**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-Q**




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





For
      the
      quarter ended September 30, 2008





OR





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





For
      the
      transition period __________ to __________.





**Commission
      file number 001-32626**





**Hana
      Biosciences, Inc.**


(Exact
      Name of Registrant as Specified in Its Charter)




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




**(650)
      588-6404**


(Registrant's
      Telephone Number, Including Area Code)





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




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




Large
                accelerated filero
            
            Accelerated
                fileroNon-accelerated
                filero
            
            Smaller
                reporting companyx(Do not check
              if
              smaller reporting company)





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




As
      of
      November 14, 2008, there were 32,386,130 shares of the registrant's common
      stock, $.001 par value, outstanding.







**INDEX**





**Page****PART
                I**
            
            **FINANCIAL
                INFORMATION**Item
                1.
            
            Financial
                Statements
            
            
            4Unaudited
                Condensed Balance Sheets
            
            
            4Unaudited
                Condensed Statements of Operations and Other Comprehensive
                Loss
            
            
            5Unaudited
                Condensed Statement of Changes in Stockholders' Equity
                (Deficit)
            
            
            6Unaudited
                Condensed Statements of Cash Flows
            
            
            7Notes
                to Unaudited Condensed Financial Statements
            
            
            8Item
                2.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            
            18Item
                3.
            
            Quantitative
                and Qualitative Disclosure About Market Risk
            
            
            27Item
                4T.
            
            Controls
                and Procedures
            
            
            27**PART
                II**
            
            **OTHER
                INFORMATION**Item
                1.
            
            Legal
                Proceedings
            
            
            28Item
                1A.
            
            Risk
                Factors
            
            
            28Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            
            28Item
                3.
            
            Defaults
                Upon Senior Securities
            
            
            28Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            
            28Item
                5.
            
            Other
                Information
            
            
            28Item
                6.
            
            Exhibits
            
            
            28Signatures
            
            
            29Index
                of Exhibits Filed with this Report
            
            
            30




-2-




**Forward-Looking
      Statements**





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





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





·
            the
                regulatory approval of our drug
                candidates;




·
            our
                use of clinical research centers and other
                contractors;




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




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




·
            our
                ability to market any of our
                products;




·
            our
                history of operating losses;




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




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




·
            the
                effect of potential strategic transactions on our
                business;




·
            our
                ability to attract and retain key personnel;
                and




·
            the
                volatility of our stock price.




These
      statements are often, but not always, made through the use of words or phrases
      such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend” and similar words or phrases. For such statements,
      we claim the protection of the Private Securities Litigation Reform Act of
      1995.
      Readers of this Quarterly Report on Form 10-Q are cautioned not to place undue
      reliance on these forward-looking statements, which speak only as of the time
      this report was filed with the Securities and Exchange Commission, or SEC.
      These
      forward-looking statements are based largely on our expectations and projections
      about future events and future trends affecting our business, and are subject
      to
      risks and uncertainties that could cause actual results to differ materially
      from those anticipated in the forward-looking statements. Discussions containing
      these forward-looking statements may be found throughout this report, including
      Part I, the section entitled “Item 2: Management's Discussion and Analysis of
      Financial Condition and Results of Operations.” These forward-looking statements
      involve risks and uncertainties, including the risks discussed in our Annual
      Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”),
      that could cause our actual results to differ materially from those in the
      forward-looking statements. Except as required by law, we undertake no
      obligation to publicly revise our forward-looking statements to reflect events
      or circumstances that arise after the filing of this report or documents
      incorporated by reference herein that include forward-looking statements. The
      risks discussed in this report should be considered in evaluating our prospects
      and future financial performance.





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





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





-3-





**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**




**HANA
      BIOSCIENCES, INC.**





**CONDENSED
      BALANCE SHEETS**


(Unaudited)





**September 30,**
              **2008**
            
            **December 31,**
              **2007****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            3,743,357
            
            $
            20,795,398Available-for-sale
                securities
            
            
            72,000
            
            
            96,000Prepaid
                expenses and other current assets
            
            
            738,491
            
            
            489,293Total
                current assets
            
            
            4,553,848
            
            
            21,380,691Property
                and equipment, net
            
            
            445,436
            
            
            432,529Restricted
                cash
            
            
            125,000
            
            
            125,000Debt
                issuance costs
            
            
            1,395,296
            
            
            1,423,380Total
                assets
            
            $
            6,519,580
            
            $
            23,361,600**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                liabilities:Accounts
                payable
            
            $
            270,311
            
            $
            1,682,739Accrued
                other expenses
            
            
            187,330
            
            
            496,239Accrued
                personnel related expenses
            
            
            637,600
            
            
            763,050Leased
                equipment: short-term
            
            
            48,085
            
            
            13,919Accrued
                clinical development costs
            
            
            2,092,441
            
            
            1,156,011Total
                current liabilities
            
            
            3,235,767
            
            
            4,111,958Notes
                payable
            
            
            2,189,716
            
            
            2,025,624Warrant
                liabilities
            
            
            2,032,523
            
            
            4,232,355Leased
                equipment: long-term
            
            
            58,680
            
            
            33,861Total
                long term liabilities
            
            
            4,280,919
            
            
            6,291,840Total
                liabilities
            
            
            7,516,686
            
            
            10,403,798Commitments
                and contingencies (Note 9):Stockholders'
                equity (deficit):Common
                stock; $0.001 par value:100,000,000
                shares authorized, 32,386,130 and 32,169,553 shares issued and outstanding
                at September 30, 2008 and December 31, 2007,
                respectively
            
            
            32,386
            
            
            32,170Additional
                paid-in capital
            
            
            103,903,612
            
            
            101,843,390Accumulated
                other comprehensive loss
            
            
            (20,000
            )
            
            (104,000
            )Accumulated
                deficit
            
            
            (104,913,104
            )
            
            (88,813,758
            )Total
                stockholders' equity (deficit)
            
            
            (997,106
            )
            
            12,957,802Total
                liabilities and stockholders' equity (deficit)
            
            $
            6,519,580
            
            $
            23,361,600





See
      accompanying notes to unaudited condensed financial statements.




-4-




**HANA
      BIOSCIENCES, INC.**





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


**(Unaudited)**


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**License
                  revenue
              
              $
              --
              
              $
              1,150,000
              
              $
              --
              
              $
              1,150,000Operating
                  expenses:General
                  and administrative
              
              
              973,414
              
              
              481,155
              
              
              4,623,889
              
              
              6,553,502Research
                  and development
              
              
              4,347,265
              
              
              5,730,859
              
              
              13,031,060
              
              
              17,442,556Total
                  operating expenses
              
              
              5,320,679
              
              
              6,212,014
              
              
              17,654,949
              
              
              23,996,058Loss
                  from operations
              
              
              (5,320,679
              )
              
              (5,062,014
              )
              
              (17,654,949
              )
              
              (22,846,058
              )Other
                  income (expense):Interest
                  income
              
              
              39,997
              
              
              265,307
              
              
              271,361
              
              
              972,932Interest
                  expense
              
              
              (254,569
              )
              
              (1,138
              )
              
              (756,211
              )
              
              (3,807
              )Other
                  expense, net
              
              
              (8,516
              )
              
              (42,418
              )
              
              (51,380
              )
              
              (61,057
              )Gain
                  or loss on derivative
              
              
              382,152
              
              
              --
              
              
              2,199,833
              
              
              --Realized
                  loss on marketable securities
              
              
              --
              
              
              (260,000
              )
              
              (108,000
              )
              
              (436,000
              )Total
                  other income (expense)
              
              
              159,064
              
              
              (38,249
              )
              
              1,555,603
              
              
              472,068Net
                  loss
              
              $
              (5,161,615
              )
              $
              (5,100,263
              )
              $
              (16,099,346
              )
              $
              (22,373,990
              )Net
                  loss per share, basic and diluted
              
              $
              (0.16
              )
              $
              (0.16
              )
              $
              (0.50
              )
              $
              (0.75
              )Weighted
                  average shares used in computing net loss per share, basic and
                  diluted
              
              
              32,385,366
              
              
              31,197,295
              
              
              32,265,010
              
              
              29,958,487Comprehensive
                  loss:Net
                  loss
              
              $
              (5,161,615
              )
              $
              (5,100,263
              )
              $
              (16,099,346
              )
              $
              (22,373,990
              )Unrealized
                  holdings gains (losses) arising during the period
              
              
              (20,000
              )
              
              --
              
              
              (128,000
              )
              
              (456,000
              )Less:
                  reclassification adjustment for losses included in net
                  loss
              
              
              --
              
              
              --
              
              
              108,000
              
              
              436,000Comprehensive
                  loss
              
              $
              (5,181,615
              )
              $
              (5,100,263
              )
              $
              (16,119,346
              )
              $
              (22,393,990
              )




See
      accompanying notes to unaudited condensed financial statements.




-5-


**HANA
      BIOSCIENCES, INC.**





**CONDENSED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY/(DEFICIT)**


**(Unaudited)**





**Period
      from January 1, 2008 to September 30, 2008**





**Common stock**
            
            **Additional**
              **paid-in**
            
            **Accumulated**
              **Other**
              **Comprehensive**
              **income**
            
            **Accumulated**
            
            **Total**
              **stockholders'****Shares**
            
            **Amount**
            
            **capital**
            
            **(loss)**
            
            **Deficit**
            
            **equity/(deficit)**Balance
                at January 1, 2008
            
            
            32,169,553
            
            $
            32,170
            
            $
            101,843,390
            
            $
            (104,000
            )
            $
            (88,813,758
            )
            $
            12,957,802Stock-based
                compensation of employees amortized over vesting period of stock
                options
            
            
            —
            
            
            —
            
            
            1,882,539
            
            
            —
            
            
            —
            
            
            1,882,539Issuance
                of shares under employee stock purchase plan
            
            
            82,168
            
            
            82
            
            
            53,642
            
            
            —
            
            
            —
            
            
            53,724Stock-based
                compensation of non-employees amortized over vesting period of stock
                options
            
            
            —
            
            
            —
            
            
            (825
            )
            
            —
            
            
            —
            
            
            (825
            )Issuance
                of shares in partial consideration of milestone payment
            
            
            134,409
            
            
            134
            
            
            124,866
            
            
            —
            
            
            —
            
            
            125,000Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (16,099,346
            )
            
            (16,099,346
            )Unrealized
                gain on available-for-sale securities, net of reclassification
                adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            84,000
            
            
            —
            
            
            84,000Balance
                at September 30, 2008
            
            
            32,386,130
            
            $
            32,386
            
            $
            103,903,612
            
            $
            (20,000
            )
            $
            (104,913,104
            )
            $
            (997,106
            )




See
      accompanying notes to unaudited condensed financial statements.




-6-





**HANA
      BIOSCIENCES, INC.**





**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Nine
                Months Ended**
              **September
                30,****2008**
            
            **2007****Cash
                flows from operating activities:**Net
                loss
            
            $
            (16,099,346
            )
            $
            (22,373,990
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            141,917
            
            
            126,798Share-based
                compensation to employees for services
            
            
            1,882,539
            
            
            4,006,878Share-based
                compensation to nonemployees for services
            
            
            (825
            )
            
            (150,165
            )Issuance
                of shares in partial consideration for license milestone
                payment
            
            
            125,000
            
            
            --Amortization
                of discount and debt issuance costs
            
            
            192,176
            
            
            --Realized
                loss on available for sale securities
            
            
            108,000
            
            
            436,000Unrealized
                gain on derivative liability
            
            
            (2,199,832
            )
            
            --Loss
                on disposal of capital assets
            
            
            5,781
            
            
            --Changes
                in operating assets and liabilities:Increase(decrease)
                in prepaid expenses and other assets
            
            
            (249,198
            )
            
            29,964Decrease
                in accounts payable
            
            
            (1,412,428
            )
            
            (863,791
            )Increase(decrease)
                in accrued and other current liabilities
            
            
            502,071
            
            
            (1,033,253
            )Net
                cash used in operating activities
            
            
            (17,004,145
            )
            
            (19,820,507
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (80,378
            )
            
            (85,333
            )Purchase
                of marketable securities
            
            
            --
            
            
            (4,496,252
            )Sale
                of marketable securities
            
            
            --
            
            
            8,975,000Net
                cash used in investing activities
            
            
            (80,378
            )
            
            4,393,415**Cash
                flows from financing activities:**Repurchase
                of employee stock options
            
            
            --
            
            
            (117,000
            )Proceeds
                from exercise of warrants and options and issuance of shares under
                employee stock purchase plan
            
            
            53,724
            
            
            142,183Proceeds
                from registered direct and private placements of preferred and common
                stock, net
            
            
            --
            
            
            3,850,000Payments
                on capital leases
            
            
            (21,242
            )
            
            --Net
                cash used in financing activities
            
            
            32,482
            
            
            3,875,183Net
                decrease in cash and cash equivalents
            
            
            (17,052,041
            )
            
            (11,551,909
            )Cash
                and cash equivalents, beginning of period
            
            
            20,795,398
            
            
            29,127,850Cash
                and cash equivalents, end of period
            
            $
            3,743,357
            
            $
            17,575,941Supplemental
                disclosures of cash flow data:Cash
                paid for interest
            
            $
            564,035
            
            $
            3,807Supplemental
                disclosures of noncash financing activities:Equipment
                financed with capital leases
            
            
            80,227
            
            
            --Unrealized
                loss on available-for-sale securities
            
            
            24,000
            
            
            20,000Common
                stock issued to as partial consideration for license
                agreement
            
            $
            125,000
            
            $
            --





See
      accompanying notes to unaudited condensed financial
      statements.




-7-




**HANA
      BIOSCIENCES, INC.**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





**NOTE
      1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION**





**BUSINESS**


Hana
      Biosciences, Inc. (“Hana,” the “Company,” “we,” “us” or “our”) is a
      biopharmaceutical company based in South San Francisco, California, which seeks
      to acquire, develop, and commercialize innovative products to strengthen the
      foundation of cancer care. The Company is committed to creating value by
      accelerating the development of its product candidates, including entering
      into strategic partnership agreements and expanding its product candidate
      pipeline by being an alliance partner of choice to universities, research
      centers and other companies.  The Company’s product candidates consist
      of the following:





***Cancer
      Therapeutics***


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





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





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





***Supportive
      Care***


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





**BASIS
      OF PRESENTATION**


The
      accompanying unaudited condensed financial statements of the Company have been
      prepared in accordance with U.S. generally accepted accounting principles (GAAP)
      for interim financial information and the instructions to Form 10-Q. In the
      opinion of the Company’s management, the unaudited condensed financial
      statements have been prepared on the same basis as the audited financial
      statements and include all adjustments, consisting of only normal recurring
      adjustments, necessary for the fair presentation of the Company’s financial
      position for the periods presented herein. The condensed balance sheet as of
      December 31, 2007 has been derived from the Company’s audited balance sheet as
      of that date. These interim financial results are not necessarily indicative
      of
      the results to be expected for the full fiscal year ending December 31,
      2008 or any subsequent interim period.





From
      inception to July 31, 2007, when the Company entered into a sublicense agreement
      with Par Pharmaceuticals, Inc., the Company was a development stage enterprise
      since it had not generated revenue from the sale of its products or through
      licensing agreements. Accordingly, prior to July 31, 2007, the financial
      statements were prepared in accordance with the provisions of Statement of
      Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by
      Development Stage Enterprises.” Upon execution of the Par sublicense agreement,
      the Company has commenced principal operations.





As
      of
      September 30, 2008, the Company has a stockholders deficit of approximately
      $1.0
      million, and for the nine months ended September 30, 2008, the Company
      experienced a net loss of $16.1 million. The Company has financed operations
      primarily through equity and debt financing and expects such losses to continue
      over the next several years.  The Company currently has a limited supply of
      cash available for operations. As of September 30, 2008 the Company had
      available $16.3 million in cash and cash equivalents and available-for-sale
      securities from which to draw upon, including $12.5 million in funds pursuant
      to
      the Company’s October 2007 loan agreement with certain affiliates of Deerfield
      Management that was earned as of September 30, 2008 and was drawn down on
      October 14, 2008. The Company will have an additional $2.5 million and $5.0
      million become available on October 30, 2008 and April 30, 2009, respectively.
      Another $2.5 million will become available to the Company if it reaches a
      clinical development milestone pursuant to the loan facility.





The
      Company does not generate any recurring revenue and will require substantial
      additional capital before it will generate cash flow from its operating
      activities, if ever. The Company’s continued operations will depend on whether
      it is able to continue the progression of clinical compounds by obtaining
      additional funding through equity or debt financings or from payments in
      connection with potential strategic transactions.  The Company can give no
      assurances that any additional capital that it is able to obtain, if any, will
      be sufficient to meet its needs. Moreover, there can be no assurance that such
      capital will be available to the Company on favorable terms or at all,
      especially given the current economic environment. Based on the anticipated
      use
      of cash resources between $5.0 million and $6.0 million per quarter, including
      any milestones pursuant to the Company’s license agreements, the Company
      estimates that it will be able to proceed with planned development
      activities into the fourth quarter of 2009.  If anticipated costs are
      higher than planned or if the Company is unable to raise additional capital,
      it
      will have to significantly curtail planned development to maintain operations
      into the fourth quarter of 2009 and beyond.




-8-





Additionally,
      as of September 30, 2008, the Company is no longer in compliance with Nasdaq’s
      listing standards relating to minimum stockholders’ equity and as such, the
      Company expects that Nasdaq will provide it with written notice that the
      Company’s common stock is being delisted from the Nasdaq Capital Market. The
      Company may appeal the delisting determination to a Nasdaq Listings
      Qualifications Panel pursuant to applicable Nasdaq rules, however, if the
      Company’s common stock is delisted from the Nasdaq Capital Market, trading in
      the Company’s common stock would likely be conducted on the OTC Bulletin Board,
      a regulated quotation service. If the Company’s common stock is delisted from
      Nasdaq, this may cause delays in the timing of transactions and may decrease
      the
      Company’s ability to raise capital through the sale of common stock.





In
      addition, if the Company’s common stock is no longer listed on the Nasdaq
      Capital Market, it may be required to redeem the warrants issued to Deerfield
      under the October 2007 loan agreement for an amount based on their value
      computed using a Black-Scholes-Merton formula. If Deerfield elects to redeem
      the
      warrants and the Company refuses or is unable to pay the redemption price,
      a
      default will have been triggered under the facility agreement, giving Deerfield
      the right to require the Company to repay the loan. This would have a
      significantly negative impact on the ability of the Company to continue clinical
      development and could potentially cause the Company to cease operations.





**NOTE
      2. SIGNIFICANT ACCOUNTING POLICIES**





*Use
      of Management's Estimates*




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





*Segment
      Reporting*




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




-9-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





*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
      anti-dilutive effect because the Company incurred a net loss during each period
      presented. The number of shares potentially issuable at September 30, 2008
      and
      2007, upon exercise or conversion that were not included in the computation
      of
      net loss per share totaled 11,768,692 and 6,029,602, respectively.





*Cash
      and Cash Equivalents and Concentration of Risk*




Financial
      instruments that potentially expose the Company to concentrations of credit
      risk
      consist primarily of cash and cash equivalents. The Company maintains its cash
      and cash equivalents with high credit quality financial institutions. The
      Company’s credit risk lies with the exposure to loss in the event of
      nonperformance by these financial institutions as balances on deposit exceed
      federally insured limits.





*Fair
      Value of Financial Instruments*





Financial
      instruments include cash and cash equivalents, marketable securities, accounts
      payable, debt and warrant liabilities. Marketable securities are carried at
      fair
      value. Cash and cash equivalents and accounts payable are carried at cost,
      which
      approximates fair value due to the relative short maturities of these
      instruments.





*Debt
      Issuance Costs*





As
      discussed in Note 5, the debt issuance costs relate to fees paid in the form
      of
      cash and warrants to secure a firm commitment to borrow funds. These fees are
      deferred, and if the commitment is exercised, amortized over the life of the
      related loan using the interest method. If the commitment expires unexercised,
      the deferred fee is expensed immediately.





*Warrant
      Liabilities*





On
      October 30, 2007, the Company entered into a loan agreement with four investment
      funds affiliated with Deerfield Management (collectively, “Deerfield”).
      Deerfield has committed funds to assist with the development of the Company’s
      product candidates. Under the agreement, the Company may borrow from Deerfield
      up to an aggregate of $30 million, of which $20 million becomes available in
      four installments every six months commencing October 30, 2007. The Company
      is
      not obligated to draw down these funds when any installment becomes available
      to
      it. As additional consideration for the loan facility, the Company also issued
      to Deerfield 6-year warrants to purchase an aggregate of 5,225,433 shares of
      the
      Company’s common stock at an exercise price of $1.31 per share, of which
      warrants to purchase 4,825,433 shares include an anti-dilution feature. This
      anti-dilution feature requires that, as the Company issues additional shares
      of
      its common stock during the term of the warrant, the number of shares
      purchasable under this series is automatically increased so that it always
      represents the right to purchase 15% of the Company’s then outstanding common
      stock. Further, if the Company draws down funds conditioned upon the achievement
      of clinical development milestones relating to the Marqibo and Menadione
      programs, it must issue additional warrants to Deerfield to purchase up to
      an
      additional 3.5% of its then outstanding shares of common stock, which warrants
      will also contain the same anti-dilutive feature. The Company also entered
      into
      a registration rights agreement with Deerfield, pursuant to which the Company
      registered the resale of the shares issuable upon exercise of the warrants
      under
      the Securities Act of 1933. These financing transactions were recorded in
      accordance with Emerging Issues Task Force “EITF” No. 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock” and related interpretations. Because the warrants are
      redeemable in the event of, among other things, a change in control or if the
      Company’s shares are no longer listed on a national securities exchange, the
      fair value of the warrants based on the Black-Scholes-Merton option pricing
      model is recorded as a liability. The Company updates its estimate of the fair
      value of the warrant liabilities in each reporting period as new information
      becomes available and any gains or losses resulting from the changes in fair
      value from period to period are included as other income (expense).




-10-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




*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 U.S. and California taxes for tax
      jurisdictions, as defined. The only periods subject to examination for the
      Company’s federal return are the 2004 through 2007 tax years. The periods
      subject to examination for the Company’s state returns in California are the
      2003 through 2007 tax years. There are currently no ongoing examinations by
      the
      relevant tax authorities.





At
      the
      adoption date and as of September 30, 2008, the Company 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
      3. RECENT ACCOUNTING PRONOUNCEMENTS**




On
      September 15, 2006, FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure
      assets and liabilities. SFAS No. 157 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. SFAS No. 157 applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value. SFAS No. 157 does
      not expand the use of fair value in any new circumstances. Originally, SFAS
      No.
      157 was effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years.
      Accordingly, we adopted SFAS No. 157 in the first quarter of fiscal year 2008.
      In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date
      of FASB Statement No. 157”, which provides a one year deferral of the
      effective date of SFAS No. 157 for non-financial assets and non-financial
      liabilities, except those that are recognized or disclosed in the financial
      statements at fair value at least annually. Therefore, the Company has adopted
      the provisions of SFAS No. 157 with respect to its financial assets and
      liabilities only. See Note 7 Fair Value Measurements in the Notes to Unaudited
      Condensed Financial Statements herein.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities” as an amendment to SFAS No. 133. SFAS 161 is intended to
      improve financial reporting about derivative instruments and hedging activities
      by requiring companies to enhance disclosure about how these instruments and
      activities affect their financial position, performance and cash flows. SFAS
      161
      also improves the transparency about the location and amounts of derivative
      instruments in a company’s financial statements and how they are accounted for
      under SFAS 133. SFAS 161 is effective for financial statements issued for fiscal
      years beginning after November 15, 2008 (the Company’s 2009 fiscal year),
      and interim periods within beginning after that date. The Company is currently
      evaluating the impact this adoption will have on the Company’s financial
      statements.





On
      May 5,
      2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
      Principles”. SFAS No. 162 identifies the sources of accounting principles and
      the framework for selecting the principles to be used in the preparation of
      financial statements that are presented in conformity with generally accepted
      accounting principles in the U.S. We are evaluating the impact, if any, this
      Standard will have on our financial statements.





In
      June
      2008, the FASB ratified the consensus reached on EITF Issue No. 07-05, *Determining
      Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
      Stock* .
      EITF
      Issue No. 07-05 clarifies the determination of whether an instrument (or an
      embedded feature) is indexed to an entity’s own stock, which would qualify as a
      scope exception under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* .
      EITF
      Issue No. 07-05 is effective for financial statements issued for fiscal
      years beginning after December 15, 2008. Early adoption for an existing
      instrument is not permitted. The Company does not believe that the pending
      adoption of EITF Issue No. 07-05 will have a material effect on the
      Company’s financial statements.





On
      October 10, 2008, the FASB issued FASB Staff Position No. 157-3, *Determining
      the Fair Value of a Financial Asset When the Market for That Asset Is Not
      Active* (“FSP
      No. 157-3”), to provide guidance on determining the fair value of financial
      instruments in inactive markets. FSP No. 157-3 became effective for the
      Company upon issuance, and had no material impact on the Company’s financial
      position, results of operations or cash flows.




-11-





**NOTE
      4. LIQUIDITY AND CAPITAL RESOURCES**





As
      of
      September 30, 2008, we had approximately $16.1 million in cash and cash
      equivalents and available-for-sale securities that may be liquidated to provide
      cash including $12.5 million in funds pursuant to the loan agreement with
      Deerfield Management that we drew down on October 14, 2008. We reported a net
      loss of $16.1 million and negative cash flows from operating activities of
      $17.0
      million for the nine months ended September 30, 2008. As of September 30,
      2008, we had a total stockholders’ deficit of $1.0 million.





Pursuant
      to the terms of the loan agreement with Deerfield, we may borrow from Deerfield
      up to an aggregate of $30 million, of which $20 million becomes available in
      four installments every six months commencing October 30, 2007. The remaining
      $10 million becomes available in three installments upon the achievement of
      clinical development milestones relating to our Marqibo and Menadione product
      candidates. We are not obligated to draw down these funds when the installment
      becomes available to us. Pursuant to such schedule, we drew down $7.5 million
      on
      November 1, 2007. As of September 30, 2008, we were eligible to draw down an
      additional $12.5 million pursuant to installments and clinical development
      milestones achieved. On October 14, 2008, we drew down the entire $12.5 million
      in available funds. On October 30, 2008, an additional $2.5 million became
      available to us pursuant to the terms of the facility agreement. The remaining
      $7.5 million of the loan is subject to disbursement through a $5 million
      installment on April 30, 2009 and a $2.5 million installment upon reaching
      the
      remaining clinical development milestone described in the facility agreement.
      Deerfield’s obligation to disburse loan proceeds expires October 30, 2010 and we
      must repay all outstanding amounts owing under the loan no later than October
      30, 2013. We expect to continue to incur losses for the foreseeable future.





We
      do not
      generate any recurring revenue and will require substantial additional capital
      before we will generate cash flow from our operating activities, if ever. Our
      continued operations will depend on whether we are able to continue
      the progression of clinical compounds and obtain additional funding through
      equity or debt financings or from payments in connection with potential
      strategic transactions.  We can give no assurances that any additional
      capital that we are able to obtain, if any, will be sufficient to meet our
      needs. Moreover, there can be no assurance that such capital will be available
      to us on favorable terms or at all, especially given the current economic
      environment. Based on the anticipated use of cash resources between $5.0 million
      and $6.0 million per quarter, including any milestones pursuant to our license
      agreements, we estimate that we will be able to proceed with
      planned development activities into the fourth quarter of 2009. 
However, if our anticipated costs are higher than planned or if we are unable
      to
      raise additional capital, we will have to significantly curtail planned
      development to maintain operations into the fourth quarter of 2009 and
      beyond.




-12-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




The
      Company's success will depend on whether it is able to continue the progression
      of the development of its product candidates, identify and acquire new and
      innovative oncology focused products, and whether the Company is able to
      successfully commercialize and sell products that have obtained FDA approval
      or
      enter into partnerships and/or license agreements regarding the
      commercialization of the Company’s products and product candidates.





**NOTE
      5. LOAN AGREEMENT**





On
      October 30, 2007, we entered into a Facility Agreement (the “loan agreement”)
      with Deerfield under which Deerfield has agreed to loan to us an aggregate
      principal amount of up to $30 million. Our obligations under the loan are
      secured by all assets owned (or that will be owned in the future) by us, both
      tangible and intangible. Pursuant to the loan agreement, we drew down $7.5
      million on November 1, 2007. The effective interest rate on this note payable,
      including debt issuance costs and discount on debt, is approximately 18.9%.
      Of
      the total $30 million funds committed pursuant to the loan agreement, $20
      million is available for disbursement to us in four installments every six
      months commencing October 30, 2007. The remaining $10 million
      available is subject to disbursement in three installments upon the achievement
      of clinical development milestones relating to our Marqibo and Menadione product
      candidates. As of September 30, 2008, we had achieved
      development milestones relating to two of these installments covering an
      aggregate of $7.5 million. Deerfield’s obligation to disburse loan proceeds
      expires October 30, 2010, and we must repay all outstanding principal and
      interest owing under the loan no later than October 30, 2013. We are also
      required to make quarterly interest payments on outstanding principal, at the
      annual rate of 9.85%. In accordance with and upon execution of the loan
      agreement, we paid a loan commitment fee of $1.1 million to an affiliate of
      Deerfield.





As
      additional consideration for the loan, on October 30, 2007, we issued to
      Deerfield two series of 6-year warrants to purchase an aggregate of 5,225,433
      shares of our common stock at an exercise price of $1.31 per share (subject
      to
      adjustment for stock splits, combinations and similar events), which represented
      the closing bid price of our common stock as reported on the Nasdaq Global
      Market on the issuance date. One series of such warrants initially represented
      the right to purchase 4,825,433 shares, which equaled 15% of our currently
      issued and outstanding shares of common stock as of October 30, 2007. These
      warrants contain an anti-dilution feature so that, as we issue additional shares
      of our common stock during the term of the warrant, the number of shares
      purchasable under this series is automatically increased so that they always
      represent 15% of our then outstanding common stock. Pursuant to this
      anti-dilution feature and as a result of additional shares of our common stock
      that we issued following October 30, 2007, this series of warrants represented
      the right to purchase an aggregate of 4,857,919 shares of our common stock
      as of
      September 30, 2008. The second series of warrants, representing the right to
      purchase an aggregate of 400,000 shares, is identical in form except that it
      does not contain such anti-dilution feature. Further, if the Company draws
      down
      the funds conditioned upon the achievement of clinical development milestones
      relating to the Marqibo and Menadione programs, it will be required to issue
      to
      Deerfield additional warrants to purchase up to an additional 3.5% of its then
      outstanding Common Stock, which warrants will contain the same anti-dilution
      feature as those issued by the Company on October 30, 2007.





As
      of
      September 30, 2008, we had drawn down $7.5 million of the entire $30 million
      loan facility. On September 30, 2008, we provided notice to Deerfield of our
      request to draw down an additional $12.5 million of the remaining $22.5 million,
      which represented the entire amount available to us based on installments and
      clinical development milestones achieved related to the Marqibo and Menadione
      programs. Deerfield disbursed this additional $12.5 million to us on October
      14,
      2008. See “Note 11. Subsequent Events.”




*Fair
      Value of Warrants* .
      The
      aggregate fair values of the warrant series issued upon execution of the loan
      agreement, under which an aggregate of the 5,225,433 shares of our common stock
      were issuable upon purchase, pursuant to the loan agreement was $5.9 million.
      $5.5 million of the total fair value, related to the warrant series to purchase
      an aggregate of 4,825,433 shares with an anti-dilution feature, was recorded
      as
      a discount to the note payable. The remaining $0.4 million fair value, relating
      to the additional warrant series to purchase an aggregate of 400,000 shares
      of
      common stock, was recorded as a debt issuance cost and is being amortized,
      using
      the interest method, over the life of the loan.




-13-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




We
      used a
      Black-Scholes-Merton option pricing model to obtain the fair market value of
      the
      warrants issued to Deerfield. In order to estimate the fair market value of
      the
      anti-dilution feature, we estimated the number of additional shares potentially
      purchasable under the warrant agreement using weighted probability
      scenarios.





A
      summary
      of the assumptions used to estimate the fair market value of the warrants issued
      pursuant to the execution of the loan agreement as well as the estimated
      additional shares purchasable under the warrants pursuant to the anti-dilution
      feature as of the period ended September 30, 2008 and December 31, 2007 is
      as
      follows:





**September 30**
            
            **December 31****2008**
            
            **2007*****Warrants***Stock
                price
            
            $
            0.60
            
            $
            1.06Risk-free
                interest rate
            
            
            3.69
            %
            
            4.1
            %Expected
                life (in years)
            
            
            5.08
            
            
            5.83Volatility
            
            
            76.9
            %
            
            67.2
            %Dividend
                yield
            
            
            0
            %
            
            0
            %Estimated
                fair market value of shares issuable under warrants
            
            $
            0.30
            
            $
            0.62





*Warrant
      liabilities.* The fair
      market value of the warrants issued pursuant to the loan agreement was recorded
      in accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company's Own Stock.” Accordingly, we determined that the fair market value of
      the warrants represented a liability because the warrants are redeemable in
      the
      event of, among other things, a change in control or if our common stock is
      no
      longer listed on a national securities exchange.  The fair market value of
      the warrants is recalculated each reporting period with the change in value
      taken as income or expense in the “Statement of Operations.”  A summary of
      the status of the fair market value of the warrants liability as of the period
      ended September 30, 2008 and December 31, 2007 is as follows:





**September
                30, 2008**
              **Fair Value of**
              **Warrant**
              **Liabilities**
            
            **December 31, 2007**
              **Fair Value of**
              **Warrant**
              **Liabilities**
            
            **Realized**
              **Gain/(Loss) on**
              **Change in**
              **Warrant**
              **Liabilities**Deerfield
                Warrants
            
            $
            2,032,523
            
            $
            4,232,355
            
            $
            2,199,832





*Summary
      of Notes Payable.* On
      November 1, 2007, we drew down $7.5 million of the $30.0 million in total loan
      proceeds available under the loan agreement. We are not required to repay any
      portion of the principal until October 30, 2013. Because we issued the warrants
      pursuant to the loan, we recognized a discount on the note.  As of
      September 30, 2008, our notes payable are comprised of the
      following:





**Face Value of**
              **Notes Payable**
              **Outstanding**
            
            **Allocation of**
              **Discount**
              **of Debt****1**
            
            **Carrying Value**Drawdown
                 #1 - November 1, 2007
            
            $
            7,500,000
            
            $
            (1,868,166
            )
            $
            5,631,384Unallocated
                discount
            
            
            —
            
            
            (3,442,118
            )
            
            (3,442,118
            )Net
                carrying value of all notes outstanding
            
            $
            7,500,000
            
            $
            (5,310,284
            )
            $
            2,189,716





1 The
      discount has been allocated ratably to the available proceeds of the loan.
       For funds that have not yet been drawn down, we will maintain the discount
      in the balance sheet, but will not begin amortizing the discount until the
      funds
      have been drawn down.




-14-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




**NOTE
      6. STOCKHOLDERS' EQUITY (DEFICIT)**





*Stock
      Incentive Plans.* We have
      two stockholder-approved stock incentive plans under which we grant or have
      granted options to purchase shares of our common stock and restricted stock
      awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the 2004
      Stock Incentive Plan (the “2004 Plan”). The Board of Directors is responsible
      for administration of the Company’s stock incentive plans and determines the
      term, exercise price and vesting terms of each option. The Board has also
      authorized the Company’s Chief Executive Officer to award grants under the 2004
      Plan in certain circumstances to new employees. 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. We may grant a maximum of 7,000,000
      shares for issuance under the 2004 plan and a maximum of 1,410,068 shares under
      the 2003 plan.





*Stock
      Options.*The
      following table summarizes information about stock options outstanding at
      September 30, 2008 and changes in outstanding options in the nine months then
      ended, all of which are at fixed prices:




**Number of**
              **Shares Subject**
              **to Options**
              **Outstanding**
            
            **Weighted Average**
              **Exercise Price per**
              **Share**
            
            **Weighted Average**
              **Remaining**
              **Contractual**
              **Term**
              **(in years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Outstanding
                January 1, 2008
            
            
            5,290,038
            
            $
            3.12
            
            
            —Options
                granted
            
            
            678,500
            
            
            0.93Options
                cancelled
            
            
            (1,473,667
            )
            
            4.03Options
                exercised
            
            
            —
            
            
            —Outstanding
                September 30, 2008
            
            
            4,494,871
            
            
            2.48
            
            
            8.35
            
            $
            45,942Exercisable
                at September 30, 2008
            
            
            1,585,538
            
            $
            3.56
            
            
            7.08
            
            $
            44,472





Total
      stock-based compensation expense was approximately $0.4 million and $1.8 million
      related to employee stock options and restricted stock recognized in the
      operating results for the three and nine months ended September 30, 2008,
      respectively, as compared to total stock-based compensation of $(0.2) million
      and $3.9 million recognized in the operating results for the three and nine
      months ended September 30, 2007. Included in the stock-based compensation
      expense for the nine months ending September 30, 2008 is approximately $0.4
      million of expense related to the correction of an error related to prior
      periods.




-15-







**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




The
      following table summarizes information about stock options outstanding at
      September 30, 2008:




**Options Outstanding**
            
            **Options Exercisable****Exercise Price**
            
            **Number of**
              **Shares**
              **Subject to**
              **Options**
              **Outstanding**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life of**
              **Options**
              **Outstanding**
            
            **Number**
              **of Options**
              **Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$ 0.07 - $ 1.35
            
            
            2,351,048
            
            $
            1.02
            
            
            8.8
                yrs
            
            
            354,548
            
            $
            0.79$ 1.36 - $ 1.74
            
            
            1,015,324
            
            
            1.67
            
            
            8.1
                yrs
            
            
            496,546
            
            
            1.67$ 1.75 - $ 4.97
            
            
            315,000
            
            
            4.06
            
            
            7.5
                yrs
            
            
            263,333
            
            
            4.22$ 4.98 - $ 7.40
            
            
            820,333
            
            
            6.72
            
            
            8.0
                yrs
            
            
            397,500
            
            
            6.72$ 7.41 - $ 11.81
            
            
            126,166
            
            
            10.19
            
            
            5.9
                yrs
            
            
            73,611
            
            
            10.14$0.07 - $11.81
            
            
            4,494,871
            
            $
            2.48
            
            
            8.4
                yrs
            
            
            1,585,538
            
            $
            3.56




*Assumptions.* The
      following table summarizes the assumptions used in applying the
      Black-Scholes-Merton option pricing model to determine the fair value of awards
      granted during the three and nine months ended September 30, 2008 and 2007,
      respectively:




**Three Months Ended September
                30,**
            
            **Nine
                Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007*****Employee
                stock options***Risk-free
                interest rate
            
            
            2.65
            %
            
            4.5
            %
            
            2.65
            %
            
            4.5
            %Expected
                life (in years)
            
            
            6.0
            
            
            6.0
            
            
            5.5
                - 6.0
            
            
            5.5
                - 6.0Volatility
            
            
            0.9
            
            
            0.8
            
            
            0.9
            
            
            0.8Dividend
                Yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %***Employee
                stock purchase plan***Risk-free
                interest rate
            
            
            3.05-3.49
            %
            
            4.82
                - 4.91
            %
            
            3.05-3.49
            %
            
            4.82
                - 5.09
            %Expected
                life (in years)
            
            
            0.5
                - 2.0
            
            
            0.5
                - 2.0
            
            
            0.5
                - 2.0
            
            
            0.5
                - 2.0Volatility
            
            
            0.75-0.80
            
            
            0.73
                - 0.93
            
            
            0.75-0.80
            
            
            0.55
                - 1.03Dividend
                Yield
            
            
            0
            %
            
            0
            %
            
            0
            %
            
            0
            %




-16-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




We
      estimate 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
“SAB 107”, we used the “simplified method” for determining the expected life of
      the options granted. Originally, under SAB 107, this method was allowed until
      December 31, 2007.  However, on December 21, 2007, the SEC’s Staff issued
      Accounting Bulletin No. 110 “SAB 110”, which will allow a company to continue to
      use the “simplified method” under certain circumstances. We will continue to use
      the simplified method as we do not have sufficient historical data to estimate
      the expected term of share-based award.  The risk-free rate for periods
      within the contractual life of the option is based on the U.S. treasury yield
      curve in effect at the time of grant valuation. We currently estimate that
      22%
      annually of our stock options awarded will be forfeited.





*Warrants* .
      As of
      September 30, 2008, all outstanding warrants were available for exercise.
      Warrants to acquire 258,927 shares of common stock at $1.85 per share expire
      in
      February of 2009.  Warrants to acquire 892,326 shares of common stock at
      $1.57 per share expire in April 2010. Warrants to acquire 864,648 shares of
      common stock at $5.80 per share expire in October 2010.  Additionally, in
      connection with our October 2007 loan agreement, we issued to Deerfield warrants
      to initially purchase 5,225,433 shares of our common stock, of which warrants
      to
      initially purchase 4,825,433 shares of our common stock were subject to an
      anti-dilution feature. This anti-dilution feature provides that the number
      of
      shares purchasable under this series automatically increased so that they always
      represent 15% of our then outstanding common stock. Pursuant to this
      anti-dilution feature and as a result of issuances of our common stock since
      the
      date of the loan agreement, the number of shares purchasable under these
      warrants increased by 32,486 in the nine months ended September 30, 2008. On
      September 30, 2008, the warrants containing the anti-dilution feature
      represented the right to purchase an aggregate of 4,857,919 shares.   All
      of the warrants issued to Deerfield expire in October 2013.  The following
      table summarizes the warrants outstanding as of September 30, 2008 and the
      changes in outstanding warrants in the period then ended:




**Number Of**
              **Shares Subject**
              **To Warrants**
              **Outstanding**
            
            **Weighted-Average**
              **Exercise Price**Warrants
                outstanding January 1, 2008
            
            
            7,241,334
            
            $
            1.90Warrants
                granted
            
            
            32,486
            
            
            1.31Warrants
                cancelled
            
            
            **—**
            
            
            —Warrants
                outstanding September 30, 2008
            
            
            7,273,820
            
            $
            1.89





*Employee
      Stock Purchase Plan.* The
      Company also has adopted the 2006 Employee Stock Purchase Plan (the “2006 Plan”)
      under which the Company's eligible employees may purchase shares of 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.




The
      2006
      Plan allows employees to contribute a percentage of their gross salary toward
      the semi-annual purchase of shares of the Company’s common stock. 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 common stock on
      the
      last trading day of the purchase period. A total of 750,000 shares of common
      stock were initially reserved for issuance under the 2006 Plan.




Through
      September 30, 2008, the Company has issued 131,622 shares under the 2006 Plan.
      For the three and nine months ended September 30, 2008, the total stock-based
      compensation expense recognized related to the 2006 Plan under SFAS 123(R)
      was
      approximately $46,000 and $108,000, respectively, compared to total stock-based
      compensation expense recognized in the three and nine months ended September
      30,
      2007 of $52,000 and $141,000, respectively.





**NOTE
      7. FAIR VALUE MEASUREMENTS**




SFAS
      No.
      157 defines fair value, establishes a framework for measuring fair value under
      GAAP and enhances disclosures about fair value measurements. Fair value is
      defined under SFAS No. 157 as the exchange price that would be received for
      an
      asset or paid to transfer a liability (an exit price) in the principal or most
      advantageous market for the asset or liability in an orderly transaction between
      market participants on the measurement date. Valuation techniques used to
      measure fair value under SFAS No. 157 must maximize the use of observable inputs
      and minimize the use of unobservable inputs. The standard describes a fair
      value
      hierarchy based on three levels of inputs, of which the first two are considered
      observable and the last unobservable, that may be used to measure fair value
      which are the following:




•
            
            Level
                1 - Quoted prices in active markets for identical assets or
                liabilities;




•
            
            Level
                2 - Inputs other than Level 1 that are observable, either directly
                or
                indirectly, such as quoted prices for similar assets or liabilities;
                quoted prices in markets that are not active; or other inputs that
                are
                observable or can be corroborated by observable market data for
                substantially the full term of the assets or liabilities;
                and




•
            
            Level
                3 - Unobservable inputs that are supported by little or no market
                activity
                and that are significant to the fair value of the assets or
                liabilities.




-17-





**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**




In
      accordance with SFAS 157, the following table represents the fair value
      hierarchy for our financial assets and liabilities held by the Company measured
      at fair value on a recurring basis as of September 30, 2008:





**Level 1**
            
            **Level 2**
            
            **Level 3**
            
            **Total**AssetsMoney
                market and treasury funds
            
            $
            3,605,695
            
            $
            —
            
            $
            —
            
            $
            3,605,695Available-for-sale
                equity securities
            
            
            72,000
            
            
            —
            
            
            —
            
            
            72,000Total
            
            $
            3,677,695
            
            $
            —
            
            $
            —
            
            $
            3,677,695





**Level 1**
            
            **Level 2**
            
            **Level 3**
            
            **Total**LiabilitiesWarrant
                liabilities
            
            
            —
            
            
            —
            
            $
            2,032,523
            
            $
            2,032,523Total
            
            $
            —
            
            $
            —
            
            $
            2,032,523
            
            $
            2,032,523





A
      reconciliation of the valuation of our liabilities with fair value measurements
      using significant unobservable inputs for the period of January 1, 2008 through
      September 30 is included below :





**Beginning
                balance**
            
            **Total
                (gains) included in earnings**
            
            **Endingbalance**Warrant
                liabilities
            
            
            4,232,355
            
            
            (2,199,833
            )
            $
            2,032,522




**NOTE
      8. AVAILABLE-FOR-SALE SECURITIES**





On
      September 30, 2008, the Company had $72,000 in total available-for-sale
      securities which consisted of shares of NovaDel Pharma, Inc. (“NovaDel”)
      purchased in conjunction with the Zensana license agreement originally entered
      into in October 2004.





During
      the nine months ended September 30, 2008, the fair value of the NovaDel shares
      decreased by a net value of $24,000, compared to net decrease in value of
      $456,000 for the nine months ended September 30, 2007.  The $24,000 net
      loss for the period ending September 30, 2008 includes a realized loss of
      $108,000 and an unrealized loss of $84,000. The realized losses in the second
      and third quarters of 2007 and the second quarter of 2008 were the result a
      decline in value of the shares that was estimated to be other-than-temporary.
      The following table summarizes the activity for the NovaDel shares classified
      as
      available-for-sale securities during the nine months ended September 30, 2008
      and 2007:





**Beginning**
              **Value**
            
            **Unrealized**
              **Gain/(Loss), net**
              **of**
              **reclassification**
              **adjustment**
            
            **Gross**
              **Realized**
              **Gain/(Loss)**
            
            **EndingValue**Nine
                months ended September 30, 2007
            
            $
            656,000
            
            $
            (20,000
            )
            $
            (436,000
            )
            $
            200,000Nine
                months ended September 30, 2008
            
            $
            96,000
            
            $
            84,000
            
            $
            (108,000
            )
            $
            72,000




-18-




**HANA
      BIOSCIENCES, INC.**





**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**





**NOTE
      9. COMMITMENTS**





***Employment
      Agreements.***  ** On June
      6, 2008, the Company entered into a new employment agreement with its President
      and Chief Executive Officer. This agreement provides for an employment term
      that
      expires in December 2010. The minimum aggregate amount of gross salary
      compensation to be provided for over the remaining term of the agreement
      amounted to approximately $0.9 million at September 30, 2008.





The
      Company entered into a written employment agreement with its Vice President
      and
      Chief Financial Officer on December 18, 2006. As amended on October 31, 2008,
      this agreement provides for an employment term that expires on October 31,
      2009.
      The minimum aggregate amount of gross salary compensation to be provided for
      over the remaining term of the agreement amounted to less than $0.2 million
      at
      September 30, 2008.





***Lease.*** The
      Company entered into a three year sublease, which commenced on May 31, 2006,
      for
      property at 7000 Shoreline Court in South San Francisco, California, where
      the
      Company’s executive offices are located. In May 2008, the Company and its
      sublessor entered into an amendment to the sublease agreement, which increased
      the term of the lease from three years to four years. The total cash payments
      due for the duration of the sublease equaled approximately $1.0 million at
      September 30, 2008.




**NOTE
      10. RESTRICTED CASH**





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





**NOTE
      11. SUBSEQUENT EVENT**





On
      October 14, 2008, the Company drew down an additional $12.5 million of funds
      pursuant to its loan agreement with Deerfield. Of these funds, $7.5 million
      were
      available to the Company because of its achievement of clinical development
      milestones relating to the Marqibo and Menadione programs. Upon the disbursement
      of these funds by Deerfield and in accordance with the loan agreement, the
      Company issued additional warrants to purchase an aggregate of 850,136 shares
      of
      common stock, which represents 2.625% of the Company’s outstanding common stock
      on October 14, 2008. These additional warrants have a term of 6 years, are
      exercisable at $1.31 per share and are otherwise identical in form as the first
      series of warrants issued by the Company on October 30, 2007 when it entered
      into the loan agreement with Deerfield, including an anti-dilution feature
      that
      automatically increases the number of shares subject to the warrants so that
      they always represent 2.625% of the Company’s outstanding common stock. The
      Company will account for these warrants in the same manner as previously issued
      anti-dilution warrants issued pursuant to the Deerfield loan agreement. See
      Note
      5. Additionally, on November 5, 2008, the Company requested disbursement of
      $2.5
      million in funds that became available on October 30, 2008 pursuant to the
      terms
      of the loan agreement.




On
      November 10, 2008, the Company initiated a Phase 1
      dose-escalation trial of Brakiva. The initiation of this clinical trial
      triggered a milestone payment to Tekmira Pharmaceuticals Corporation (formerly
      Inex Pharmaceuticals Corporation) pursuant to the May 2006 License Agreement.
      Payment of this milestone may be settled by any combination of cash and issuance
      of shares of the Company’s common stock at the discretion of the
      Company.


-19-







**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 accompanying notes
      included elsewhere in this Quarterly Report on Form 10-Q. This discussion
      includes forward-looking statements that involve risks and uncertainties. As
      a
      result of many factors, such as those set forth under “Risk Factors” in Item 1A
      of Part I of the 2007 Form 10-K, our actual results may differ
      materially from those anticipated in these forward-looking
      statements* .





**Overview**





We
      are a
      biopharmaceutical company focused on acquiring, developing, and commercializing
      innovative products to strengthen the foundation of cancer care. The Company
      is
      committed to creating value by accelerating the development of its product
      candidates, including entering into strategic partnership agreements and
      expanding its product candidate pipeline by being an alliance partner of choice
      to universities, research centers and other biotechnology and pharmaceutical
      companies.





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





·
            ***Marqibo******®******(vincristine
                sulfate liposomes injection) -***Marqibo has been evaluated in 15 clinical trials with over 600 patients,
                including Phase 2 clinical trials in patients with non-Hodgkin’s lymphoma,
                or NHL, and acute lymphoblastic leukemia, or ALL. Based on the results
                from these studies, we are conducting a registration-enabling Phase
                2
                clinical trial, which we refer to as the rALLy study. The study population
                is adults with Philadelphia chromosome negative ALL in second relapse
                or
                those who failed 2 prior lines of therapy.  The primary outcome
                measure is complete remission or CR, or complete remission without
                full hematologic recovery or CRi.  The sample size is 56
                evaluable subjects from up to 50 sites. We also plan to conduct a
                confirmatory, Phase 3 front-line trial of Marqibo in subjects (at
                least 60
                years of age) with newly diagnosed Philadelphia chromosome negative
                ALL.
                 The primary outcome measure will be event-free survival, death,
                failure to achieve CR/CRi, and relapse after CR/CRi are the defining
                events. In addition we are conducting a Phase 2 study to assess the
                efficacy of Marqibo in patients with metastatic malignant uveal melanoma
                as determined by Disease Control Rate (CR, partial response or durable
                stable disease).  Secondary objectives are to assess the safety and
                antitumor activity of Marqibo as determined by response rate, progression
                free survival and overall survival. 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 approximately 30 subjects in this clinical trial.
                Marqibo
                received a U.S. orphan drug designation in January 2007 as well as
                a
                European Commission orphan drug designation in June 2008 for the
                ALL
                indication. Marqibo also received a U.S. orphan drug designation
                in July
                2008 for metastatic uveal melanoma. Marqibo received a fast track
                designation in August 2007 for the treatment of adult ALL from the
                FDA.




·
            ***AlocrestTM
                (vinorelbine liposomes injection)***-
                In February 2008, we completed enrollment in a Phase 1 study of Alocrest.
                The trial enrolled 30 adult subjects with confirmed solid tumors
                refractory to standard therapy or for which no standard therapy was
                known
                to exist. The objectives of the Phase 1 clinical trial were: (1)
                to assess
                the safety and tolerability of Alocrest; (2) to determine the maximum
                tolerated dose of Alocrest; (3) to characterize the pharmacokinetic
                profile of Alocrest; and (4) to explore preliminary efficacy of Alocrest.
                The study was conducted at the Cancer Therapy and Research Center
                and
                South Texas Accelerated Research Therapeutics (START), both located
                in San
                Antonio, Texas and at McGill University in Montreal.  The majority of
                study subjects had heavily pretreated disease. Reversible neutropenia,
                a
                low white blood cell count, was the dose-limiting toxicity. The results
                of
                this study indicated promising anti-cancer activity and expected
                toxicity,
                and a 50% disease control rate was achieved across a broad range
                of
                doses.





·
            ***BrakivaTM
                (topotecan liposomes injection) -***In
                November 2008, we initiated a Phase 1 dose-escalation clinical
                trial of Brakiva, which is primarily designed to assess the
                safety, tolerability and maximum tolerated
                dose.





·
            ***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
                have finalized an initial formulation of Menadione and completed
                essential
                IND-enabling studies. We initiated a Phase 1 clinical trial in cancer
                patients in April 2008 and another Phase 1 study in healthy volunteers
                in
                September 2008.





To
      date,
      we have not received regulatory approval and marketing authorization for any
      drug candidates in any market.  However we have received revenues from a
      sublicense agreement entered into with Par Pharmaceuticals in July 2007 for
      Zensana. The successful development of our current 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. Also, if we are unable to enter into strategic
      partnerships, we may not be able to develop or we may be forced to slow down
      development and commercialization of some or all our product
      candidates.




-20-




We
      will
      not generate any product commercial sales until we receive approval from the
      FDA
      or equivalent foreign regulatory bodies to begin marketing and 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. Our successes depend not
      only
      on the safety and efficacy of our product candidates, but also on our ability
      to
      finance the development of these product candidates or in some instances, enter
      into strategic partnerships. Our major sources of working capital have been
      proceeds from various private financings, primarily private sales of our common
      stock and other equity securities.





*Revenues*





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




*Research
      and Development Expenses*





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





*General
      and Administrative Expenses*





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





**Critical
      Accounting Policies and Estimates**





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).




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
      (SAB 107), we used the “simplified method” for determining the expected life of
      the options granted. Originally, under SAB 107, this method was allowed until
      December 31, 2007.  However, on December 21, 2007, the SEC issued SEC’s
      Staff Accounting Bulletin No. 110 (SAB 110), which will allow a company to
      continue to use the “simplified method” under certain circumstances, which we
      will continue to use as we do not have sufficient historical data to estimate
      the expected term of share based award.  The risk-free rate for periods
      within the contractual life of the option is based on the U.S. treasury yield
      curve in effect at the time of grant valuation. 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 22% annually
      of
      our stock options awarded will be forfeited.




-21-




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 is not currently a market-based mechanism or other practical
      application to verify the reliability and accuracy of the estimates stemming
      from these valuation models, nor is there a means to compare and adjust the
      estimates to actual values.


The
      guidance in SFAS No. 123R, SAB No. 107 and SAB No. 110 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 6 of our unaudited financial
      statements included elsewhere in this Form 10-Q report for further information
      regarding the SFAS No. 123R disclosures.





***Warrant
      Liabilities***


On
      October 30, 2007, we entered into a loan agreement with four investment funds
      affiliated with Deerfield Management (collectively, “Deerfield”). Deerfield has
      committed funds to assist with the development of our product candidates. Under
      the agreement, we may borrow from Deerfield up to an aggregate of $30 million,
      of which $20 million may be drawn down by us in as many as four installments
      every six months commencing October 30, 2007.  As additional consideration
      for the loan, we also issued to Deerfield 6-year warrants to initially purchase
      an aggregate of 5,225,433 shares of our common stock at an exercise price of
      $1.31 per share, of which warrants to initially purchase 4,825,433 shares
      include an anti-dilution feature.  This anti-dilution feature requires
      that, as we issue additional shares of our common stock during the term of
      the
      warrant, the number of shares purchasable under this series is automatically
      increased so that they always represent 15% of our then outstanding common
      stock. As a result of additional issuances of our common stock since October
      30,
      2007, as of September 30, 2008, these warrants represented the right to purchase
      an additional 32,486 shares of common stock, or 5,257,919 shares in the
      aggregate. Further, to the extent we draw down the funds conditioned upon the
      achievement of clinical development milestones relating to the Marqibo and
      Menadione programs, we will be required to issue additional warrants to
      Deerfield to purchase up to an additional 3.5% of our then outstanding shares
      of
      Common Stock, which warrants will contain the same anti-dilution feature as
      those issued on October 30, 2007.  Pursuant to the loan agreement, we also
      entered into a registration rights agreement, so that Deerfield may sell the
      shares issuable upon exercise of the warrants.  These financing
      transactions were recorded in accordance with Emerging Issues Task Force Issue
      No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
      Potentially Settled in, a Company's Own Stock.” Because the warrants are
      redeemable in the event of, among other things, a change in control or if our
      shares are no longer listed on a national securities exchange, the fair value
      of
      the warrants based on the Black-Scholes-Merton option pricing model is recorded
      as a liability.  We update our estimate of the fair value of the warrant
      liabilities in each reporting period as new information becomes available and
      any gains or losses resulting from the changes in fair value from period to
      period are included as an increase or decrease of interest expense.





***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.




-22-




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




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





**Recent
      Accounting Pronouncements**





On
      September 15, 2006, FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure
      assets and liabilities. SFAS No. 157 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. SFAS No. 157 applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value. SFAS No. 157 does
      not expand the use of fair value in any new circumstances. Originally, SFAS
      No.
      157 was effective for financial statements issued for fiscal years beginning
      after November 15, 2007, and interim periods within those fiscal years.
      Accordingly, we adopted SFAS No. 157 in the first quarter of fiscal year 2008.
      In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date
      of FASB Statement No. 157”, which provides a one year deferral of the
      effective date of SFAS No. 157 for non-financial assets and non-financial
      liabilities, except those that are recognized or disclosed in the financial
      statements at fair value at least annually. Therefore, the Company has adopted
      the provisions of SFAS No. 157 with respect to its financial assets and
      liabilities only. See Note 7 Fair Value Measurements in the Notes to Unaudited
      Condensed Financial Statements herein.





In
      March
      2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
      and Hedging Activities” as an amendment to SFAS No. 133. SFAS 161 is intended to
      improve financial reporting about derivative instruments and hedging activities
      by requiring companies to enhance disclosure about how these instruments and
      activities affect their financial position, performance and cash flows. SFAS
      161
      also improves the transparency about the location and amounts of derivative
      instruments in a company’s financial statements and how they are accounted for
      under SFAS 133. SFAS 161 is effective for financial statements issued for fiscal
      years beginning after November 15, 2008 (the Company’s 2009 fiscal year),
      and interim periods within beginning after that date. The Company is currently
      evaluating the impact this adoption will have on the Company’s financial
      statements.





On
      May 5,
      2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
      Principles”. SFAS No. 162 identifies the sources of accounting principles and
      the framework for selecting the principles to be used in the preparation of
      financial statements that are presented in conformity with generally accepted
      accounting principles in the U.S. We are evaluating the impact, if any, this
      Standard will have on our financial statements.





In
      June
      2008, the FASB ratified the consensus reached on EITF Issue No. 07-05, *Determining
      Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
      Stock* .
      EITF
      Issue No. 07-05 clarifies the determination of whether an instrument (or an
      embedded feature) is indexed to an entity’s own stock, which would qualify as a
      scope exception under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* .
      EITF
      Issue No. 07-05 is effective for financial statements issued for fiscal
      years beginning after December 15, 2008. Early adoption for an existing
      instrument is not permitted. The pending adoption of EITF Issue No. 07-05
      will have no material impact on our Company’s financial statements.





On
      October 10, 2008, the FASB issued FASB Staff Position No. 157-3, *Determining
      the Fair Value of a Financial Asset When the Market for That Asset Is Not
      Active* (“FSP
      No. 157-3”), to provide guidance on determining the fair value of financial
      instruments in inactive markets. FSP No. 157-3 became effective for the
      Company upon issuance, and had no material impact on the Company’s financial
      position, results of operations or cash flows.





**Results
      of Operations**





***Three
      Months Ended September 30, 2008 Compared to Three Months Ended September 30,
      2007***




*Revenue.* For
      the
      three months ended September 30, 2007, we recognized $1.2 million in revenue
      compared to zero for the same period


in
      2008.
      This revenue consisted entirely of the recognition of the upfront payment
      received from Par as part of the sublicense agreement for


Zensana.





*General
      and administrative expenses.* For the
      three months ended September 30, 2008, general and administrative, or G&A,
      expense was $1.0 million, as compared to $0.5 million for the three months
      ended
      September 30, 2007. The increase of approximately $0.5 million is due
      to:




·
            An
                increase in employee related expenses of $0.7 million;
                and





·
            A
                decrease in professional fees and outside services of $0.2
                million.




The
      primary reason of the increase in employee related expenses of $0.7 million
      is
      due to an increase of $0.6 million in employee related share-based compensation
      expense due to a large credit to expense in 2007 from stock options forfeited
      by
      our former chief executive officer when he resigned in September 2007.





For
      the
      three months ended September 30, 2008, outside services and professional service
      fees decreased $0.2 million compared to the three months ended September 30,
      2007, mainly due to decreased legal, consulting and accounting
      fees.




-23-




*Research
      and development expense* . For
      the three months ended September 30, 2008, research and development, or R&D,
      expense was $4.3 million, as compared to $5.7 million for three months ended
      September 30, 2007. The decrease of $1.4 million is due to:





·
            A
                decrease in direct drug development costs, professional fees and
                outside
                services of $1.3 million; and





·
            A
                decrease in rent, depreciation, insurance and other allocated expenses
                of
                $0.1 million.





The
      decrease of $1.3 million in expenses for the clinical development of our product
      pipeline includes a decrease of $0.4 million in professional and outside
      services, and a decrease in direct development costs for our product candidates
      of $0.9 million. These clinical costs included the physical manufacturing of
      drug compounds and payments to our contract research organizations. Also, we
      had
      a decrease in expenses related to product candidates that are no longer in
      our
      pipeline. A summary of the results of operations by drug candidate is as
      follows:





·
            Marqibo
                expenses increased by $0.5 million in the three months ended September
                30,
                2008, compared to the same period ended in 2007. In mid-2007, we
                initiated
                the rALLy study and the clinical development and manufacturing costs
                for
                this trial as well as the uveal melanoma trial accounted for the
                increase
                in expenses as we prepare to enter the second half of these trials
                and
                increase enrollment.





·
            Alocrest
                expenses decreased by $0.4 million in the three months ended September
                30,
                2008, compared to the same period ended in 2007. The majority of
                the
                decrease relates to a decrease of $0.5 million in manufacturing costs
                incurred in 2007 as part of the preparation for the Phase 1 trial
                for the
                Alocrest program initiated in 2007 and which completed enrollment
                in
                February 2008. Clinical costs increased slightly in the three months
                ended
                September 30, 2008 as we continue to process the data from the Phase
                1
                trial.





·
            Brakiva
                expenses decreased by $0.2 million in the three months ended September
                30,
                2008, compared to the same period ended in 2007. In October 2007,
                we
                activated an IND in the US and we were preparing for the initiation
                of a
                Phase 1 trial of Brakiva, which commenced in November 2008.
                Manufacturing costs decreased by $0.1 million. These costs decreased
                because we have completed most of the manufacturing work for this
                trial in
                2007, prior to the IND activation with additional manufacturing production
                for clinical trials performed in early 2008. Additionally, pre-clinical
                costs decreased by $0.1 million the IND filing with the FDAwas completed
                in 2007.





·
            Menadione
                expenses decreased by $0.5 million in the three months ended September
                30,
                2008, compared to the same period ended in 2007. Menadione pre-clinical
                work decreased by $1.0 million as all pre-clinical work done before
                the
                initiation of in the Phase 1 trial in early 2008. These cost savings
                were
                partially off-set by increased clinical trial costs as we currently
                have
                two Phase 1 trials on going as of September 30
                2008.




·
            Talvesta
                expenses decreased by $0.1 million in the three months ended September
                30,
                2008, compared to the same period ended in 2007. The costs associated
                with
                this program decreased after the program was put on clinical hold
                in early
                2007 and later terminated in October 2007. There were large clinical
                wrap-up costs in the various programs in 2007. These costs have
                substantially decreased in 2008 as have manufacturing costs. We will
                not
                incur any significant costs relating to Talvesta going
                forward.





·
            Zensana
                expenses decreased by $0.1 million in the three months ended September
                30,
                2008, compared to the same period ended in 2007. The Zensana program
                was
                halted in the first quarter of 2007 and an NDA filed with the FDA
                in 2007
                was pulled. In July 2007, we entered into a sub-license agreement
                with Par
                Pharmaceuticals, wherein Par will be responsible for all development
                and
                related costs going forward. During the three months ended September
                30,
                2007, we were still incurring manufacturing costs related to an analysis
                of the stability of Zensana. We do not expect to incur any significant
                additional costs relating to Zensana going
                forward.





R&D
      related allocable operating expenses; including rent, insurance, and other
      expenses decreased by approximately $0.1 million for the three months ended
      September 30, 2008 compared to the three months ended September 30, 2007. This
      is due mostly due to decreased spending on conferences and travel in 2008 in
      conjunction with a cost savings plan.




-24-




*Interest
      income.* For the
      three months ended September 30, 2008, interest income was approximately $0.1
      million as compared to interest income of $0.3 million for the three months
      ended September 30, 2007. The decrease of $0.2 million resulted from a decreased
      cash balance in our interest bearing accounts as well as decreasing interest
      rates.





*Interest
      expense.* For the
      three months ended September 30, 2008, interest expense was $0.3 million as
      compared to immaterial interest expense for the three months ended September
      30,
      2007. The increase resulted from accrued interest related to an outstanding
      loan
      balance from a draw down of funds on November 1, 2007 pursuant to the facility
      loan agreement with Deerfield.





*Gain
      on change in fair market value of warrant liabilities* .
      For the
      three months ended September 30, 2008, we recognized a gain related to the
      change in fair market value of the warrant liabilities, pursuant to the warrants
      issued to Deerfield as part of the loan agreement (see Note 5) of approximately
      $0.4 million.  There was no such transaction that affected the financial
      statements for the three months ended September 30, 2007.





*Realized
      loss on impairment of available-for-sale securities* . For
      the three months ended September 30, 2008, we did not recognize any loss related
      to the impairment in the fair market value of our available-for-sale securities,
      compared to a loss of $0.3 million in the three months ended September 30,
      2007.
      The reason for the impairment was that the decline in value of the shares held
      was determined to be other-than-temporary.




***Nine
      Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
      2007***




*Revenue.* For
      the
      nine months ended September 30, 2007, we recognized $1.2 million in revenue
      compared to zero for the same period in 2008. This revenue consisted entirely
      of
      the recognition of the upfront payment received from Par as part of the
      sublicense agreement for


Zensana.





*General
      and administrative expenses.* For the
      nine months ended September 30, 2008, G&A expense was $4.6 million, as
      compared to $6.6 million for the nine months ended September 30, 2007. The
      decrease of approximately $2.0 million is due primarily to:





·
            An
                decrease in employee related expenses of $1.1
                million;





·
            A
                decrease in professional fees and outside services of $0.7 million;
                and





·
            A
                decrease in rent, depreciation, insurance and other allocated expenses
                of
                $0.3 million.





The
      primary reason of the decrease in employee related expense of $1.1 million
      is
      due to a decrease of $0.6 million in salaries, benefits and other personnel
      related expenses, due to the employment termination of sales and marketing
      personnel in early 2007 after to termination of the Zensana program which was
      set to launch commercialization in April 2007. Additionally, there was a
      decrease of $0.5 million in employee related share-based compensation expense
      as
      a large number of share-based awards were forfeited by our former chief
      executive officer when he resigned in September 2007, which decreased subsequent
      stock-based compensation expense in future periods.





For
      the
      three months ended September 30, 2008, outside services and professional service
      fees decreased $0.7 million compared to the three months ended September 30,
      2007, mainly due to decreased legal expenses. In 2007, we incurred large legal
      expenses related to the termination of our Zensana and Talvesta clinical
      programs. Additionally, consulting and accounting fees decreased due to
      decreased expenses related to our testing for Sarbanes-Oxley Section 404
      compliance.





For
      the nine months ended September 30, 2008, there was a decrease of $0.3 million
      in G&A related allocable expenses, including rent, insurance and other
      expenses compared to nine months ended September 30, 2007. These costs decreased
      by $0.3 million due to the termination of the sales and marketing department
      during in the first half of 2007.





*Research
      and development expenses* . For
      the nine months ended September 30, 2008, research and development, or R&D,
      expense was $13.0 million, as compared to $17.4 million for nine months ended
      September 30, 2007. The decrease of $4.4 million is due primarily
      to:





·
            A
                decrease in employee related expenses of $2.0
                million;





·
            A
                decrease in direct drug development costs, professional fees and
                outside
                services of $1.9 million; and





·
            A
                decrease in rent, depreciation, insurance and other allocated expenses
                of
                $0.5 million.





Employee
      related expenses decreased by $2.0 million in 2008 due to a decrease of
      share-based compensation expense of $1.6 million, as well as a decrease of
      $0.4
      million in salaries, bonuses and other employee related expenses as the
      headcount in R&D departments decreased in the nine months ended September
      30, 2008 compared to the nine months ended September 30, 2007 due to a lower
      headcount in certain R&D related departments. Share-based compensation
      decreased as the price of our common stock declined in 2007, so options granted
      in 2007 and 2008 have a smaller fair value compared to older options granted
      in
      2006.




-25-





The
      decrease of $1.9 million in expenses for the clinical development of our product
      pipeline includes a decrease of $0.1 million in professional and outside
      services and a decrease in direct development costs for our product candidates
      of $2.0 million, partially offset by increased license milestone fees related
      to
      Menadione of $0.2 million. These clinical costs included the physical
      manufacturing of drug compounds and payments to our contract research
      organizations. Also, we had a decrease in expenses related to product candidates
      that are no longer in our pipeline. A summary of the results of operations
      by
      drug candidate is as follows:




·
            Marqibo
                expenses increased by $0.8 million in the nine months ended September
                30,
                2008 compared to the same period ended in 2007. We initiated two
                Phase 2
                clinical trials in 2007, which increased manufacturing and clinical
                costs
                in 2008. These costs were partially offset by decreased pre-clinical
                and
                regulatory costs as the Company was pursuing a special protocol assessment
                for Marqibo in 2007.





·
            Alocrest
                expenses decreased by $1.1 million in the nine months ended September
                30,
                     2008 compared to the same period ended in 2007. Manufacturing
                and clinical
                costs decreased due to the completion of enrollment in the Phase
                1 trial
                for the Alocrest program in February 2008 and the Company does not
                currently plan to initiate an additional clinical study in
                2008.





·
            Brakiva
                expenses remained unchanged for the nine months ended September 30,
                2008
                compared to the same period ended in 2007. The Company activated
                an IND in
                the US and Canada and initiated a Phase 1 trial of Brakiva
                in November 2008.





·
            Menadione
                expenses decreased by $0.2 million in the nine months ended September
                30,
                2008 compared to the same period ended in 2007. Menadione costs decreased
                during the nine months ended September 30, 2008 due to decreased
                pre-clinical costs of $1.2 million as the drug moved into the clinical
                stage of development in 2008. This was partially off set by higher
                clinical costs in 2008 for the two on going Phase 1 studies of $1.0
                million and higher manufacturing costs of $0.1 million.




·
            Talvesta
                expenses decreased by $0.5 million in the nine months ended September
                30,
                2008 compared to the same period ended in 2007. The costs associated
                with
                this program decreased after the program was put on clinical hold
                in early
                2007 and later terminated in October 2007. There were large clinical
                wrap-up and on-going manufacturing costs in the various programs
                in 2007.
                These costs have substantially decreased in 2008. We will not incur
                any
                significant costs relating to Talvesta going
                forward.





·
            Zensana
                expenses decreased by $1.1 million in the nine months ended September
                30,
                2008 compared to the same period ended in 2007. The Zensana program
                was
                halted in the first quarter of 2007 and an NDA filed with the FDA
                in 2007
                was pulled. In July 2007, we entered into a sub-license agreement
                with Par
                Pharmaceuticals, wherein Par will be responsible for all development
                and
                related costs going forward. During the nine months ended September
                30,
                2007 the Company was still incurring manufacturing and regulatory
                costs
                related to the NDA. We do not expect to incur any significant additional
                costs relating to Zensana going
                forward.





R&D
      related allocable operating expenses; including rent, insurance, and other
      expenses decreased by approximately $0.5 million for the nine months ended
      September 30, 2008 compared to the ninie months ended September 30, 2007. The
      Company decreased spending on conferences and travel in 2008 by $0.6 million
      as
      part of a cost cutting plan. These costs were offset partially by increased
      rent, insurance and other allocable expenses.





*Interest
      income.* For the
      nine months ended September 30, 2008, interest income was $0.3 million as
      compared to interest income of $1.0 million for the nine months ended September
      30, 2007. The decrease of $0.7 million resulted from decreased cash balance
      in
      our interest bearing accounts as well as decreasing interest rate
      yields.





*Interest
      expense.* For the
      nine months ended September 30, 2008, interest expense was $0.8 million as
      compared to immaterial interest expense for the nine months ended September
      30,
      2007. The increase resulted from accrued interest related to an outstanding
      loan
      balance from a draw down of funds on November 1, 2007 pursuant to the loan
      agreement with Deerfield.





*Loss
      on change in fair market value of warrant liabilities* .
      For the
      nine months ended September 30, 2008, we recognized a gain related to the
      change in fair market value of the warrant liabilities, pursuant to the warrants
      issued to Deerfield as part of the Facility Loan Agreement (see Note 5) of
      approximately $2.2 million.  There was no such transaction that affected
      the financial statements for the nine months ended September 30,
      2007.





*Realized
      loss on impairment of available-for-sale securities* . For
      the nine months ended September 30, 2008, we recognized a loss of $0.1
      related to the impairment in the fair market value of our available-for-sale
      securities, compared to a loss of $0.4 million in the nine months ended
      September 30, 2007. The reason for the impairment was that the decline in value
      of the shares held was determined to be other-than-temporary.




-26-




**Liquidity
      and Capital Resources**




As
      of
      September 30, 2008, we had approximately $16.1 million in cash and cash
      equivalents and available-for-sale securities, that may be liquidated to provide
      cash, including $12.5 million in funds pursuant to the loan agreement with
      Deerfield Management that we drew down on October 14, 2008. We reported a net
      loss of $16.1 million and negative cash flows from operating activities of
      $17.1
      million for the nine months ended September 30, 2008. As of September 30,
      2008, we had a total stockholder’s deficit of $1.0 million.





Pursuant
      to the terms of the loan agreement with Deerfield, we may borrow from Deerfield
      up to an aggregate of $30 million, of which $20 million becomes available in
      four installments every six months commencing October 30, 2007. The remaining
      $10 million becomes available in three installments upon the achievement of
      clinical development milestones relating to our Marqibo and Menadione product
      candidates. We are not obligated to draw down these funds when any installment
      becomes available to us. Pursuant to such schedule, we drew down $7.5 million
      on
      November 1, 2007. As of September 30, 2008, we were eligible to draw down an
      additional $12.5 million pursuant to installments and clinical development
      milestones achieved. On October 14, 2008, we drew down the entire $12.5 million
      in available funds. On October 30, 2008, an additional $2.5 million became
      available to us pursuant to the terms of the facility agreement and on November
      5, 2008, we requested disbursement of these funds from Deerfield. The remaining
      $7.5 million of the loan is subject to disbursement through a $5 million
      installment on April 30, 2009 and a $2.5 million installment upon reaching
      the
      remaining clinical development milestone described in the facility agreement.
      Deerfield’s obligation to disburse loan proceeds expires October 30, 2010 and we
      must repay all outstanding amounts owing under the loan no later than October
      30, 2013. We expect to continue to incur losses for the foreseeable future.





We
      do not
      generate any recurring revenue and will require substantial additional capital
      before we will generate cash flow from our operating activities, if ever. Our
      continued operations will depend on whether we are able to continue the
      progression of clinical compounds and obtain additional funding through equity
      or debt financings or from payments in connection with potential strategic
      transactions.  We can give no assurances that any additional capital that
      we are able to obtain, if any, will be sufficient to meet our needs. Moreover,
      there can be no assurance that such capital will be available to us on favorable
      terms or at all, especially given the current economic environment. Based on
      the
      anticipated use of cash resources between $5.0 million and $6.0 million per
      quarter, including any milestones pursuant to our license agreements, we
      estimate that we will be able to proceed with planned development
      activities into the fourth quarter of 2009.  However, if our anticipated
      costs are higher than planned or if we are unable to raise additional capital,
      we will have to significantly curtail planned development to maintain operations
      into the fourth quarter of 2009 and beyond.





Additionally,
      as of September 30, 2008, we are no longer in compliance with Nasdaq’s listing
      standards relating to minimum stockholders’ equity and as such, we expect that
      Nasdaq will provide us with written notice that our common stock is being
      delisted from the Nasdaq Capital Market. We may appeal the delisting
      determination to a Nasdaq Listings Qualifications Panel pursuant to applicable
      Nasdaq rules, however, if our common stock is delisted from the Nasdaq Capital
      Market, trading in our common stock would likely be conducted on the OTC
      Bulletin Board, a regulated quotation service. If our common stock is delisted
      from Nasdaq, this may cause delays in the timing of financial transactions
      and
      may decrease our ability to raise capital through the sale of common stock.





In
      addition, if our common stock is no longer listed on the Nasdaq Capital Market,
      we may be required to redeem the warrants issued to Deerfield under our loan
      agreement at their Black-Scholes-Merton value. If Deerfield elects to redeem
      the
      warrants and we refuse or are unable to pay the redemption price, a default
      will
      have been triggered under the facility agreement, giving Deerfield the right
      to
      require us to repay the loan. This would have a significantly negative impact
      on
      our ability to continue clinical development and could potentially cause us
      to
      cease operations.





For
      the
      remainder of the year ending December 31, 2008 we plan to continue focusing
      on
      the continued development of our four product candidates that are currently
      in
      clinical and preclinical phases.  We expect our principal expenditures
      during 2008 to include:




·
            operating
                expenses, including expanded R&D and G&A
                expenses;





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




As
      part
      of our planned research and development, we intend to use clinical research
      organizations and third parties to help perform our clinical studies and
      manufacturing. As indicated above, at our current and desired pace of clinical
      development of our product candidates, in the fourth quarter of 2008 we expect
      to spend approximately between $3.5 million and $4.5 million on clinical
      development (including milestone payments that we expect to be triggered under
      the license agreements relating to our product candidates, which may be
      satisfied through the issuance of shares of our common stock, at our
      discretion), between $0.5 million and $1.5 million on general corporate and
      administrative expenses, including $0.2 million in rent on our
      facilities..





We
      believe that our cash, cash equivalents and marketable securities, which totaled
      $3.8 million as of September 30, 2008, along with the funds available through
      the Deerfield agreement, will be sufficient to meet our anticipated operating
      needs into the fourth quarter of 2009 based upon current operating and spending
      assumptions. However, we expect to incur substantial expenses as we continue
      our
      drug development efforts, particularly to the extent we advance our lead
      candidate Marqibo through a pivotal clinical study. 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;





·
            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.




-27-




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 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, particularly given the current economic conditions.
      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
      in
      our Annual Report on Form 10-K for the year ended December 31, 2007, our
      assumptions relating to 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 in the future to continue development of our product
      candidates. 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.***  ** We have
      incurred $3.0 million and $2.2 million in project costs related to our
      development of Marqibo in the nine months ending September 30, 2008 and 2007,
      respectively. In 2007, we initiated the the Phase 2 rALLy study and a pilot
      Phase 2 trial in metastic uveal melanoma. Pending finalization of the protocol
      with cooperative groups and approval by the Cancer Therapy Evaluation Program,
      we anticipate conducting a confirmatory Phase 3 supportive trial in front-line
      ALL potentially commencing in 2009. We estimate that we will need to expend
      at
      least an aggregate of approximately $47 million in order for us to obtain full
      FDA approval for Marqibo, if ever, which includes a milestone payment that
      would
      be owed to our licensor upon FDA approval.  We expect that it will take
      approximately three to four years until we will have completed development
      and
      obtained full FDA approval of Marqibo, if ever. During the remainder of 2008,
      we
      estimate that we will spend between $1.5 million and $2.0 million on the
      clinical development of Marqibo.





***Alocrest.*** We have
      incurred $0.6 million and $1.7 million in project costs related to our
      development of Alocrest in the nine months ending September 30, 2008 and 2007,
      respectively. We initiated a Phase 1 clinical trial in August 2006 and completed
      enrollment in February 2008. This Phase 1 trial was designed to assess safety,
      tolerability and preliminary efficacy in patients with advanced solid tumors.
      We
      presented the clinical data from this Phase 1 trial in mid 2008. We are seeking
      a third-party with which to partner the further development of
      Alocrest.





***Brakiva.*** We have
      incurred $0.9 million and $0.9 million in project costs related to our
      development of Brakiva in the nine months ending September 30, 2008 and 2007,
      respectively. In November 2008, we initiated a Phase 1 clinical trial of Brakiva
      designed to assess safety, tolerability and a maximum tolerated dose. As this
      drug is early in its clinical development, both the registrational strategy
      and
      total expenditures to obtain FDA approval are still being evaluated. During
      the
      remainder of 2008, we estimate that we will spend between $0.5 million and
      $1.0
      million on the clinical development of Brakiva and we are not currently in
      a
      position to estimate the amount of capital required to fund the development
      of
      Brakiva until completion.





***Menadione.*** We have
      incurred $1.7 million and $1.8 million in project costs related to our
      development of Menadione in the nine months ending September 30, 2008 and 2007,
      respectively. We initiated a Phase 1 clinical trial in cancer patients in April
      2008 and another Phase 1 clinical trial in healthy volunteers in September
      2008.
 As this drug is early in its clinical development, both the registrational
      strategy and total expenditures to obtain FDA approval are still being
      evaluated. During the remainder of 2008, we estimate that we will spend between
      $1.0 million and $1.5 million on the clinical development of Menadione.




-28-




**Off-Balance
      Sheet Arrangements**




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





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




Not
      applicable.





**Item
      4T. Controls and Procedures**




*Evaluation
      of Disclosure Controls and Procedures* .





We
      conducted an evaluation as of September 30, 2008, under the supervision and
      with
      the participation of our management, including our Chief Executive Officer
      and
      Chief Financial Officer, of the effectiveness of the design and operation of
      our
      disclosure controls and procedures, which are defined under SEC rules as
      controls and other procedures of a company that are designed to ensure that
      information required to be disclosed by a company in the reports that it files
      under the Securities Exchange Act of 1934, as amended, is recorded, processed,
      summarized and reported within required time periods. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that, as of such date, our disclosure controls and procedures were
      effective.





*Limitations
      on the Effectiveness of Controls*





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




*Changes
      in Internal Controls Over Financial Reporting*





During
      the quarter ended September 30, 2008, 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.




-29-





**PART
      II - OTHER INFORMATION**





**Item
      1. Legal Proceedings**





We
      are
      not involved in any legal proceeding.





**Item
      1A. Risk Factors**





We
      have
      not had any material changes to our risk factors disclosed in response to Item
      1A of Part I of our Annual Report on Form 10-K for the year ended December
      31,
      2007.





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





None





**Item
      3. Defaults Upon Senior Securities**





Not
      applicable.





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





None





**Item
      5. Other Information**





None





**Item
      6. Exhibits**





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




-30-




**SIGNATURES**




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




**HANA
                BIOSCIENCES, INC.**Dated:
                November 14, 2008
            By:
            /s/ Steven
                R. Deitcher, MDSteven
                R. Deitcher, MDPresident
                and Chief Executive Officer





Dated:
                November 14, 2008
            By:
            /s/ John
                P. IparraguirreJohn
                P. Iparraguirre
              Vice
                President, Chief Financial Officer




-31-





**Index
      to Exhibits Filed with this Report**




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




-32-