
                1A.
            Risk
                Factors
            
            28Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            44Item
                3.
            Defaults
                Upon Senior Securities
            
            44Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            
            44Item
                5.
            Other
                Information
            
            45Item
                6.
            Exhibits
            
            45Signatures
            
            46Index
                of Exhibits Filed with this Report
            
            47




1




**Forward-Looking
      Statements**




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





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




·
            the
                regulatory approval of our drug
                candidates;




·
            our
                use of clinical research centers and other
                contractors;




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




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




·
            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 this Form 10-Q in Part II, Item 1A and elsewhere in this report
      should be considered in evaluating our prospects and future financial
      performance.




2




**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Unaudited Condensed Financial Statements**





**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**CONDENSED
      BALANCE SHEETS**




**June
                30,**
            
            **December
                31,****2007**
            
            **2006****ASSETS**
            
            **(Unaudited)**Current
                assets:Cash
                and cash equivalents
            
            $
            14,368,012
            
            $
            29,127,850Available-for-sale
                securities
            
            
            6,590,494
            
            
            6,131,000Prepaid
                expenses and other current assets
            
            
            441,399
            
            
            496,519Total
                current assets
            
            
            21,399,905
            
            
            35,755,369Property
                and equipment, net
            
            
            417,885
            
            
            424,452Restricted
                cash
            
            
            125,000
            
            
            125,000Total
                assets
            
            $
            21,942,790
            
            $
            36,304,821**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            3,193,112
            
            $
            2,739,956Accrued
                expenses
            
            
            570,007
            
            
            1,547,459Accrued
                personnel related expenses
            
            
            742,738
            
            
            1,050,657Accrued
                research and development costs
            
            
            366,984
            
            
            596,927Total
                current liabilities
            
            
            4,872,841
            
            
            5,934,999Commitment
                and contingencies:Stockholders'
                equity:Common
                stock; $0.001 par value:100,000,000
                shares authorized, 29,485,283 and 29,210,627 shares issued and outstanding
                at June 30, 2007 and December 31, 2006, respectively
            
            
            29,485
            
            
            29,211Additional
                paid-in capital
            
            
            97,171,024
            
            
            93,177,445Accumulated
                other comprehensive income
            
            
            —
            
            
            20,000Deficit
                accumulated during the development stage
            
            
            (80,130,560
            )
            
            (62,856,834
            )Total
                stockholders' equity
            
            
            17,069,949
            
            
            30,369,822Total
                liabilities and stockholders' equity
            
            $
            21,942,790
            
            $
            36,304,821





See
      accompanying notes to unaudited condensed financial statements.





3




**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




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


**(Unaudited)**




**Cumulative****Period
                from****December
                6,****Three
                Months Ended**
            
            **Six
                Months Ended**
            
            **2002
                (date of**
              **inception)
                to****June
                30,**
            
            **June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **2007**Operating
                expenses:Selling,
                General and administrative
            
            $
            2,725,362
            
            $
            2,576,308
            
            $
            6,072,347
            
            $
            3,560,283
            
            $
            23,712,291Research
                and development
            
            
            6,473,793
            
            
            18,368,374
            
            
            11,711,697
            
            
            20,946,506
            
            
            58,373,740Total
                operating expenses
            
            
            9,199,155
            
            
            20,944,682
            
            
            17,784,044
            
            
            24,506,789
            
            
            82,086,031Loss
                from operations
            
            
            (9,199,155
            )
            
            (20,944,682
            )
            
            (17,784,044
            )
            
            (24,506,789
            )
            
            (82,086,031
            )Other
                income (expense):Interest
                income, net
            
            
            313,392
            
            
            249,426
            
            
            704,958
            
            
            384,752
            
            
            2,276,534Other
                expense, net
            
            
            (189,388
            )
            
            (8,800
            )
            
            (194,640
            )
            
            (16,692
            )
            
            (321,063
            )Total
                other income (expense)
            
            
            124,004
            
            
            240,626
            
            
            510,318
            
            
            368,060
            
            
            1,955,471Net
                loss
            
            $
            (9,075,151
            )
            $
            (20,704,056
            )
            $
            (17,273,726
            )
            $
            (24,138,729
            )
            $
            (80,130,560
            )Net
                loss per share, basic and diluted
            
            $
            (0.31
            )
            $
            (0.81
            )
            $
            (0.59
            )
            $
            (1.00
            )Shares
                used in computing net loss per share, basic and diluted
            
            
            29,383,420
            
            
            25,640,398
            
            
            29,334,829
            
            
            24,037,103Comprehensive
                loss:Net
                loss
            
            $
            (9,075,151
            )
            $
            (20,704,056
            )
            $
            (17,273,726
            )
            $
            (24,138,729
            )Unrealized
                gain (loss)
            
            
            116,000
            
            
            (156,000
            )
            
            (20,000
            )
            
            68,000Comprehensive
                loss
            
            $
            (8,959,151
            )
            $
            (20,860,056
            )
            $
            (17,293,726
            )
            $
            (24,070,729
            )





See
      accompanying notes to unaudited condensed financial statements.





4


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





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


**(Unaudited)**





**Period
      from January 1, 2007 to June 30, 2007**





**Common
                stock**
            
            **Additional**
              **paid-in**
            
            **Accumulated
                other comprehensive income**
            
            **Deficit
                accumulated during development**
            
            **Total
                stockholders'****Shares**
            
            **Amount**
            
            **capital**
            
            **(loss)**
            
            **stage**
            
            **equity**Balance
                at January 1, 2007
            
            
            29,210,627
            
            $
            29,211
            
            $
            93,177,445
            
            $
            20,000
            
            $
            (62,856,834
            )
            $
            30,369,822Issuance
                of shares upon exercise of warrants,
              options
                and restricted stock
            
            
            263,234
            
            
            263
            
            
            26,736
            
            
            —
            
            
            —
            
            
            26,999Stock-based
                compensation of employees
              amortized
                over vesting period of stock options
            
            
            —
            
            
            —
            
            
            4,173,679
            
            
            —
            
            
            —
            
            
            4,173,679Issuance
                of shares under employee stock purchase plan
            
            
            11,422
            
            
            11
            
            
            61,834
            
            
            —
            
            
            —
            
            
            61,845Share-based
                compensation to
              nonemployees
                for services
            
            
            —
            
            
            —
            
            
            (151,670
            )
            
            —
            
            
            —
            
            
            (151,670
            )Repurchase
                of employee stock options
            
            
            —
            
            
            —
            
            
            (117,000
            )
            
            —
            
            
            —
            
            
            (117,000
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (17,273,726
            )
            
            (17,273,726
            )Unrealized
                loss on available-for-sale securities
            
            
            —
            
            
            —
            
            
            —
            
            
            (20,000
            )
            
            —
            
            
            (20,000
            )Balance
                at June 30, 2007
            
            
            29,485,283
            
            $
            29,485
            
            $
            97,171,024
            
            $
            —
            
            $
            (80,130,560
            )
            $
            17,069,949




See
      accompanying notes to unaudited condensed financial statements.




5


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**




**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**


**Six****Months
                  Ended June 30,**
              
              **Cumulative
                  Period from December 6, 2002 (date of inception) to June
                  30,****2007**
              
              **2006**
              
              **2007****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (17,273,726
              )
              $
              (24,138,729
              )
              $
              (80,130,560
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              83,322
              
              
              29,500
              
              
              263,042Stock-based
                  compensation of employees
              
              
              4,173,679
              
              
              2,636,905
              
              
              14,251,309Share-based
                  compensation to nonemployees for services
              
              
              (151,670
              )
              
              354,805
              
              
              671,471Shares
                  issued to nonemployees - transaction fee
              
              
              —
              
              
              —
              
              
              185,841Services
                  rendered for satisfaction of unearned consulting fee
              
              
              —
              
              
              —
              
              
              212,445Services
                  rendered in lieu of payment of subscription receivable
              
              
              —
              
              
              —
              
              
              36,000Shares
                  to be issued to employees for services rendered
              
              
              —
              
              
              —
              
              
              249,750Issuance
                  of shares in partial consideration for license agreement
              
              
              —
              
              
              10,279,640
              
              
              10,929,640Issuance
                  of shares in partial consideration of milestone payment
              
              
              —
              
              
              —
              
              
              493,620Loss
                  on sale of capital assets
              
              
              —
              
              
              —
              
              
              41,759Realized
                  loss on available-for-sale securities
              
              
              176,000
              
              
              —
              
              
              176,000Changes
                  in operating assets and liabilities:(Increase)
                  decrease in prepaid expenses and other assets
              
              
              55,119
              
              
              (16,615
              )
              
              (441,400
              )Increase
                  (decrease) in accounts payable
              
              
              453,156
              
              
              420,259
              
              
              3,193,112Increase
                  (decrease) in accrued and other liabilities
              
              
              (1,515,313
              )
              
              1,877,353
              
              
              1,679,730Net
                  cash used in operating activities
              
              
              (13,999,433
              )
              
              (8,556,882
              )
              
              (48,188,241
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (76,754
              )
              
              (276,900
              )
              
              (725,445
              )Proceeds
                  from sale of equipment
              
              
              —
              
              
              —
              
              
              2,760Purchase
                  of equity securities
              
              
              —
              
              
              —
              
              
              (636,000
              )Purchase
                  of marketable securities
              
              
              (3,480,494
              )
              
              (1,750,000
              )
              
              (9,555,494
              )Sale
                  of marketable securities
              
              
              2,825,000
              
              
              —
              
              
              3,425,000Restricted
                  cash deposited in escrow
              
              
              —
              
              
              (125,166
              )
              
              (125,000
              )Net
                  cash used in investing activities
              
              
              (732,248
              )
              
              (2,152,066
              )
              
              (7,614,179
              )**Cash
                  flows from financing activities:**Proceeds
                  from registered direct and private placements of preferred and
                  common
                  stock, net
              
              
              —
              
              
              37,118,550
              
              
              67,927,272Proceeds
                  from issuances of notes payable to stockholders
              
              
              —
              
              
              —
              
              
              801,619Collection
                  of subscription receivable
              
              
              —
              
              
              —
              
              
              4,000Repayment
                  of notes payable to stockholders
              
              
              —
              
              
              —
              
              
              (651,619
              )Repurchase
                  of employee stock options
              
              
              (117,000
              )
              
              —
              
              
              (117,000
              )Proceeds
                  from exercise of warrants and options and employee stock purchase
                  plan
              
              
              88,843
              
              
              774,175
              
              
              2,206,160Net
                  cash (used) provided in financing activities
              
              
              (28,157
              )
              
              37,892,725
              
              
              70,170,432Net
                  (decrease) increase in cash and cash equivalents
              
              
              (14,759,838
              )
              
              27,183,777
              
              
              14,368,012Cash
                  and cash equivalents, beginning of period
              
              
              29,127,850
              
              
              17,082,521
              
              
              —Cash
                  and cash equivalents, end of period
              
              $
              14,368,012
              
              
              44,266,298
              
              $
              14,368,012Supplemental
                  disclosures of cash flow data:Cash
                  paid for interest
              
              $
              2,668
              
              
              932
              
              $
              43,698Supplemental
                  disclosures of noncash financing activities:Common
                  stock issued for repayment of debt
              
              
              —
              
              
              150,000Unrealized
                  loss on available-for-sale securities
              
              
              20,000
              
              
              68,000
              
              
              —Common
                  stock issued to employees for services rendered in 2004
              
              
              —
              
              
              —
              
              
              249,750Common
                  stock issued for services to be rendered
              
              
              —
              
              
              —
              
              
              450,948Common
                  Stock issued to as partial consideration for license
                  agreement
              
              
              —
              
              
              10,279,642
              
              
              —Common
                  stock issued on conversion of preferred stock
              
              
              —
              
              
              —
              
              
              2,395




See
      accompanying notes to unaudited condensed financial
      statements.





6


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


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





*Business*





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





*Basis
      of Presentation*





The
      Company is a development stage enterprise since it has not generated revenue
      from the sale of its products and its efforts through June 30, 2007 have been
      principally devoted to identification, licensing and the clinical development
      of
      its products, as well as raising capital. Accordingly, the financial statements
      have been prepared in accordance with the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development
      Stage Enterprises.”





The
      accompanying unaudited condensed financial statements have been prepared in
      accordance with United States generally accepted accounting principles for
      interim financial information of “publicly held companies” and, accordingly,
      they do not include all required disclosures for complete annual financial
      statements. These interim financial statements include all adjustments that
      the management of Hana 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 financial statements for the year ended December 31, 2006, included
      in the Company's Annual Report on Form 10-K for the year ended December 31,
      2006
      (the “Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on
      April 2, 2007. The accompanying condensed balance sheet as of December 31,
      2006
      has been derived from the audited balance sheet as of that date included in
      the
      Form 10-K.





*Use
      of Management's Estimates*




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      based upon current assumptions that affect the reported amounts of assets and
      liabilities, disclosures of contingent assets and liabilities at the date of
      the
      financial statements and the reported amounts of expenses during the reporting
      period. Examples include provisions for deferred taxes and assumptions related
      to share-based compensation expense. Actual results may differ materially from
      those estimates.





*Segment
      Reporting*




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





*Loss
      Per Share*





Basic
      net
      loss per common share is calculated by dividing net loss by the weighted-average
      number of common shares outstanding for the period. Diluted net loss per common
      share is the same as basic net loss per common share, since potentially dilutive
      securities from stock options, stock warrants and restricted stock would have
      an
      antidilutive effect because the Company incurred a net loss during each period
      presented. The number of shares potentially issuable at June 30, 2007 and 2006
      upon exercise or conversion that were not included in the computation of net
      loss per share totaled 7,719,348 and 6,291,518 ,
      respectively.




7


**HANA
        BIOSCIENCES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


*Cash
      and Cash Equivalents and Concentration of Risk*




The
      Company considers all highly-liquid investments with a maturity of three months
      or less when acquired to be cash equivalents. Financial instruments that
      potentially expose the Company to concentrations of credit risk consist
      primarily of cash and cash equivalents, and available-for-sale
      securities. The Company maintains its cash and cash equivalents with high
      credit quality financial institutions and available-for-sale securities consist
      of U.S. government and government agency securities, corporate notes, bonds
      and
      commercial paper.





*Available-for-sale
      Securities*





Available-for-sale
      securities consist of investments acquired with maturities exceeding three
      months. All available-for-sale securities are reported at fair value, based
      on
      quoted market price, with unrealized gains or losses included in other
      comprehensive income (loss). For available-for-sale securities, a loss is
      recognized in the period an investment is considered to have an
      other-than-temporary impairment. The recognized loss is equal to the difference
      between the cost basis of the security and the fair value of the securities
      at
      the balance sheet date of the reporting period for which the assessment is
      made.
      The new cost basis of the security will become the fair value of the security
      at
      this same period.





The
      Company owns certain auction rate securities in its managed money accounts.
      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 securities as short-term investments. There were no material
      unrealized gains or losses associated with these investments as of June 30,
      2007.




*Income
      Taxes*





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued
      FASB Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement No.
      109* ”
(FIN
      48), which clarifies the recognition, measurement, accounting and disclosure
      for
      uncertainty in tax positions. The Company is subject to the provisions of FIN
      48
      as of January 1, 2007, and has analyzed filing positions in federal and state
      jurisdictions where it has filed income tax returns, as well as all open tax
      years in these jurisdictions. The Company is subject to US and California taxes
      for tax jurisdictions, as defined. The only periods subject to examination
      for
      the Company’s federal return are the 2003 through 2006 tax years. The periods
      subject to examination for the Company’s state returns in California are years
      2002 through 2006. There are currently no ongoing examinations by the relevant
      tax authorities.





At
      the
      adoption date and as of June 30, 2007, we had no material unrecognized tax
      benefits and no adjustments to liabilities or operations were required. There
      was no interest or penalties recognized related to uncertain tax positions.
      The
      Company will account for any interest related to uncertain tax positions as
      interest expense, and for penalties as tax expense.




**NOTE
      2. RECENT ACCOUNTING PRONOUNCEMENTS**




On
      September 15, 2006 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.




8


**HANA
        BIOSCIENCES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


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





**NOTE
      3. LIQUIDITY AND CAPITAL RESOURCES**





The
      Company reported a net loss of $17.3 million for the six months ended June
      30,
      2007. The net loss from date of inception, December 6, 2002 to June 30, 2007
      amounted to $80.1 million. The Company's operating activities have used $48.2
      million in cash since its inception.





The
      Company has financed its operations since inception primarily through equity
      and
      debt financing. During the six months ended June 30, 2007, the Company had
      a net
      decrease of $14.8 million in cash and cash equivalents. This decrease primarily
      resulted from net cash used in operating activities of $14.0 million for the
      six
      months ended June 30, 2007. Total cash and cash equivalents and marketable
      securities as of June 30, 2007 were $21.0 million compared to $35.3 million
      at
      December 31, 2006.





The
      Company's continued operations will depend on whether it is able to continue
      the
      progression of clinical compounds, identify and acquire new and innovative
      oncology focused products, and whether the Company is able to successfully
      commercialize and sell products that have reached FDA approval. Through June
      30,
      2007, a significant portion of the Company's financing has been through private
      placements of common stock. The Company will continue to fund operations from
      cash on hand and through the potential sale of similar sources of capital
      previously described.





At
      the
      current and desired pace of clinical development of the Company’s current
      product candidates, over the next 12 months the Company expects to be able
      to
      fund research and development (including milestone payments that are expected
      to
      be triggered under the license agreements relating to the Company’s product
      candidates, all of which can be satisfied through the issuance of new shares
      the
      Company’s common stock), and general corporate and administrative expenses.





The
      Company believes that its cash, cash equivalents and marketable securities,
      which totaled $21.0 million as of June 30, 2007, will be sufficient to meet
      its
      anticipated operating needs through the first half of 2008 based upon current
      and desired pace of clinical development. However, the actual amount of funds
      needed to operate is subject to many factors, some of which are beyond the
      Company’s control. The Company expects to incur substantial expenses as it
      continues its drug development efforts, particularly to the extent the Company
      advances its lead candidate Marqibo through a pivotal clinical study. The
      Company cannot assure that future financing will be available in amounts or
      on
      terms acceptable to it, if at all. If the Company is unable to raise additional
      capital when it needs to or in sufficient amounts, it will be forced to curtail
      the development of its product candidates, which would delay the time by which
      any of our product candidates could receive regulatory approval.




**NOTE
      4. STOCKHOLDERS' EQUITY**





*Stock
      Incentive Plans.* The
      Company has two stockholder approved stock incentive plans under which it grants
      or has granted options to purchase shares of its common stock and restricted
      stock awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the
      2004 Stock Incentive Plan (the “2004 Plan”). The Board of Directors or the chief
      executive officer, when designated by the Board, is responsible for
      administration of the Company’s employee stock incentive plans and determines
      the term, exercise price and vesting terms of each option. In general, stock
      options issued under the 2003 Plan and 2004 Plan have a vesting period of three
      years and expire ten years from the date of grant.




9


**HANA
        BIOSCIENCES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


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





In
      September 2004, the Company's Board of Directors approved and adopted the 2004
      Plan, which initially authorized 2,500,000 shares of common stock for issuance.
      On March 31, 2006, the Board approved, subject to stockholder approval, an
      amendment to the 2004 Plan to increase the total number of shares authorized
      for
      issuance there under to 4,000,000. At the Company’s May 2006 Annual Meeting, the
      Company's stockholders ratified and approved the 2004 Plan, as amended. At
      the
      2007 Annual Meeting on June 22, 2007, the Company's stockholders approved an
      additional increase of shares authorized for issuance from 4,000,000 to
      7,000,000. The Company may make future stock option issuances from this
      plan.





At
      the May 2006 Annual Meeting, the Company's Stockholders also ratified and
      approved the Company's 2006 Employee Stock Purchase Plan (the “2006 Plan”),
      which had been approved by the Company’s Board of Directors on March 31, 2006.
      The 2006 Plan provides the Company's eligible employees with the opportunity
      to
      purchase shares of Company common stock through lump sum payments or payroll
      deductions. The 2006 Plan is intended to qualify as an “employee stock purchase
      plan” under Section 423 of the Internal Revenue Code. As adopted, the 2006
      Plan authorized the issuance of up to a maximum of 750,000 shares of common
      stock. As of June 30, 2007, there have been 11,422 shares issued under the
      2006
      Plan, with an additional 38,032 shares issued on July 1, 2007.




*Restricted
      Stock Awards* The
      Company's Board of Directors has awarded, under the 2004 Plan, 524,264 shares
      of
      restricted stock as of June 30, 2007, at no cost to the Company's executive
      officers and directors.





A
      summary
      of the status of the Company's restricted stock awards as of June 30, 2007
      and
      changes during the six months ended June 30, 2007 is as follows:




**Nonvested
                Restricted Stock Awards**
            
            **Number of Shares**
            
            **Weighted Average**
              **Grant-Date**
              **Fair
                Value**Nonvested
                at January 1, 2007
            
            
            460,764
            
            $
            10.65Granted
            
            
            —
            
            
            —Vested
            
            
            (246,568
            )
            
            10.49Cancelled/Forfeited
            
            
            —
            
            
            —Nonvested
                at June 30, 2007
            
            
            214,196
            
            $
            10.84





*Stock
      Options* .
      The
      Company currently awards stock option grants under its 2003 and 2004 Plan.
      Under
      the 2003 Plan, the Company may grant incentive and non-qualified stock options
      to employees, directors, consultants and service providers to purchase up to
      an
      aggregate of 1,410,068 shares of its common stock. Under the 2004 Plan, the
      Company may grant incentive and non-qualified stock options to employees,
      directors, consultants and service providers to purchase up to an aggregate
      of
      7,000,000 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.





10


**HANA
      BIOSCIENCES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


The
      following table summarizes information about stock options outstanding at June
      30, 2007 and changes in outstanding options in the six months then ended, all
      of
      which are at fixed prices:





**Number
                of Shares Subject to Options
                Outstanding**
            
            **Weighted Average
                Exercise Price per Share**
            
            **Weighted Average
                Remaining Contractual Term**
              **(in
                years)**
            
            **Aggregate
                Intrinsic Value**Outstanding
                January 1, 2007
            
            
            5,123,917
            
            $
            4.27Options
                granted
            
            
            1,158,000
            
            
            2.67Options
                cancelled
            
            
            (776,001
            )
            
            6.09Options
                exercised
            
            
            16,664
            
            
            1.62Outstanding
                June 30, 2007
            
            
            5,489,252
            
            
            3.68
            
            
            8.42
            
            $
            1,583,393Exercisable
                at June 30, 2007
            
            
            2,210,808
            
            $
            2.09
            
            
            7.22
            
            $
            1,457,484





Total
      stock-based compensation was approximately $1.8 million and $4.2 million related
      to employee stock options and restricted stock recognized in the operating
      results for the three and six months ended June 30, 2007 compared to $2.1
      million and $2.6 million stock-based compensation for the three and six months
      ended June 30, 2006, respectively.





The
      following table summarizes information about stock options outstanding at June
      30, 2007:




**Options
                Outstanding**
            
            **Options
                Exercisable****Number
                of Shares Subject to Options**
            
            **Weighted
                Average**
            
            **Weighted
                Average Remaining Contractual Life of Options**
            
            **Number
                of Options**
            
            **Weighted
                Average**
              **Exercise****Exercise
                Price**
            
            **Outstanding**
            
            **Exercise
                Price**
            
            **Outstanding**
            
            **Exercisable**
            
            **Price**$0.07
                - $  1.69
            
            
            2,440,003
            
            $
            1.01
            
            
            7.9
                yrs
            
            
            1,420,147
            
            $
            0.63$2.17
                - $  4.75
            
            
            1,238,249
            
            
            4.08
            
            
            8.2
                yrs
            
            
            672,662
            
            
            4.00$4.97
                - $  7.42
            
            
            1,606,500
            
            
            6.62
            
            
            9.4
                yrs
            
            
            39,499
            
            
            6.00$8.08
                - $11.81
            
            
            204,500
            
            
            10.10
            
            
            8.0
                yrs
            
            
            78,500
            
            
            10.12$0.07
                - $11.81
            
            
            5,489,252
            
            $
            3.68
            
            
            8.4
                yrs
            
            
            2,210,808
            
            $
            2.09





*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
      June 30, 2007, the Company had issued 11,422 shares under the 2006 Plan, with
      an
      additional 38,032 shares issued on July 1, 2007. For the three and six months
      ended June 30, 2007, the total stock-based compensation expense recognized
      related to the 2006 Plan under SFAS 123(R) was approximately $21,000 and
      $89,000, respectively.  There
      was
      no stock-based compensation realized for the same period in 2006 as the Company
      had not initiated the 2006 Plan until July 1, 2006.




11


**HANA
        BIOSCIENCES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


*Assumptions.* The
      following table summarizes the assumptions used in applying the
      Black-Scholes-Merton option pricing model to determine the fair value of awards
      granted during the three and six months ended June 30, 2007 and June 30, 2006,
      respectively:





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            **2006**
            
            **2007**
            
            **2006*****Employee
                stock options***Risk-free
                interest rate
            
            
            4.5
            %
            
            5.01
            %
            
            4.5
            %
            
            5.01
            %Expected
                life (in years)
            
            
            5.75
                - 6.0
            
            
            5.0
                - 6.0
            
            
            5.5
                - 6.0
            
            
            5.0
                - 6.0Volatility
            
            
            0.8
            
            
            0.7
            
            
            0.8
            
            
            0.7Dividend
                Yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %***Employee
                stock purchase plan***Risk-free
                interest rate
            
            
            4.82
                - 4.91
            %
            
            —
            
            
            4.82
                - 5.09
            %
            
            —Expected
                life (in years)
            
            
            0.5
                - 2.0
            
            
            —
            
            
            0.5
                - 2.0
            
            
            —Volatility
            
            
            0.73
                - 0.93
            
            
            —
            
            
            0.55
                - 1.03
            
            
            —Dividend
                Yield
            
            
            0
            %
            
            —
            
            
            0
            %
            
            —





The
      Company's computation of expected volatility of employee stock options is based
      on historical volatilities of peer companies. Peer companies' historical
      volatilities are used in the determination of expected volatility due to the
      short trading history of the Company's common stock, which is approximately
      two
      and a half years as of June 30, 2007. In selecting the peer companies, the
      Company considered the following factors: industry, stage of life cycle, size,
      and financial leverage. For the 2006 Plan, the Company used actual volatilities
      as the Company had sufficient historical data for the volatilities used in
      the
      Black-Scholes-Merton calculation. To determine the expected term of the
      Company's employee stock options granted upon adoption of SFAS 123(R) we
      utilized the simplified approach as defined by SEC Staff Accounting Bulletin
      No. 107, “Share-Based Payment” (SAB 107). This approach resulted in
      expected terms of 5.5 to 6 years for options granted during the six months
      ended
      June 30, 2007. The interest rate for periods within the contractual life of
      the
      award is based on the U.S. Treasury yield curve in effect at the time of
      grant.




*Non-Employee
      Stock Options.* The
      Company has also granted stock options to non-employee consultants. In
      accordance with Emerging Issues Task Force Issue 96-18, “Accounting for Equity
      Instruments That Are Issued to Other Than Employees for Acquiring or in
      Conjunction with Selling, Goods or Services” (EITF 96-18), compensation cost for
      options issued to non-employee consultants is measured at each reporting period
      and adjusted until the commitment date is reached, being either the date that
      a
      performance commitment is reached or the performance of the consultant is
      complete. The Company utilized a Black-Scholes-Merton option pricing model
      to
      determine the fair value of such awards.  For the three and six months
      ended June 30, 2007, the Company recognized a credit of $0.1 million and $0.2
      million of stock-based compensation expense related to awards held by
      non-employee consultants, respectively, due to the decline in the Company’s
      stock price at June 30, 2007 compared to December 31, 2006. During the three
      and
      six months ended June 30, 2006, the Company recognized $0.4 million in
      stock-based compensation related to awards held by non-employee
      consultants.




*Warrants* .
      The
      following table summarizes the warrants outstanding as of June 30, 2007 and
      the
      changes in outstanding warrants in the six months then ended:




NUMBER
                OF
              SHARES SUBJECT
              TO
                WARRANTS
              OUTSTANDING
            
            WEIGHTED-AVERAGE
              EXERCISE
                PRICEWarrants
                outstanding January 1, 2007
            
            
            2,015,901
            
            $
            3.42Warrants
                exercised
            
            
            —
            
            
            —Warrants
                cancelled
            
            
            —
            
            
            —Warrants
                outstanding June 30, 2007
            
            
            2,015,901
            
            $
            3.42





12


**HANA
        BIOSCIENCES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


**NOTE
      5. AVAILABLE FOR SALE SECURITIES**





On
      June
      30, 2007, the Company had $6,590,494 in total marketable securities which
      consisted of shares of NovaDel Pharma, Inc (“NovaDel”) purchased in conjunction
      with the Zensana license agreement, and other short-term
      investments.




At
      June
      30, 2007, the Company had $6,130,494 of marketable securities invested in
      auction rate securities and other short-term investments and no material
      unrealized gains or lossed were recognized as of June 30, 2007 related to these
      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. The market value of these shares on June
      30, 2007 was $460,000, and for the six months ended June 30, 2007, the Company
      realized a loss of $176,000 since the original purchase in October 2004. These
      securities were written down to their fair market value on June 30, 2007, as
      the
      decline in value, in the opinion of management, is considered other than
      temporary. On June 30, 2006, the market value of these shares was $540,000
      and
      the Company had an unrealized loss of $96,000 since the original purchase in
      October 2004.




**NOTE
      6. RESTRICTED CASH**





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





**NOTE
      7. COMMITMENTS**





***Employment
      Agreements.*** ** The
      Company entered into a written three year employment agreement with its
      President and Chief Executive Officer dated November 1, 2003. This agreement
      was
      amended in December 2005 to provide for an employment term that expires in
      November 2008. The minimum aggregate amount of gross salary compensation to
      be
      provided over the remaining term of the agreement amounted to approximately
      $460,000 at June 30, 2007.





The
      Company entered into a written two year employment agreement with its Vice
      President, Chief Business Officer on January 25, 2004. This agreement was
      amended in December 2005 and now provides for an employment term that expires
      in November 2008. The minimum aggregate amount of gross salary compensation
      to
      be provided over the remaining term of the agreement amounted to approximately
      $333,000 at June 30, 2007.




13


**HANA
        BIOSCIENCES, INC.**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 
 **NOTES
        TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**


On
      May 6,
      2007, the Company entered into a written three year employment agreement with
      its Executive Vice President, Development and Chief Medical Officer, whose
      employment commenced May 21, 2007. This agreement provides for an employment
      term that expires in May 2010. The minimum aggregate amount of gross salary
      compensation and guaranteed bonuses to be provided for over the remaining term
      of the agreement amounted to approximately $1,245,000 at June 30, 2007.




The
      Company entered into a written an employment agreement with its Vice President
      and Chief Financial Officer on December 18, 2006. This agreement provides for
      an
      employment term that expires in November 2008. The minimum aggregate amount
      of
      gross salary compensation to be provided for over the remaining term of the
      agreement amounted to approximately $233,000 at June 30, 2007.





***Lease.*** The
      Company entered into a three year sublease, which commenced on May 31, 2006,
      for
      property at 7000 Shoreline Court in South San Francisco, California, where
      the
      Company’s executive offices are located. The total cash payments due for the
      duration of the sublease equaled approximately $1.1 million on June 30, 2007.




**NOTE
      8. SUBSEQUENT EVENTS**




On
      July
      31, 2007, the Company entered into a sublicense agreement with Par
      Pharmaceutical, Inc. (“Par”) and NovaDel, pursuant to which the Company granted
      to Par and its affiliates, and NovaDel consented to such grant, a
      royalty-bearing exclusive right and license to develop and commercialize Zensana
      within the United States and Canada. The Company previously had acquired such
      exclusive, sublicensable rights from NovaDel and commenced development of
      ZensanaTM, a pharmaceutical product that contains ondansetron, pursuant to a
      License Agreement with NovaDel dated October 24, 2004, as amended. As agreed
      by
      the Company and NovaDel, Par assumed primary responsibility for the development,
      regulatory approval by the U.S. Food and Drug Administration (the “FDA”), and
      sales and marketing of Zensana.




In
      consideration for the license grant to Par, and upon execution of the Sublicense
      Agreement, Par purchased 2,500,000 newly-issued shares of the Company’s common
      stock at a price per share of $2.00 per share for aggregate consideration of
      $5,000,000. The share purchase price reflected a 25% premium to the
      volume-weighted average sale price of the Company’s common stock during the 10
      trading days ending July 30, 2007. The purchase of the shares was made pursuant
      to a separate subscription agreement between the Company and Par dated July
      31,
      2007. Under the terms of the subscription agreement, Par agreed that it will
      not
      sell, transfer or otherwise dispose of all or any such shares for one year
      following the effective date of the Sublicense Agreement or, if earlier, the
      filing of a new drug application with the FDA or the termination of the
      Sublicense Agreement (the “Lock-Up Period”). For a one-year period following the
      expiration of the Lock-Up Period, Par further agreed not to sell more than
      50%
      of the shares in any 90-day period. The offer and sale of the Company’s shares
      to PAR was registered under the Securities Act of 1933 and made pursuant to
      the
      Company’s Form S-3 registration statement, SEC File. No.
      333-138138.




As
      additional consideration for the sublicense, following regulatory approval
      of
      Zensana, the Sublicense Agreement, Par is required to pay the Company an
      additional one-time payment of $6,000,000, of which $5,000,000 is payable by
      the
      Company to NovaDel under the License Agreement. In addition, the Sublicense
      Agreement provides for an additional aggregate of up to $44,000,000 in
      commercialization milestone payments based upon actual net sales of Zensana
      in
      the United States and Canada, which amounts are not subject to
      any corresponding obligations to NovaDel. The Company will also be entitled
      to royalty payments based on net sales of Zensana by Par or any of its
      affiliates in such territory, however, the amount of such royalty payments
      is
      generally equal to the same amount of royalties that the Company will owe
      NovaDel under the License Agreement, except to the extent that aggregate net
      sales of Zensana exceed a specified amount in the first 5 years following FDA
      approval of an NDA, in which case the royalty rate payable to the Company
      increases beyond its royalty obligation to NovaDel.





In
      order
      to give effect to and accommodate the terms of the Sublicense Agreement, on
      July
      31, 2007, the Company and NovaDel also entered into an Amended and Restated
      License Agreement. The primary modifications to the Amended and Restated License
      Agreement are as follows:




·
            The
                Company relinquished its right under the original License Agreement
                to
                reduced royalty rates to NovaDel until such time as the Company recovered
                one-half of its costs and expenses incurred in developing Zensana
                from
                sales of Zensana or payments or other fees from a
                sublicensee;




14




·
            NovaDel
                will surrender for cancellation all 73,121 shares of the Company’s common
                stock that it acquired upon the execution of the original License
                Agreement;




·
            The
                Company will have the right, but not the obligation, to exploit the
                licensed product in Canada;




·
            The
                Company or its sublicensee must consummate the first commercial sale
                of
                the licensed product within 9 months of regulatory approval by the
                FDA of
                such product; and




·
            If
                the Sublicense Agreement is terminated, the Company may elect to
                undertake
                further development of Zensana.




15





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




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





**Overview**





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





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





·
            ***Marqibo***®***(vincristine sulfate injection, OPTISOMETM)****-*We
                acquired our rights to Marqibo from Tekmira Pharmaceuticals Corporation
                (formerly Inex Pharmaceuticals Corporation) in May 2006. Marqibo
                has been
                evaluated in more than 600 patients in 13 clinical trials, including
                Phase
                2 clinical trials in patients with non-Hodgkin’s lymphoma, or NHL, and
                acute lymphoblastic leukemia, or ALL. We recently initiated a
                multi-center, multi-national Phase 2 clinical trial of Marqibo in
                adult
                patients with relapsed ALL, also known as the rALLy study. The patient
                population is defined as Philadelphia chromosome-negative adult patients
                in second relapse or those patients who relapsed following two lines
                of
                anti-leukemia chemotherapy, including those who have previously undergone
                stem cell transplantation. We expect to enroll up to 56 evaluable
                patients
                in this clinical trial. We also plan to conduct a Phase 3 first-line,
                clinical trial in newly diagnosed, elderly adults with Philadelphia
                chromosome-negative ALL. This Phase 3 randomized trial will compare
                Marqibo to vincristine in the induction, consolidation, and maintenance
                phases of treatment. We plan to conduct this study in collaboration
                with
                three major U.S. and European oncology cooperative groups. Pending
                finalization of the protocol and final review by the cooperative
                groups,
                we anticipate this study will potentially commence in 2007. We are
                also
                planning a single-center pilot Phase 2 clinical trial of Marqibo
                in
                patients with metastatic malignant uveal melanoma. The patient population
                is defined as adults with uveal melanoma and confirmed metastatic
                disease
                that is untreated or that has progressed following one prior therapy.
                We
                expect to enroll up to 30 patients in this clinical trial. Additionally,
                Marqibo has been granted Orphan Drug Designation by the FDA for the
                treatment of adult ALL.




·
            ***AlocrestTM
                (vinorelbine tartrate injection, OPTISOMETM)****-*In
                August 2006, we initiated a Phase 1 clinical trial to assess the
                safety,
                tolerability and preliminary efficacy of Alocrest in patients with
                advanced solid tumors. The trial is being conducted at the Cancer
                Therapy
                and Research Center in San Antonio, Texas,**McGill
                University in Montreal, Canada; and South Texas Accelerated Research
                Therapeutics, San Antonio. We expect to complete the Phase 1 trial
                in 2007
                and potentially launch additional trials in
                2007.





·
            ***Optisomal
                Topotecan****-*Following
                completion of preclinical development, we expect to file an
                investigational new drug application, or IND, and to initiate a Phase
                1
                clinical trial in 2007.




·
            ***TalvestaTM
                (talotrexin) for Injection****-*In
                April 2004, we commenced an NCI-sponsored Phase 1 clinical trial
                to evaluate the safety of Talvesta when administered intravenously
                on
                days 1, 8 and 15 of a 28-day cycle to patients with solid tumors. In
                March 2007, this clinical trial was discontinued due to toxicity.
                Fifty
                subjects received doses of Talvesta with one drug related patient
                death
                being reported during this clinical trial. We commenced a Phase 1/2
                clinical trial of Talvesta in non-small cell lung cancer in February
                2005.
                In the Phase 1 portion of this clinical trial, which is now closed
                for
                enrollment, Talvesta was administered to patients to ascertain the
                maximum
                tolerated dose of the drug. We have suspended enrollment in this
                clinical
                trial for additional safety analysis. In May 2005, we commenced a
                Phase
                1/2 clinical trial of Talvesta in ALL. The Phase 1 portion of this
                clinical trial is closed for enrollment.  While we have not seen
                issues related to toxicity in the ALL trial, we proactively suspended
                enrollment in the Phase 2 portion of the ALL trial as a safety
                precaution.  Subsequent to our postponement of initiating new
                clinical trials, the FDA notified us that it had placed the Talvesta
                studies on clinical hold. We anticipate meeting with the FDA upon
                the
                completion of our safety analysis, which we anticipate to be completed
                in
                the fourth quarter of 2007. After evaluation of the final safety
                and
                efficacy analysis of the completed trials and our meeting with the
                FDA, we
                will determine our next steps for the drug
                candidate.




16


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




·
            ***ZensanaTM
                (ondansetron HCI) Oral Spray*****-In
                June 2006, we submitted our new drug application, or NDA, for Zensana
                for
                the prevention of chemotherapy-induced, radiation-induced and
                post-operative nausea and vomiting, referred to as CINV, RINV and
                PONV,
                respectively, under Section 505(b)(2) of the Food, Drug and Cosmetic
                Act,
                or FDCA, a form of registration that relies, at least in part, on
                data in previously approved NDAs for which we do not have a right
                of
                reference or published literature or both. While our NDA was pending
                with
                the FDA, long-term stability studies revealed small amounts of
                precipitated material in scale-up batches of Zensana. Through further
                investigation, we determined that the precipitation is caused by
                an issue
                with the original formulation, and was not related to the manufacturing
                process. As a result, we withdrew our NDA without prejudice in March
                2007.
                Since then, we have developed an alternate formulation. The alternate
                formulation is currently under active investigation. On July 31,
                2007, we
                entered into a definitive agreement providing for the sublicense
                of all of
                our rights to develop and commercialize Zensana to Par Pharmaceutical,
                Inc. Under the terms of our agreement, Par is now responsible for
                all
                regulatory, development and commercialization activities for
                Zensana. Accordingly, we do not expect to incur additional expenses
                relating to Zensana. See “-
                Off
                Balance Sheet Arrangements - License Agreements - Zensana.”




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




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




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




17




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


**Critical
      Accounting Policies**





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




***Share
      Based Compensation***




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




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




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





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





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




18




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





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





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




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





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




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




**Recent
      Accounting Pronouncements**





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




19





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




**Results
      of Operations**





***Three
      Months Ended June 30, 2007 Compared to Three Months Ended June 30,
      2006***




*General
      and administrative expenses.* For the
      three months ended June 30, 2007, general and administrative, or G&A,
      expense was $2.7 million, as compared to $2.6 million for the three months
      ended
      June 30, 2006. There was an increase of $0.3 million increase in salaries,
      other
      employee benefits and personnel related costs which were offset by a decrease
      of
      $0.2 million in employee related share-based compensation expense. For the
      three
      months ended June 30, 2007, we also incurred a minimal increase in outside
      services and professional service fees related to increased audit, legal,
      consulting fees as well as outside services. Also for the three months ended
      June 30, 2007, there was a minimal increase in allocable expenses, including
      rent, insurance and other expenses.





*Research
      and development expenses.* For the
      three months ended June 30, 2007, research and development, or R&D, expense
      was $6.5 million, as compared to $18.4 million for the three months ended June
      30, 2006. The decrease of $11.9 million is due primarily to a decrease of $12.3
      million in costs related to the acquisition and development of our six product
      candidates. These include a decrease in costs of $11.9 million in 2007 related
      to acquisition costs related to the Inex Agreement, completed in May 2006,
      of
      which $10.1 million was a non-cash charge for stock issued as consideration
      to
      Inex, as well as an additional decrease of $1.0 million relates to a payment
      made for milestones reached in our license agreements in June 2006. Costs
      related to the development of our six drug candidates increased by $0.3 million
      in 2007 over the same period as 2006. There was also an increase in outside
      services, consultants and professional fees related to research and development
      projects of $0.3 million in 2007 compared to the 2006. These development costs
      included the physical manufacturing of drug compounds, payments to our contract
      research organizations. Costs for Marqibo increased by $0.5 million, as the
      Phase 2 clinical trial in adult patients with relapsed ALL started to initiate
      sites. Costs related to the development of Zensana decreased by $1.1 million
      in
      the three months ended June 30, 2007 compared to June 30, 2006, due mainly
      to a
      decrease in manufacturing costs and clinical costs. As a result of our July
      2007
      sublicense agreement with Par Pharmaceutical, we do not expect to incur
      additional costs relating to the development of Zensana. Development costs
      for
      Topotecan, Alocrest and Menadione increased by $1.0 million due mainly to
      manufacturing costs for these drugs as well as clinical costs for Alocrest
      related to the Phase 1 study in advanced solid tumors. Costs related to IPdR
      and
      Talvesta decreased by $0.2 million  in the three months ended June 30,
      2007 compared to the same period in 2006 as IPdR was halted in January 2007
      and Talvesta clinical trials were halted in May 2007. Employee related expenses
      decreased by $0.1 million and other allocable operating expenses increased
      by
      approximately $0.6 million for the three months ended June 30, 2007 compared
      to
      the three months ended June 30, 2006. This includes a $0.4 million increase
      in
      conference and printing expenses as well as an increase of $0.2 million in
      rent,
      insurance and other allocable costs as head count increased in 2007 over
      2006.





*Interest
      income (expense), net.* For the
      three months ended June 30, 2007, net interest income was $0.3 million as
      compared to net interest income of $0.2 million for the three months ended
      June
      30, 2006. The increase of $0.1 million resulted from an increase of $0.1 million
      in interest income, due to increased cash balance in our interest bearing
      accounts due to our May 2006 financing which resulted in net proceeds of $37.1
      million, plus rising interest rates.





*Other
      income (expense), net.* For
      the
      three months ended June 30, 2007, net other expense was $0.2 million as compared
      to net other expense of approximately $9,000 for the three months ended June
      30,
      2006. The increase of approximately $176,000 resulted primarily due to a
      write-down on available-for-sale securities for an other than temporary
      loss.




20




***Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006***




*General
      and administrative expenses.* For the
      six months ended June 30, 2007, general and administrative, or SG&A, expense
      was $6.1 million, as compared to $3.6 million for the six months ended June
      30,
      2006. The increase of $2.5 million is due primarily to an increase in
      salaries, other employee benefits and personnel related costs of approximately
      $1.6 million, including an increase of $0.9 million in employee related
      share-based compensation expense due to increased employee stock options and
      restricted stock issued in subsequent quarters of 2006 and in 2007 as well
      as
      increased salary, bonus and benefits of $0.7 due to increased wages and
      headcount in 2007 compared to 2006. For the six months ended June 30, 2007,
      we
      also incurred an increase of approximately $0.6 million in outside services
      and
      professional service fees mainly related to increased audit, consulting and
      outside services related to sales and marketing. The increase in accounting
      and
      consulting fees related mainly to increased cost of complying with Section
      404
      of the Sarbanes-Oxley Act, including increased external audit fees, consulting
      fees for management’s assessment of internal controls, which costs occurred
      mainly at the end of 2006 and in the first three months of 2007. Also for the
      six months ended June 30, 2007, there was an increase of approximately $0.3
      million in allocable expenses, including an increase of $0.1 million in
      marketing costs related to the launch of Zensana and an increase of $0.2 million
      in rent, insurance and other allocable expenses.





*Research
      and development expenses.* For the
      six months ended June 30, 2007, research and development, or R&D, expense
      was $11.7 million, as compared to $20.9 million for the six months ended June
      30, 2006. The decrease of $9.2 million is due primarily to a decrease of $11.6
      million in research and development costs related to the acquisition and
      development of our six product candidates. These include a decrease in costs
      of
      $11.9 million in 2007 related to acquisition costs related to the Inex
      Agreement, completed in May 2006, of which $10.1 million was a non-cash charge
      for stock issued as consideration to Inex, as well as an additional decrease
      of
      $1.1 million relates to a payment made for milestones reached in our license
      agreements in June 2006. The decrease of costs was partially offset by an
      increase of $1.0 million for costs related to the development on our six drugs,
      as well as an increase in outside services, consultants and professional fees
      related to research and development projects increased of $0.4 million for
      the
      six months ended June 30, 2007 compared to the six months ended June 30, 2006.
      These development costs included the physical manufacturing of drug compounds,
      payments to our contract research organizations. Costs for Marqibo increased
      by
      $1.2 million, as the Phase 2 clinical trial in adult patients with relapsed
      ALL
      started to initiate sites. Costs related to the development of Zensana decreased
      by $1.4 million in the six months ended June 30, 2007 compared to June 30,
      2006,
      due mainly to a decrease in manufacturing costs and clinical costs. As a result
      of our July 2007 sublicense agreement with Par Pharmaceutical, we do not expect
      to incur additional costs relating to the development of Zensana. Development
      costs for Topotecan, Alocrest and Menadione increased by $1.6 million due mainly
      to manufacturing costs for these early stage drugs as well as clinical costs
      for
      Alocrest related to the Phase 1 study in advanced solid tumors. Costs related
      to
      IPdR and Talvesta decreased by $0.5 million as IPdR was halted in January 2007
      and Talvesta clinical trials were halted in May 2007. Other outside services,
      consultants and professional fees related to research and development projects
      increased by $0.1 million in the six months ended June 30, 2007 compared to
      the
      six months ended June 30, 2006. Employee related expenses increased by $1.6
      million in 2007, including an increase in salaries, other employee benefits
      and
      personnel related costs of approximately $1.0 million and an increase of $0.6
      million in employee related share-based compensation expense due to increased
      employee stock options issued in subsequent quarters 2006 and in 2007. The
      increase in salary, bonus and benefits was due to increased wages and headcount
      in 2007 compared to 2006 as the research and development teams expanded with
      the
      acquisition of 4 additional drugs in 2006. Other allocable operating expenses
      increased by approximately $0.8 million for the six months ended June 30, 2007
      compared to the six months ended June 30, 2006. This includes a $0.4 million
      increase in conference costs, a $0.1 million increase in travel expenses, as
      well as an increase of $0.3 million in rent, insurance and other allocable
      costs
      as head count increased in 2007 over 2006.





*Interest
      income (expense), net.* For the
      six months ended June 30, 2007, net interest income was $0.7 million as compared
      to net interest income of $0.4 million for the six months ended June 30, 2006.
      The increase of $0.3 million resulted from an increase of $0.3 million in
      interest income, due to increased cash balance in our interest bearing accounts
      due to our May 2006 financing which resulted in net proceeds of $37.1 million,
      plus rising interest rates.





*Other
      income (expense), net.* For
      the
      six months ended June 30, 2007, net other expense was $0.2 million as compared
      to net other expense of approximately $17,000 for the six months ended June
      30,
      2006. The increase of approximately $183,000 resulted primarily from a
      write-down on available-for-sale securities for an other than temporary
      loss.




21





**Liquidity
      and Capital Resources**




From
      inception to June 30, 2007, we have incurred an aggregate net loss of $80.1
      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 financing.
      From
      inception through June 30, 2007, we had a net increase in cash and cash
      equivalents and marketable securities of $21.0 million. This increase primarily
      resulted from net cash provided by financing activities of $70.2 million,
      substantially all of which was derived from our five private placements which
      netted proceeds of $68.0 million. The increase in cash provided by financing
      activities was offset by net cash used in operating activities of $48.2 million
      and net cash used in investing activities of $7.6 million for the cumulative
      period from inception to June 30, 2007. Our continued operations will depend on
      whether we are able to raise additional funds through various potential sources,
      such as equity and debt financing. Through June 30, 2007, a significant portion
      of our financing has been through private placements of common stock, preferred
      stock and debt financing. We will continue to fund operations from cash on
      hand
      and through future placements of capital stock or debt financings. We can give
      no assurances that any additional capital that we are able to obtain will be
      sufficient to meet our needs. Given the current and desired pace of clinical
      development of our six product candidates, we estimate that we will have
      sufficient cash on hand to fund clinical development through the first half
      of
      2008. We may, however, choose to raise additional capital before 2008 in order
      to fund our future development activities, likely by selling shares of our
      capital stock or other securities. If we are unable to raise additional capital,
      we will likely be forced to curtail our desired development activities, which
      will delay the development of our product candidates. There can be no assurance
      that such capital will be available to us on favorable terms or at all. We
      will
      need additional financing thereafter until we can achieve profitability, if
      ever.





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





In
      July
      2004, we received gross proceeds of $8.0 million through the sale of 2,395,210
      shares of our Series A Convertible Preferred Stock, all of which converted
      into
      3,377,409 shares of common stock in January 2005.





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




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




22





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





***Current
      and Future Capital Requirements.*** Our plan
      of operation for the year ending December 31, 2007 is to continue implementing
      our business strategy, including the continued development of our six product
      candidates that are currently in clinical and preclinical phases. We also intend
      to expand our drug candidate portfolio by acquiring additional drug technologies
      for development. We expect our principal expenditures during the next 12 months
      to include:





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




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





As
      part
      of our planned research and development, we intend to use clinical research
      organizations and third parties to perform our clinical studies and
      manufacturing. As indicated above, at our current and desired pace of clinical
      development of our six product candidates, over the next 12 months we expect
      to
      spend approximately $18.0 million on clinical development (including milestone
      payments of $2.5 million that we expect to be triggered under the license
      agreements relating to our product candidates, all of which can be satisfied
      through the issuance of new shares our common stock at our discretion), $4.0
      million on general corporate and administrative expenses, including $600,000
      on
      facilities and rent. We recently initiated a multi-center, multi-national
      Phase 2 clinical trial of Marqibo in adult patients with relapsed ALL. We also
      plan to conduct a Phase 3 first-line, clinical trial in newly diagnosed, elderly
      adults with Philadelphia chromosome-negative ALL and a single-center pilot
      Phase
      2 clinical trial of Marqibo in patients with metastatic malignant uveal melanoma
      . We also expect to complete our Phase 1 clinical trial and initiate additional
      trials of Alocrest in 2007. We expect to initiate a Phase 1 study of Optisomal
      Topotecan. We also plan to complete formulation and preclinical work on
      menadione, and anticipate filing an IND in 2007.





We
      believe that our cash, cash equivalents and marketable securities, which totaled
      $21.0 million as of June 30, 2007, will be sufficient to meet our anticipated
      operating needs through the first half of 2008 based upon our current and
      desired pace of clinical development. However, we expect to incur substantial
      expenses as we continue our drug discovery and development efforts, particularly
      to the extent we advance our lead candidate Marqibo through a pivotal clinical
      study. We cannot guarantee that future financing will be available in amounts
      or
      on terms acceptable to us, if at all.





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




·
            costs
                associated with conducting preclinical and clinical
                testing;





·
            costs
                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;




23


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




·
            costs
                of increased general and administrative
                expenses.




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





***Research
      and Development Projects***





The
      discussion below describes for each of our development projects the research
      and
      development expenses we have incurred to date and, to the extent we are able
      to
      reasonably ascertain, the amounts we estimate we will have to expend in order
      to
      complete development of each project and the time we estimate it will take
      to
      complete development of each project. In addition to those risks identified
      under Item 1A of our Annual Report on Form 10-K for the year ended December
      31,
      2006, our assumptions relating the expected costs of development and timeframe
      for completion are dependent on numerous risks and other factors, including
      the
      availability of capital, unforeseen safety issues, lack of effectiveness, and
      significant unforeseen delays in the clinical trial and regulatory approval
      process, any of which could be extremely costly. In addition, our estimates
      assume that we will be able to enroll a sufficient number of patients in
      clinical trials.





Since
      our
      business does not currently generate positive cash flow, we will likely need
      to
      raise additional capital to continue development of our product candidates
      beyond 2007. If we are to raise such capital, we expect to raise it primarily
      by
      selling shares of our capital stock. To the extent additional capital is not
      available when we need it, we may be forced to discontinue or scale-back our
      development efforts relating to one or more of our product candidates or
      out-license our rights to our product candidates to a third party, any of which
      would have a material adverse effect on the prospects of our
      business.





***Marqibo.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Marqibo
      in May 2006, we have incurred $3.0 million in project costs related to our
      development of Marqibo through June 30, 2007, of which $1.7 million and $1.3
      million was incurred in 2007 and 2006, respectively. In 2007, we plan to
      initiate a Phase 2, open-label trial in relapsed adult ALL and a Phase 2 trial
      in uveal melanoma. Pending finalization of the protocol with cooperative groups,
      we anticipate conducting a Phase 3 trial in front-line ALL potentially
      commencing in 2007. We estimate that we will need to expend at least an
      aggregate of approximately $47 million in order for us to obtain FDA approval
      for Marqibo, if ever, which includes a milestone payment that would be owed
      to
      our licensor upon FDA approval.  We believe we currently have sufficient
      capital to fund our planned development activities of Marqibo through 2007.
      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.





***Alocrest.*** ** Since
      acquiring the exclusive world-wide rights to develop and commercialize Alocrest
      in May 2006, we have incurred $2.0 million in project costs related to our
      development of Alocrest through June 30, 2007, of which $1.2 million and $0.8
      million was incurred in 2007 and 2006, respectively. We initiated a Phase 1
      clinical trial in August 2006. This Phase 1 trial is designed to assess safety,
      tolerability and preliminary efficacy in patients with advanced solid tumors.
      We
      estimate that we will need to expend at least an aggregate of approximately
      $47
      million, in order for us to obtain FDA approval for Alocrest, if ever, which
      amount includes milestone payments that would be owed to our licensor upon
      FDA
      approval.  We believe we currently have sufficient capital to fund our
      planned development activities of Alocrest through 2007. We expect that it
      will
      take approximately five to six years until we will have completed development
      and obtained FDA approval of Alocrest, if ever.




24





***Optisomal
      Topotecan.*** Since
      acquiring the exclusive world-wide rights to develop and commercialize Optisomal
      topotecan in May 2006, we have incurred $1.5 million in project costs related
      to
      our development of this drug through June 30, 2007, of which $0.5 million and
      $1.0 million was incurred in 2007 and 2006, respectively. Following completion
      of additional preclinical development, we expect to file an IND and initiate
      clinical trials in 2007. As this drug is early in its clinical development,
      both
      the registrational strategy and total expenditures to obtain FDA approval are
      still being evaluated.





***Talvesta*** . From
      inception through June 30, 2007, we have incurred $4.4 million of costs related
      to our development of Talvesta, of which $0.4 million and $1.7 million was
      incurred in 2007 and 2006, respectively. We believe we currently have sufficient
      capital to fund our planned development activities of Talvesta through 2007.
      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.





***Menadione*** *.* We
      licensed our rights to menadione from the Albert Einstein College of Medicine
      in
      October 2006 and have incurred approximately $0.7 million in project costs
      related to our development of this drug through June 30, 2007, of which $0.4
      million and $0.3 million was incurred in 2007 and 2006, respectively. We expect
      to complete formulation of menadione in 2007 and to file an IND in 2008. We
      will incur approximately $1.3 million in costs to fund our research and
      development efforts for this drug during 2007. As this drug is early in its
      clinical development, both the registrational strategy and total expenditures
      to
      obtain FDA approval are still being evaluated.





***Zensana
      (ondansetron HCl) Oral Spray*** ***.***  Since
      acquiring our rights to Zensana in October 2004, we have incurred $7.9 million
      of project costs related to our development through June 30, 2007, of which
      $0.9
      million and $6.1 million was incurred in 2007 and 2006, respectively. In June
      2006, we submitted our NDA for Zensana for the prevention of CINV, RINV and
      PONV
      under Section 505(b)(2) of the FDCA. While our NDA was pending with the FDA,
      long-term stability studies revealed small amounts of precipitated material
      in
      scale-up batches of Zensana. Through further investigation of this issue, we
      determined that the precipitation issue in long-term stability was not related
      to the manufacturing process, but was in fact an issue with the original
      formulation. As a result, in March 2007, we withdrew our NDA without prejudice.
      Since then, we have developed an alternate formulation. The alternate
      formulation is currently under active investigation.  On July 31, 2007, we
      entered into a definitive agreement providing for the sublicense all of our
      rights to develop and commercialize Zensana to Par Pharmaceutical, Inc.
      Accordingly, we do not expect to incur additional costs relating to the
      development of Zensana. See “- Off-
      Balance
      Sheet Arrangements - License Agreements - Zensana.”




**Off-Balance
      Sheet Arrangements**





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





***License
      Agreements.***





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




25





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





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




On
      July
      31, 2007, we entered into a sublicense agreement with Par Pharmaceutical,
      Inc. and NovaDel , pursuant to which we granted to Par and its affiliates,
      and NovaDel consented to such grant, a royalty-bearing exclusive right and
      license to develop and commercialize Zensana within the United States and
      Canada. We previously had acquired such exclusive, sublicensable rights from
      NovaDel and commenced development of ZensanaTM, a pharmaceutical product that
      contains ondansetron, pursuant to a License Agreement with NovaDel dated October
      24, 2004, as amended. As agreed by us and NovaDel, Par assumed primary
      responsibility for the development, regulatory approval by the FDA, and sales
      and marketing of Zensana.




In
      consideration for the license grant to Par, and upon execution of the Sublicense
      Agreement, Par purchased 2,500,000 newly-issued shares of our common stock
      at a
      price per share of $2.00 per share for aggregate consideration of $5,000,000.
      The share purchase price reflected a 25% premium to the volume-weighted average
      sale price of our common stock during the 10 trading days ending July 30, 2007.
      The purchase of the shares was made pursuant to a separate subscription
      agreement between us and Par dated July 31, 2007. Under the terms of the
      subscription agreement, Par agreed that it will not sell, transfer or otherwise
      dispose of all or any such shares for one year following the effective date
      of
      the Sublicense Agreement or, if earlier, the filing of a new drug application
      with the FDA or the termination of the Sublicense Agreement (the “Lock-Up
      Period”). For a one-year period following the expiration of the Lock-Up Period,
      Par further agreed not to sell more than 50% of the shares in any 90-day
      period.




As
      additional consideration for the sublicense, following regulatory approval
      of
      Zensana, the Sublicense Agreement, Par is required to pay us an additional
      one-time payment of $6,000,000, of which $5,000,000 is payable by us to NovaDel
      under the License Agreement. In addition, the Sublicense Agreement provides
      for
      an additional aggregate of $44,000,000 in commercialization milestone payments
      based upon actual net sales of Zensana in the United States and Canada, which
      amounts are not subject to any corresponding obligations to NovaDel. We
      will also be entitled to royalty payments based on net sales of Zensana by
      Par
      or any of its affiliates in such territory, however, the amount of such royalty
      payments is generally equal to the same amount of royalties that we will owe
      NovaDel under the License Agreement, except to the extent that aggregate net
      sales of Zensana exceed a specified amount in the first 5 years following FDA
      approval of an NDA, in which case the royalty rate payable to us increases
      beyond its royalty obligation to NovaDel.





In
      order
      to give effect to and accommodate the terms of the Sublicense Agreement, on
      July
      31, 2007, we also entered into an Amended and Restated License Agreement with
      NovaDel. The primary modifications to the Amended and Restated License
      Agreement are as follows:




·
            we
                relinquished our right under the original License Agreement to reduced
                royalty rates to NovaDel until such time as we have recovered one-half
                of
                our costs and expenses incurred in developing Zensana from sales
                of
                Zensana or payments or other fees from a
                sublicensee;




·
            NovaDel
                will surrender for cancellation all 73,121 shares of our common stock
                that
                it acquired upon the execution of the original License
                Agreement;




·
            We
                will have the right, but not the obligation, to exploit the licensed
                product in Canada;




·
            We
                or our sublicensee must consummate the first commercial sale of the
                licensed product within 9 months of regulatory approval by the FDA
                of such
                product; and




·
            If
                the Sublicense Agreement is terminated, we may elect to undertake
                further
                development of Zensana.




***Inex
      License Agreement.*** **** In
      May
      2006, we entered into a series of related agreements with Inex Pharmaceuticals
      Corporation. Pursuant to a license agreement with Inex, we received an
      exclusive, worldwide license to patents, technology and other intellectual
      property relating to our Marqibo, Alocrest and Optisomal Topotecan product
      candidates. Under the license agreement, we also received an exclusive,
      worldwide sublicense to other patents and intellectual property relating to
      these product candidates held by the M.D. Anderson Cancer Center. In addition,
      we entered into a sublicense agreement with Inex and the University of British
      Columbia, or UBC, which licenses to Inex other patents and intellectual property
      relating to the technology used in Marqibo, sphingosome encapsulated vinorelbine
      and Optisomal Topotecan. Further, Inex assigned to us its rights under a license
      agreement with Elan Pharmaceuticals, Inc., from which Inex had licensed
      additional patents and intellectual property relating to the three sphingosomal
      product candidates.





In
      consideration for the rights and assets acquired from Inex, we paid to Inex
      aggregate consideration of $11.8 million, which payment consisted of $1.5
      million in cash and 1,118,568 shares of our common stock. We also agreed to
      pay
      to Inex royalties on sales of the licensed products, as well as upon the
      achievement of specified development and regulatory milestones and up to a
      maximum aggregate amount of $30.5 million for all product candidates. The
      milestones and other payments may include annual license maintenance fees and
      milestones. To date, we have made one milestone payment of $1.0 million to
      Inex
      upon initiation of a Phase 1 clinical trial in Alocrest.





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




26




**Lease
      Agreements** .
      We
      entered into a three year sublease, which commenced on May 31, 2006, for
      property at 7000 Shoreline Court in South San Francisco, California, where
      the
      Company has relocated its executive offices. The total cash payments due for
      the
      duration of the sublease equaled approximately $1.1 million on June 30,
      2007.




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




Our
      exposure to market risk is confined to our cash, cash equivalents, auction
      rate securities and our investment in NovaDel Pharma, Inc. We have
      attempted to minimize risk by investing in high-quality financial instruments,
      primarily money market funds with no security having an effective duration
      longer than 90 days. We are subject to risk due to general market conditions,
      which may adversely impact the carrying value of our auction rate securities
      and
      our investment in NovaDel. If the market interest rate decreases by 100 basis
      points or 1%, the fair value of our cash and cash equivalents portfolio would
      have minimal to no impact on the carrying value of our portfolio. We did not
      hold any derivative instruments as of June 30, 2007, and we have never held
      such
      instruments in the past.





**Item
      4. Controls and Procedures**




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





Based
      on
      their evaluation as of June 30, 2007, our Chief Executive Officer and Chief
      Financial Officer, with the participation of management, have concluded that
      our
      disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
      of the Securities Exchange Act of 1934) are effective to ensure that the
      information required to be disclosed by us in the reports that we file or submit
      under the Securities and Exchange Act of 1934 is recorded, processed, summarized
      and reported within the time periods specified in Securities and Exchange
      Commission rules and forms.




During
      the quarter ended June 30, 2007, there were no changes in our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to materially affect, our internal controls over financial
      reporting.




27


**PART
      II - OTHER INFORMATION**




**Item
      1. Legal Proceedings**





We
      are
      not involved in any legal proceeding.





**Item
      1A. Risk Factors**





*Investment
      in our common stock involves significant risk. You should carefully consider
      the
      information described in the following risk factors, together with the other
      information appearing elsewhere in this report, before making an investment
      decision regarding our common stock.* *The
      risk factors set forth below that are marked with an asterisk (*) contain
      material changes to the similarly titled risk factor included in Item 1A to
      our Annual Report on Form 10-K.* *If
      any of these risks actually occur, our business, financial conditions, results
      of operation and future growth prospects would likely be materially and
      adversely affected. In these circumstances, the market price of our common
      stock
      could decline, and you may lose all or a part of your investment in our common
      stock. Moreover, the risks described below are not the only ones that we face.
      Additional risks not presently known to us or that we currently deem immaterial
      may also affect our business, operating results, prospects or financial
      condition.*





**Risks
      Related to Our Business**




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




We
      are a
      development stage company with a limited operating history. We have never
      generated revenue and have incurred significant net losses in each year since
      our inception. We expect to incur substantial losses and negative cash flow
      from
      operations for the foreseeable future, and we may never achieve or maintain
      profitability. For the year ended December 31, 2006, we had net losses of
      $44.8 million. From our inception in December 2002 through June 30, 2007, we
      have incurred an aggregate net loss of $80.1 million.




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




·
            continue
                to undertake preclinical development and, if and when permitted by
                appropriate regulatory agencies, clinical trials for our current
                and any
                new product candidates;




·
            seek
                regulatory approvals for our product candidates at the appropriate
                time in
                the future;




·
            implement
                additional internal systems and
                infrastructure;




·
            seek
                to acquire additional technologies to develop;
                and




·
            hire
                additional personnel.




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




28


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


We
      expect
      to incur losses at least until we can successfully commercialize one or more
      of
      our product candidates. We expect that we will require additional financing
      to
      fund our development programs and to expand our infrastructure and
      commercialization activities. Net cash used in operating activities was $20.5
      million in the year ended December 31, 2006 and $14.0 million for the six
      months ended June 30, 2007. Together with our existing cash, cash equivalents
      and available for sale securities, we expect that the net proceeds from this
      offering will be sufficient to fund our operations into the second half of
      2008.
      Accordingly, we will need additional capital to fund our operations beyond
      such
      point. If we fail to obtain the necessary financing, we will not be able to
      fund
      our operations. We have no committed sources of additional capital. We do not
      know whether additional financing will be available on terms favorable to us
      when needed, if at all. If we fail to advance our current product candidates
      to
      later stage clinical trials, successfully commercialize Marqibo or acquire
      new
      product candidates for development, we will have difficulty obtaining additional
      financing. Our future capital requirements depend on many factors,
      including:





·
            costs
                associated with conducting preclinical and clinical
                testing;




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




·
            costs
                of establishing arrangements for manufacturing our product
                candidates;




·
            costs
                of acquiring new drug candidates;




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




·
            costs,
                timing and outcome of regulatory
                reviews;




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




·
            costs
                of increased general and administrative
                expenses.




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




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





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





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




29





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




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




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




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




We
      are
      highly dependent on Mark Ahn, our president and chief executive officer, Fred
      Vitale, our vice president and chief business officer, Steven Deitcher, our
      executive vice president, development and chief medical officer, and John
      Iparraguirre, our vice president and chief financial officer. Dr. Ahn’s,
      Mr. Vitale’s, Dr. Deitcher’s and Mr. Iparraguirre’s employment are
      governed by written employment agreements, each of which have terms that expire
      in either November 2008 or, in Dr. Deitcher’s case, May 2010. Dr. Ahn,
      Mr. Vitale, Dr. Deitcher and Mr. Iparraguirre may terminate their
      employment with us at any time, subject, however, to
      certain non-solicitation covenants. The loss of the technical knowledge and
      management and industry expertise that would result in the event Dr. Ahn
      left Hana could result in delays in the development of our product candidates,
      and divert management resources. The loss of Mr. Vitale could impair our
      ability to expand our product development pipeline and commercialize our product
      candidates, which may harm our business prospects. The loss of Dr. Deitcher
      could impair our ability to initiate new and sustain existing clinical trials,
      as well as identify potential product candidates. The loss of
      Mr. Iparraguirre could impair our ability to obtain additional financing
      and to accurately and timely file our periodic and other reports with the SEC.
      We do not carry “key person” life insurance for any of our officers or key
      employees.




***Our
      ability to realize any of the milestones and royalties payable under our
      Sublicense Agreement with Par is substantially dependent on Par’s ability to
      successfully develop and obtain FDA approval of Zensana.****





Our
      ability to realize any of the contingent milestones and other consideration
      under our Sublicense Agreement with Par is subject to Par’s ability to
      successfully develop and commercialize Zensana. Under the terms of the
      Sublicense Agreement, Par has responsibility for the development of Zensana.
      If
      the current formulation of Zensana proves to be scaleable, Par will need to
      reestablish bioequivalency through new clinical trials. Even if these studies
      are successful, Par may not be in a position to file an NDA until 2009 or later.
      If Par’s development of Zensana is not successful, we will be unable to
      commercialize Zensna. Since we have no products available for sale, the failure
      to commercialize Zensana may significantly harm our business.




30





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




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




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




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





·
            decreased
                demand for our product candidates;




·
            injury
                to our reputation;




·
            withdrawal
                of clinical trial participants;




·
            withdrawal
                of prior governmental approvals;




·
            costs
                of related litigation;




·
            substantial
                monetary awards to patients;




·
            product
                recalls;




·
            loss
                of revenue; and




·
            the
                inability to commercialize our product
                candidates.




Our
      inability to obtain sufficient product liability insurance at an acceptable
      cost
      to protect against potential product liability claims could prevent or inhibit
      the commercialization of pharmaceutical products we develop, alone or with
      collaborators. We currently do not carry product liability insurance but instead
      maintain a $10 million clinical trial insurance policy for our ongoing
      clinical trials of our product candidates. Even if our agreements with any
      future collaborators entitle us to indemnification against damages from product
      liability claims, such indemnification may not be available or adequate should
      any claim arise.




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




***If
      we are unable to obtain regulatory approval to sell our lead product candidate,
      Marqibo, or any of our other product candidates, our business will
      suffer.***




In
      May 2006, we licensed Marqibo from Inex, which was succeeded by Tekmira
      Pharmaceuticals Corp. in April 2007. Marqibo is not currently permitted to
      be
      commercially used. Inex submitted an NDA pursuant to Section 505(b)(2) for
      accelerated marketing approval of Marqibo primarily based upon a single arm,
      Phase II clinical trial, which was reviewed by the FDA in 2004 and 2005. In
      January 2005, the FDA issued a not approvable letter to Inex for the Marqibo
      NDA
      for the treatment of patients with relapsed refractory NHL previously treated
      with at least two chemotherapy regimens. The FDA’s not approvable letter cited a
      variety of reasons for not approving the NDA, including the
      following:




31




·
            The
                information presented by Inex was inadequate and contained clinical
                deficiencies;




·
            The
                information presented by Inex failed to provide evidence of an effect
                on a
                surrogate that is reasonably likely to predict clinical
                benefit;




·
            The
                information presented by Inex contained chemistry, manufacturing
                and
                control deficiencies;




·
            A
                supportive study in NHL patients and ALL patients was not well conducted
                or well controlled; and




·
            The
                information presented by Inex did not demonstrate an improvement
                over
                available therapy.




In
      rejecting the NDA, the FDA recommended that, if Inex planned to pursue
      development of Marqibo for the treatment of relapsed refractory NHL, Inex should
      conduct additional studies, including but not limited to randomized controlled
      studies comparing Marqibo to other chemotherapy regimens. Even if such studies
      are successfully performed, Marqibo may not receive FDA approval.




With
      respect to Marqibo and any of our other product candidates, additional FDA
      regulatory risks exist which may prevent FDA approval of these drug candidates
      and thereby prevent their commercial use. Additionally, if Marqibo or any of
      our
      product candidates are approved by the FDA, such approval may be withdrawn
      by
      the FDA for a variety of reasons, including:




·
            that
                clinical or other experience, tests, or other scientific data show
                that
                the drug is unsafe for use;




·
            that
                new evidence of clinical experience or evidence from new tests, evaluated
                together with the evidence available to the FDA when the NDA was
                approved,
                shows that the drug is not shown to be safe for use under the approved
                conditions of use;




·
            that
                on the basis of new information presented to the FDA, there is a
                lack of
                substantial evidence that the drug will have the effect it purports
                or is
                represented to have under the approved conditions of
                use;




·
            that
                an NDA contains any untrue statement of a material fact; or




·
            for
                a drug approved under FDA’s accelerated approval regulations or as a fast
                track drug, if any required post-approval study is not conducted
                with due
                diligence or if such study fails to verify the clinical benefit of
                the
                drug.




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




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




Other
      than Marqibo, the other product candidates that we are developing, Alocrest,
      Talvesta, Optisomal Topotecan, and topical menadione, are in early stages of
      development and will require extensive clinical and other testing and analysis
      before we will be in a position to consider seeking FDA approval to sell such
      product candidates. In addition to the risks set forth above for Marqibo, which
      also apply to Alocrest, Optisomal Topotecan, Talvesta and topical menadione,
      these product candidates also have additional risks as each is in an earlier
      stage of development and review.




32




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




·
            delays
                in patient enrollment, and variability in the number and types of
                patients
                available for clinical trials;




·
            difficulty
                in maintaining contact with patients after treatment, resulting in
                incomplete data;




·
            poor
                effectiveness of product candidates during clinical
                trials;




·
            safety
                issues, side effects, or other adverse
                events;




·
            results
                that do not demonstrate the safety or effectiveness of the product
                candidates;




·
            governmental
                or regulatory delays and changes in regulatory requirements, policy
                and
                guidelines; and




·
            varying
                interpretation of data by the FDA.




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




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




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




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




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




33




·
            delay
                or prevent commercialization of, and our ability to derive product
                revenues from, our product
                candidates;




·
            impose
                costly procedures on us;




·
            reduce
                the potential prices we may be able to charge for our product candidates,
                assuming they are approved for sale;
                and




·
            diminish
                any competitive advantages that we may otherwise
                enjoy.




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




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




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




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




Orphan
      drug designation is an important element of our competitive strategy because
      the
      latest of our licensors’ patents for Marqibo expires in September 2020. In
      2007,
      the FDA granted orphan drug designation for the use of Marqibo in treating
      adult
      ALL. The company that obtains the first FDA approval for a designated orphan
      drug for a rare disease generally receives marketing exclusivity for use of
      that
      drug for the designated condition for a period of seven years. However, even
      though we obtained orphan drug status for Marqibo in the treatment of adult
      ALL,
      the FDA may permit other companies to market a drug for the same designated
      and
      approved condition during our period of orphan drug exclusivity if it can be
      demonstrated that the drug is clinically superior to our drug. This could create
      a more competitive market for us.




34


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


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





·
            restrictions
                on the products, manufacturers or manufacturing
                process;




·
            warning
                letters or untitled letters;




·
            civil
                or criminal penalties or
                fines;




·
            injunctions;




·
            product
                seizures, detentions or import
                bans;




·
            voluntary
                or mandatory product recalls and publicity
                requirements;




·
            suspension
                or withdrawal of regulatory
                approvals;




·
            total
                or partial suspension of production and/or sale;
                and




·
            refusal
                to approve pending applications for marketing approval of new drugs
                or
                supplements to approved
                applications.




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




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




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




35




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




We
      have
      no experience in drug formulation or manufacturing and do not intend to
      establish our own manufacturing facilities. We lack the resources and expertise
      to formulate or manufacture our own product candidates. We contract with one
      or
      more manufacturers to manufacture, supply, store and distribute drug supplies
      for our clinical trials. If any of our product candidates receive FDA approval,
      we will rely on one or more third-party contractors to manufacture our drugs.
      Our anticipated future reliance on a limited number of third-party manufacturers
      exposes us to the following risks:




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




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




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




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




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




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




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




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




We
      intend
      to commence a multi-center, multi-national Phase 2 trial of Marqibo in adult
      patients with relapsed ALL. We also plan to conduct a Phase 3 first-line
      clinical trial in newly-diagnosed, elderly adults with Philadelphia
      chromosome-negative ALL. In addition, we are planning a single-center pilot
      Phase 2 clinical trial of Marqibo in patients with metastatic malignant uveal
      melanoma. See “Overview” in Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations. **** A
      significant portion of our time and financial resources for at least the next
      twelve months will be used in the development of our Marqibo program. We
      anticipate that our ability to generate revenues in the near term will depend
      solely on the successful development, regulatory approval and commercialization
      of Marqibo.




36





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





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




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




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




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




If
      we are
      unable to commercialize our product candidates, we will not generate product
      revenues. The results of our clinical trials to date do not provide assurance
      that acceptable efficacy or safety will be shown.




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




We
      currently have no sales, marketing or distribution capabilities. To
      commercialize our product candidates, we must either develop internal sales,
      marketing and distribution capabilities, which will be expensive and time
      consuming, or make arrangements with third parties to perform these services.
      If
      we decide to market any of our products directly, we must commit financial
      and
      managerial resources to develop marketing capabilities and a sales force with
      technical expertise and with supporting distribution capabilities. Other factors
      that may inhibit our efforts to commercialize our product candidates, if
      approved, directly and without strategic partners include:




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




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




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




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




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




37


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


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




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




Even
      if
      the FDA approves any of our product candidates, if physicians and patients
      do
      not accept and use them, our business will be adversely affected. Acceptance
      and
      use of our products will depend upon a number of factors including:




·
            perceptions
                by members of the health care community, including physicians, about
                the
                safety and effectiveness of our
                drugs;




·
            pharmacological
                benefit and cost-effectiveness of our products relative to competing
                products;




·
            availability
                of reimbursement for our products from government or other healthcare
                payors;




·
            effectiveness
                of marketing and distribution efforts by us and our licensees and
                distributors, if
                any; and




·
            the
                price at which we sell our
                products.




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





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





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





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




38


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





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





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





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





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




The
      market for our product candidates is characterized by intense competition and
      rapid technological advances. If our product candidates receive FDA approval,
      they will compete with a number of existing and future drugs and therapies
      developed, manufactured and marketed by others. If approved, Marqibo will
      compete with unencapsulated vincristine, which is generic, other cytotoxic
      agents such as antimetabolites, alkylating agents, cytotoxic antibiotics, vinca
      alkyloids, platinum compounds and taxanes, and other cytotoxic agents that
      use
      different encapsulation technologies. If approved, Talvesta will compete
      with existing antifolate therapies currently being sold by Pfizer, Inc.
      (trimetrexate), Eli Lilly & Co. (pemetrexed) and Novartis AG
      (edatrexate). These or other future competing products and product candidates
      may provide greater therapeutic convenience or clinical or other benefits for
      a
      specific indication than our products, or may offer comparable performance
      at a
      lower cost. If our products fail to capture and maintain market share, we may
      not achieve sufficient product revenues and our business will suffer.




39




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




·
            developing
                drugs;




·
            undertaking
                preclinical testing and human clinical
                trials;




·
            obtaining
                FDA and other regulatory approvals of
                drugs;




·
            formulating
                and manufacturing
                drugs; and




·
            launching,
                marketing and selling drugs.




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




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




**Risks
      Related to Our Intellectual Property**




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




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




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




The
      rights to product candidates that we acquire from licensors or collaborators
      are
      protected by patents and proprietary rights owned by them, and we rely on the
      patent protection and rights established or acquired by them. We generally
      do
      not unilaterally control, or do not control at all, the prosecution of patent
      applications licensed from third parties. Accordingly, we are unable to exercise
      the same degree of control over this intellectual property as we may exercise
      over internally developed intellectual property.




40




The
      patent positions of pharmaceutical and biotechnology companies can be highly
      uncertain and involve complex legal and factual questions. Even if we are able
      to obtain patents, any patent may be challenged, invalidated, held unenforceable
      or circumvented. The existence of a patent will not necessarily protect us
      from
      competition. Competitors may successfully challenge our patents, produce similar
      drugs or products that do not infringe our patents or produce drugs in countries
      where we have not applied for patent protection or that do not respect our
      patents. Under our license agreements, we generally do not unilaterally control,
      or do not control at all, the enforcement of the licensed patents or the defense
      of third party suits of infringement or invalidity.





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





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





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




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




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




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




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




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




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




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




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




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




41


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


Our
      license agreements relating to Talvesta and Zensana  are
      subject to termination by our licensors in the event we materially breach those
      agreements. With respect to the Talvesta license, Dana-Farber Cancer Institute,
      Inc. and Ash Stevens, Inc. may terminate the agreement, after giving us notice
      and an opportunity to cure, if we commit a material breach, including failing
      to
      make a scheduled milestone or other payment when due, failing to meet our
      diligence obligations, ceasing to carry on our business with respect to the
      licensed products, or being convicted of a felony relating to the manufacture,
      use, sale or importation of the licensed products. The agreement also provides
      that it may be terminated if we become involved in a bankruptcy, insolvency
      or
      similar proceeding. Under the Zensana license, NovaDel may terminate our
      license, after giving us notice and an opportunity to cure, for our material
      breach or payment default. The license also terminates automatically if we
      are
      involved in a bankruptcy. Our license agreement with Albert Einstein College
      of
      Medicine, or AECOM, similarly provides that AECOM may terminate the agreement,
      after providing us with notice and an opportunity to cure, for our material
      breach or default, upon our bankruptcy.  In the event these license
      agreements are terminated, we will lose all of our rights to develop and
      commercialize the applicable product candidate covered by such license, which
      would harm our business and future prospects.




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




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




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





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





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





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




42





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





**Risks
      Related to Our Securities**




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




From
      January 1, 2005 to June 30, 2007, the market price of our common stock
      has ranged from a high of $12.94 per share to a low of $1.25 per
      share. The volatile price of our stock makes it difficult for investors to
      predict the value of their investment, to sell shares at a profit at any given
      time, or to plan purchases and sales in advance. You might not be able to sell
      your shares of common stock at or above the offering price due to fluctuations
      in the market price of the common stock arising from changes in our operating
      performance or prospects. In addition, the stock markets in general, and the
      markets for biotechnology and biopharmaceutical companies in particular, have
      experienced extreme volatility that has often been unrelated to the operating
      performance of particular companies. A variety of factors may affect our
      operating performance and performance and cause the market price of our common
      stock to fluctuate. These include, but are not limited to:




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




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




·
            developments
                or disputes concerning patents or other proprietary
                rights;




·
            regulatory
                developments in the United States and foreign
                countries;




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




·
            economic
                or other crises and other external
                factors;




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




·
            departure
                of any of our key management personnel;
                or




·
            sales
                of our common stock.




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




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




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




43





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




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




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




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





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





None




**Item
      3. Defaults Upon Senior Securities**





Not
      applicable





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





We
      held
      our Annual Meeting of Stockholders at the Radisson Sierra Point Hotel, 5000
      Sierra Point Parkway in Brisbane, California on June 22, 2006. The stockholders
      took the following actions:




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




**Nominee**
            
            **Votes
                For**
            
            **Votes
                Withheld**Mark
                J. Ahn
            
            
            21,028,815
            
            
            315,195Arie
                S. Belldegrun
            
            
            19,975,706
            
            
            1,368,304Isaac
                Kier
            
            
            19,998,189
            
            
            1,345,821Leon
                E. Rosenberg
            
            
            21,039,098
            
            
            304,912Michael
                Weiser
            
            
            16,530,614
            
            
            4,813,396Linda
                E. Wiesinger
            
            
            21,012,864
            
            
            331,146




(ii) 
        The stockholders approved an amendment to our 2004 Stock Incentive
      Plan increasing the number of shares common stock authorized for issuance
      thereunder to 7,000,000. There were 5,371,766 votes were cast for the proposal;
      4,357,546 votes were cast against the proposal; 632,711 votes abstained; and
      there were 10,981,987 broker non-votes.





44





**Item
      5. Other Information**





On
      April
      30, 2007, we entered into an assignment and novation agreement with Inex
      Pharmaceuticals Corporation, pursuant to which Inex assigned to us all of its
      rights, benefits and obligations of a Patent and Technology License Agreement
      dated February 14, 2000, as amended on August 15, 2000, between Inex and the
      University of Texas M.D. Anderson Cancer Center (the “M.D. Anderson License”).
      Pursuant the M.D. Anderson License and prior to the assignment, Inex held an
      exclusive, worldwide license to certain patents and other intellectual property
      owned by M.D. Anderson relating to Marqibo. Since May 2006, we have had an
      exclusive, worldwide sublicense to the same patents and intellectual property
      pursuant to pursuant to a License Agreement dated May 6, 2006 between us and
      Inex (the “Original Inex License Agreement”). As a result of the assignment of
      the M.D. Anderson License, we hold a direct license to such patents and
      intellectual property from M.D. Anderson. The M.D. Anderson License is attached
      to this Form 10-Q as Exhibit 10.3 and incorporated herein by
      reference.





On
      April
      30, 2007, we amended and restated the Original Inex License Agreement. The
      terms
      of the Original Inex License Agreement were described under paragraph (1) of
      Item 1.01 of our Current Report on Form 8-K filed with the Commission on May
      11,
      2006, which is incorporated by reference herein. As a result of the assignment
      by Inex to us of its interest in the M.D. Anderson License, the purpose of
      the
      April 2007 amended and restated license agreement was to remove the sublicense
      granted to us by Inex covering certain patents and other intellectual property
      owned by the University of Texas M.D. Anderson Cancer Center that relate to
      our
      Marqibo, Alocrest and Optisomal Topotecan product candidates. The amended and
      restated license agreement with Inex is attached to this Form 10-Q as Exhibit
      10.4 and incorporated herein by reference.




**Item
      6. Exhibits**




**Exhibit
                No.**
            
            **Description**10.1
            
            Employment
                Agreement dated May 6, 2007 between Hana Biosciences, Inc. and Steven
                R.
                Deitcher.10.2
            
            Hana
                Biosciences, Inc. 2004 Stock Incentive Plan, as amended through June
                22,
                2007 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
                filed June 27, 2007).10.3
            
            Patent
                and Technology License Agreement dated February 14, 2000 (including
                amendment dated August 15, 2000) between the Board of Regents of
                the
                University of texas System on behalf of the University of Texas M.D.
                Anderson Cancer Center and Hana Biosciences, Inc., as successor in
                interest to Inex Pharmaceuticals Corp.**10.4
            
            Amended
                and Restated License Agreement dated April 30, 2007 between the Company
                and Tekmira Pharmaceuticals Corp., as successor in interest to Inex
                Pharmaceuticals Corp. **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).





**
            Certain
                portions of this exhibit have been omitted pursuant to a request
                for
                confidential treatment. The entire exhibit has been separately filed
                with
                the Commission.





45


**SIGNATURES**




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


**HANA
                BIOSCIENCES, INC.**Dated:
                August 9, 2007
            By:
            /s/ Mark
              J.
              AhnMark
              J. AhnPresident
                and Chief Executive Officer


Dated:
                August 9, 2007
            By:
            /s/ John
              P.
              IparraguirreJohn
                P. Iparraguirre
              Vice
                President, Chief Financial Officer




46


**Index
      to Exhibits Filed with this Report**




**Exhibit
                No.**
            
            **Description**10.1
            
            Employment
                Agreement dated May 6, 2007 between Hana Biosciences, Inc. and Steven
                R.
                Deitcher.10.2
            
            Hana
                Biosciences, Inc. 2004 Stock Incentive Plan, as amended through June
                22,
                2007 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
                filed June 27, 2007).10.3
            
            Patent
                and Technology License Agreement dated February 14, 2000 (including
                amendment dated August 15, 2000) between the Board of Regents of
                the
                University of texas System on behalf of the University of Texas M.D.
                Anderson Cancer Center and Hana Biosciences, Inc., as successor in
                interest to Inex Pharmaceuticals Corp.**10.4
            
            Amended
                and Restated License Agreement dated April 30, 2007 between the Company
                and Tekmira Pharmaceuticals Corp., as successor in interest to Inex
                Pharmaceuticals Corp. **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).





**
            Certain
                portions of this exhibit have been omitted pursuant to a request
                for
                confidential treatment. The entire exhibit has been separately filed
                with
                the Commission.




47