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
quarterly period ended June 30, 2010





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 has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes o
     No  ̈




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 filer   o
            Accelerated
      filer   oNon-accelerated
      filer   o
            Smaller
      reporting company   x(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
August 13, 2010, there were 84,937,237 shares of the registrant's common
stock, $.001 par value.







INDEX





PagePART
      I
                  FINANCIAL
      INFORMATION
                  4Item
      1.
                  Unaudited
      Condensed Financial Statements
                  4Unaudited
      Condensed Balance Sheets
                  4Unaudited
      Condensed Statements of Operations and Other Comprehensive
      Loss
                  5Unaudited
      Condensed Statement of Changes in Redeemable, Convertible Preferred Stock
      and Stockholders' 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
                  20Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  27Item
      4.
                  Controls
      and Procedures
                  27PART
      II
                  OTHER
      INFORMATION
                  28Item
      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.
                  [Removed
      and Reserved]
                  28Item
      5.
                  Other
      Information
                  28Item
      6.
                  Exhibits
                  29Signatures
                  30Index
      of Exhibits Filed with this Report
                  31


- 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 Quarterly Report on Form 10-Q 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 below in Part II, Item 1A“Risk Factors,” 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. Unaudited Condensed Financial Statements




HANA
BIOSCIENCES, INC.





CONDENSED
BALANCE SHEETS





June
      30,
                                            2010
                                          
                                          
                                          December
      31,
                                            2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                          
                                          $
                                          37,820,075
                                          
                                          
                                          $
                                          9,570,453Available-for-sale
      securities
                                          
                                          
                                          76,000
                                          
                                          
                                          
                                          68,000Prepaid
      expenses and other current assets
                                          
                                          
                                          119,187
                                          
                                          
                                          
                                          114,067Total
      current assets
                                          
                                          
                                          38,015,262
                                          
                                          
                                          
                                          9,752,520Property
      and equipment, net
                                          
                                          
                                          177,463
                                          
                                          
                                          
                                          252,455Restricted
      cash
                                          
                                          
                                          125,000
                                          
                                          
                                          
                                          125,000Debt
      issuance costs
                                          
                                          
                                          963,906
                                          
                                          
                                          
                                          1,193,594Total
      assets
                                          
                                          $
                                          39,281,631
                                          
                                          
                                          $
                                          11,323,569LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
                                          
                                          $
                                          3,491,426
                                          
                                          
                                          $
                                          4,027,075Other
      short-term liabilities
                                          
                                          
                                          11,022
                                          
                                          
                                          
                                          43,586Total
      current liabilities
                                          
                                          
                                          3,502,448
                                          
                                          
                                          
                                          4,070,661Notes
      payable, net of discount
                                          
                                          
                                          23,042,679
                                          
                                          
                                          
                                          22,597,050Other
      long-term liabilities
                                          
                                          
                                          5,742
                                          
                                          
                                          
                                          6,540Investors’
      right to purchase future shares of Series A-1 and A-2 preferred stock
      (Note 5)
                                          
                                          
                                          9,048,000
                                          
                                          
                                          
                                          -Warrant
      liabilities, non-current
                                          
                                          
                                          1,040,991
                                          
                                          
                                          
                                          2,145,511Total
      long term liabilities
                                          
                                          
                                          33,137,412
                                          
                                          
                                          
                                          24,749,101Total
      liabilities
                                          
                                          
                                          36,639,860
                                          
                                          
                                          
                                          28,819,762Commitments
      and contingencies (Notes 4, 5, 6, 8, 9, 11 and 12):Redeemable
      convertible preferred stock; $100 par value:10,000,000
      shares authorized, 400,000 and 0 shares issued and outstanding at June 30,
      2010 and December 31, 2009, respectively; aggregate liquidation value of
      $100.8 million and $0 at June 30, 2010 and December 31, 2009,
      respectively
                                          
                                          
                                          29,898,219
                                          
                                          
                                          
                                          -Stockholders'
      deficit:Common
      stock; $0.001 par value:200,000,000
      shares authorized, 84,844,815 and 79,649,976 shares issued and outstanding
      at June 30, 2010 and December 31, 2009, respectively
                                          
                                          
                                          84,845
                                          
                                          
                                          
                                          79,650Additional
      paid-in capital
                                          
                                          
                                          119,595,976
                                          
                                          
                                          
                                          117,572,373Accumulated
      other comprehensive income
                                          
                                          
                                          (16,000
                                          )
                                          
                                          
                                          (24,000
                                          )Accumulated
      deficit
                                          
                                          
                                          (146,921,269
                                          )
                                          
                                          
                                          (135,124,216
                                          )Total
      stockholders' deficit
                                          
                                          
                                          (27,256,448
                                          )
                                          
                                          
                                          (17,496,193
                                          )Total
      liabilities, redeemable, convertible preferred stock and stockholders'
      deficit
                                          
                                          $
                                          39,281,631
                                          
                                          
                                          $
                                          11,323,569





See
accompanying notes to unaudited condensed financial statements.


- 4
-





HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(Unaudited)





Three Months Ended
                                        
                                        
                                        Six Months EndedJune 30,
                                        
                                        
                                        June 30,2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2009Operating
      expenses:General
      and administrative
                                        
                                        $
                                        1,875,840
                                        
                                        
                                        $
                                        1,195,073
                                        
                                        
                                        $
                                        3,046,735
                                        
                                        
                                        $
                                        2,572,673Research
      and development
                                        
                                        
                                        2,705,425
                                        
                                        
                                        
                                        3,002,071
                                        
                                        
                                        
                                        5,963,970
                                        
                                        
                                        
                                        7,194,554Total
      operating expenses
                                        
                                        
                                        4,581,265
                                        
                                        
                                        
                                        4,197,144
                                        
                                        
                                        
                                        9,010,705
                                        
                                        
                                        
                                        9,767,227Loss
      from operations
                                        
                                        
                                        (4,581,265
                                        )
                                        
                                        
                                        (4,197,144
                                        )
                                        
                                        
                                        (9,010,705
                                        )
                                        
                                        
                                        (9,767,227
                                        )Other
      income (expense):Interest
      income
                                        
                                        
                                        238
                                        
                                        
                                        
                                        574
                                        
                                        
                                        
                                        506
                                        
                                        
                                        
                                        12,156Interest
      expense
                                        
                                        
                                        (940,735
                                        )
                                        
                                        
                                        (833,142
                                        )
                                        
                                        
                                        (2,025,319
                                        )
                                        
                                        
                                        (1,560,149
                                        )Other
      expense, net
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (4,907
                                        )Change
      in fair value of warrant liabilities
                                        
                                        
                                        (424,379
                                        )
                                        
                                        
                                        (2,821,169
                                        )
                                        
                                        
                                        (383,535
                                        )
                                        
                                        
                                        (2,157,109
                                        )Change
      in fair value of investors’ right to purchase future shares of Series A-1
      and A-2 preferred stock
                                        
                                        
                                        (378,000
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (378,000
                                        )
                                        
                                        
                                        —Total
      other expense
                                        
                                        
                                        (1,742,876
                                        )
                                        
                                        
                                        (3,653,737
                                        )
                                        
                                        
                                        (2,786,348
                                        )
                                        
                                        
                                        (3,710,009
                                        )Net
      loss
                                        
                                        $
                                        (6,324,141
                                        )
                                        
                                        $
                                        (7,850,881
                                        )
                                        
                                        $
                                        (11,797,053
                                        )
                                        
                                        $
                                        (13,477,236
                                        )Deemed
      dividends attributable to preferred stock
                                        
                                        
                                        (9,307,431
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (9,307,431
                                        )
                                        
                                        
                                        —Net
      loss applicable to common stock
                                        
                                        
                                        (15,631,572
                                        )
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (21,104,484
                                        )
                                        
                                        
                                        —Net
      loss per share applicable to common stock, basic and
    diluted
                                        
                                        $
                                        (0.19
                                        )
                                        
                                        $
                                        (0.24
                                        )
                                        
                                        $
                                        (0.26
                                        )
                                        
                                        $
                                        (0.42
                                        )Weighted
      average shares used in computing net loss per share, basic and
      diluted
                                        
                                        
                                        82,066,490
                                        
                                        
                                        
                                        32,451,184
                                        
                                        
                                        
                                        80,930,614
                                        
                                        
                                        
                                        32,450,465Comprehensive
      loss:Net
      loss
                                        
                                        $
                                        (6,324,141
                                        )
                                        
                                        $
                                        (7,850,881
                                        )
                                        
                                        $
                                        (11,797,053
                                        )
                                        
                                        $
                                        (13,477,236
                                        )Unrealized
      holdings gains (losses) arising during the period
                                        
                                        
                                        —
                                        
                                        
                                        
                                        28,000
                                        
                                        
                                        
                                        8,000
                                        
                                        
                                        
                                        (4,000
                                        )Comprehensive
      loss
                                        
                                        $
                                        (6,324,141
                                        )
                                        
                                        $
                                        (7,822,881
                                        )
                                        
                                        $
                                        (11,789,053
                                        )
                                        
                                        $
                                        (13,481,236
                                        )





See
accompanying notes to unaudited condensed financial
statements.


- 5
-





HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENT OF CHANGES IN REDEEMABLE, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT


(Unaudited)





Period
from January 1, 2010 to June 30, 2010





Redeemable Convertible
                              Preferred Stock
                            
                            
                            Common stock
                            
                            
                            Additional
                              paid-in
                            
                            
                            Accumulated
                              Other
                              Comprehensive
                            
                            
                            Accumulated
                            
                            
                            Total
                              stockholders'Shares
                            
                            
                            Amount
                            
                            
                            Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            income
                            
                            
                            deficit
                            
                            
                            deficitBalance
      at January 1, 2010
                            
                            
                            —
                            
                            
                            $
                            —
                            
                            
                            
                            79,649,976
                            
                            
                            $
                            79,650
                            
                            
                            $
                            117,572,373
                            
                            
                            $
                            (24,000
                            )
                            
                            $
                            (135,124,216
                            )
                            
                            $
                            (17,496,193
                            )Share-based
      compensation of employees amortized over vesting period of stock
      options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            429,970
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            429,970Issuance
      of shares upon exercise of warrants
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            5,056,551
                            
                            
                            
                            5,057
                            
                            
                            
                            1,533,564
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,538,621Issuance
      of shares under employee stock purchase plan
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            138,288
                            
                            
                            
                            138
                            
                            
                            
                            22,195
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            22,333Issuance
      of Series A-1 redeemable, convertible preferred stock, net of issuance
      costs of $1,431,781, and fair value of investors’ right to acquire future
      shares of Series A-1 and A-2 preferred stock
                            
                            
                            400,000
                            
                            
                            
                            20,906,404
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Beneficial
      conversion feature on Series A-1 redeemable, convertible preferred
      stock
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            8,991,815
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            8,991,815Dividend
      accretion of Series A-1 redeemable, convertible preferred stock 
      pursuant to beneficial conversion feature
                            
                            
                            —
                            
                            
                            
                            8,991,815
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (8,991,815
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (8,991,815
                            )Issuance
      of warrants related to Series A-1 redeemable, convertible preferred
      stock
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            37,874
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            37,874Unrealized
      loss on available-for-sale securities
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            8,000
                            
                            
                            
                            —
                            
                            
                            
                            8,000Net
      loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (11,797,053
                            )
                            
                            
                            (11,797,053
                            )Balance
      at June 30, 2010
                            
                            
                            400,000
                            
                            
                            $
                            29,898,219
                            
                            
                            
                            84,844,815
                            
                            
                            $
                            84,845
                            
                            
                            $
                            119,595,976
                            
                            
                            $
                            (16,000
                            )
                            
                            $
                            (146,921,269
                            )
                            
                            $
                            (27,256,448
                            )





See
accompanying notes to unaudited condensed financial
statements.


- 6
-





HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2010
                                                  
                                                  
                                                  2009Cash
      flows from operating activities:Net
      loss
                                                  
                                                  $
                                                  (11,797,053
                                                  )
                                                  
                                                  $
                                                  (13,477,236
                                                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                                                  
                                                  
                                                  81,491
                                                  
                                                  
                                                  
                                                  99,489Share-based
      compensation to employees for services
                                                  
                                                  
                                                  429,970
                                                  
                                                  
                                                  
                                                  619,331Amortization
      of discount and debt issuance costs
                                                  
                                                  
                                                  675,317
                                                  
                                                  
                                                  
                                                  400,550Loss
      on change in fair value of warrant liability
                                                  
                                                  
                                                  383,535
                                                  
                                                  
                                                  
                                                  2,157,109Loss
      on change in fair value of investors’ right to purchase futureshares
      of Series A-1 and A-2 preferred stock
                                                  
                                                  
                                                  378,000
                                                  
                                                  
                                                  
                                                  —Changes
      in operating assets and liabilities:(Increase)/decrease
      in prepaid expenses and other assets
                                                  
                                                  
                                                  (5,120
                                                  )
                                                  
                                                  
                                                  76,258Decrease
      in accounts payable and accrued liabilities
                                                  
                                                  
                                                  (549,021
                                                  )
                                                  
                                                  
                                                  (666,825
                                                  )Net
      cash used in operating activities
                                                  
                                                  
                                                  (10,402,881
                                                  )
                                                  
                                                  
                                                  (10,791,324
                                                  )Cash
      flows from investing activities:Purchase
      of property and equipment
                                                  
                                                  
                                                  (6,499
                                                  )
                                                  
                                                  
                                                  —Net
      cash used in investing activities
                                                  
                                                  
                                                  (6,499
                                                  )
                                                  
                                                  
                                                  —Cash
      flows from financing activities:Proceeds
      from exercise of warrants and options and issuance of shares under
      employee stock purchase plan
                                                  
                                                  
                                                  72,899
                                                  
                                                  
                                                  
                                                  13,271Payments
      on capital leases
                                                  
                                                  
                                                  (19,990
                                                  )
                                                  
                                                  
                                                  (30,777
                                                  )Proceeds
      from issuances of notes payable
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  5,000,000Proceeds
      from private placement of Series A-1 preferred stock for $40 million less
      cash issuance costs of $1,393,907
                                                  
                                                  
                                                  38,606,093
                                                  
                                                  
                                                  
                                                  —Net
      cash provided by financing activities
                                                  
                                                  
                                                  38,659,002
                                                  
                                                  
                                                  
                                                  4,982,494Net
      increase (decrease) in cash and cash equivalents
                                                  
                                                  
                                                  28,249,622
                                                  
                                                  
                                                  
                                                  (5,808,830
                                                  )Cash
      and cash equivalents, beginning of period
                                                  
                                                  
                                                  9,570,453
                                                  
                                                  
                                                  
                                                  13,999,080Cash
      and cash equivalents, end of period
                                                  
                                                  $
                                                  37,820,075
                                                  
                                                  
                                                  $
                                                  8,190,250Supplemental
      disclosures of cash flow data:Cash
      paid for interest
                                                  
                                                  $
                                                  2,025,997
                                                  
                                                  
                                                  $
                                                  1,140,301Supplemental
      disclosures of noncash financing activities:Equipment
      financed with capital leases
                                                  
                                                  
                                                  —
                                                  
                                                  
                                                  
                                                  9,895Unrealized
      loss on available-for-sale securities
                                                  
                                                  
                                                  8,000
                                                  
                                                  
                                                  $
                                                  (4,000
                                                  )Fair
      value of warrants issued to nonemployee as partial payment of services
      rendered
                                                  
                                                  $
                                                  37,874
                                                  
                                                  
                                                  $
                                                  —Extinguishment
      of warrant liabilities, net of cash proceeds from warrant
      exercise
                                                  
                                                  $
                                                  1,488,055
                                                  
                                                  
                                                  $
                                                  —





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”, “we”, “our”, “us” or the “Company”) 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.  Our product candidates consist of the
following:




·
            Marqibo® (vincristine sulfate
      liposomes injection), our lead product candidate, is a novel, targeted
      OptisomeTM encapsulated formulation product candidate of the anti-cancer
      drug vincristine, which is approved by the Food and Drug Administration,
      or FDA, and is currently in development primarily for the treatment of
      adult acute lymphoblastic leukemia, or ALL, and metastatic uveal
      melanoma.




·
            Menadione Topical Lotion, a novel
      supportive care 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), a type of anti-cancer
      agent used in the treatment of lung, colon, head and neck , pancreatic and
      breast cancer.




·
            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.




·
            AlocrestTM (vinorelbine liposomes
      injection), a novel, targeted OptisomeTM encapsulated formulation product
      candidate of the FDA-approved anticancer drug
      vinorelbine.





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. These interim financial results are
not necessarily indicative of the results to be expected for the full fiscal
year ending December 31, 2010 or any subsequent interim period.





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 and investors’ rights to
purchase shares of Series A-1 and A-2 preferred stock, 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.





Fair
Value of Financial Instruments





Financial
instruments include cash and cash equivalents, marketable securities, and
accounts payable. 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.  The
fair value of the Company’s notes payable at June 30, 2010 is $13.4
million.


- 8
-





Cash
and Cash Equivalents and Short-Term Investments




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





Debt
Issuance Costs





As
discussed in Note 4, 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.




Financial
Instruments with Characteristics of Both Equity and Liabilities





The
Company has issued certain financial instruments, including warrants to purchase
common stock and rights to purchase shares of Series A-1 and A-2 preferred
stock, that have the characteristics of both equity and
liabilities.  These instruments were evaluated to be classified as
liabilities at the time of issuance and are revalued at fair value from period
to period with the resulting change in value included in other
income/(expense).  See Notes 5 and 8




Reclassification





Approximately
$0.3 million and $0.5 million in research & development expenses have been
reclassified as general administrative expenses for the three and six month
periods ending June 30, 2009 in the Company’s Statement of Operations, to
conform to the current year presentation.





NOTE
3. LIQUIDITY AND CAPITAL RESOURCES




Liquidity
and Capital Resources




As of
June 30, 2010, the Company had a stockholder's deficit of approximately $27.3
million and an accumulated deficit of $146.9 million.  For the six
months ended June 30, 2010, we recognized a net loss of $11.8
million.  The Company has financed operations primarily through equity
and debt financing and expects such losses to continue over the next several
years.  As of June 30, 2010, the Company had aggregate cash and cash
equivalents and available-for-sale securities of $37.9 million and available
working capital of $34.4 million.  The Company has drawn down $27.5
million of long-term debt under the loan facility agreement with Deerfield
Management.  On June 7, 2010, the Company entered into an Investment
Agreement with certain investors wherein it sold 400,000 shares of convertible
preferred stock at the stated value of $100 per share, for gross proceeds of $40
million.





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 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 on
favorable terms or at all, especially given the current economic
environment.  If the Company raises additional funds through
collaborations and licensing arrangements, it may be necessary to relinquish
some rights to its technologies, product candidates or products, or grant
licenses on terms that are not favorable to the Company. If the Company raises
additional funds by incurring debt, it could incur significant interest expense
and become subject to covenants that could affect the manner in which it
conducts its business.





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





·
            costs associated with conducting
      preclinical and clinical testing of product
    candidates;





·
            costs of establishing
      arrangements for manufacturing the Company’s product
      candidates;





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





·
            costs, timing and outcome of
      regulatory reviews;





·
            costs of obtaining, maintaining
      and defending patents on the Company’s product candidates;
      and





·
            costs of increased general and
      administrative expenses.





The
Company has based its estimates on assumptions that may prove to be wrong, in
which case, the Company may need to obtain additional funds sooner or in greater
amounts than currently
anticipated.


- 9
-





NOTE
4.  FACILITY AGREEMENT





On
October 30, 2007, the Company entered into a Facility Agreement (the “Facility
Agreement”) with certain affiliates of Deerfield Management (collectively,
“Deerfield”), pursuant to which Deerfield agreed to loan to the Company up to
$30 million.  In accordance with and upon execution of the Facility
Agreement, the company paid a loan commitment fee of $1.1 million to Deerfield
Management.  The Company has drawn down an aggregate of $27.5 million since
October 30, 2007, all of which was outstanding at June 30, 2010. Pursuant to the
Facility Agreement, the Company is required to make quarterly interest payments
on outstanding principal, at a stated annual rate of 9.85%.  Under the
original terms of the Facility Agreement, all outstanding indebtedness was
required to be repaid in full on October 30, 2013.  However, on June
7, 2010, the Company and Deerfield entered into an amendment to the Facility
Agreement that, among other terms, extended the maturity date of the outstanding
principal to June 30, 2015.  The Company deemed this modification
unsubstantial as the change in the present value of cash flows related to the
payment of interest and principal was less than 10%.  The Company’s
obligations under the Facility Agreement are secured by all assets owned (or
that will be owned in the future) by the Company, both tangible and intangible.
The effective interest rate on the $27.5 million notes payable, including
discount on debt, is approximately 14.32%.





Discount on Debt. The Company
issued certain warrants to Deerfield as part of the Facility
Agreement.  The fair value of these warrants was $6.0 million that was
recorded as a discount on the note payable.  The discount on debt is
being amortized over the life of the loan agreement.  The remaining
debt discount of approximately $4.5 million on June 7, 2010, the date of the
amendment to the Facility Agreement, will be amortized over the loan period from
June 7, 2010 to June 30, 2015, which is the modified principal maturity date
pursuant to the terms of the Facility Agreement, as
amended.


- 10
-


Summary of Notes Payable. On
November 1, 2007, the Company drew down $7.5 million of the $30.0 million in
total loan proceeds available under the Facility Agreement. On October 14, 2008
and November 12, 2008, the Company drew down an additional $12.5 million and
$2.5 million, respectively. On May 20, 2009, the Company drew down $5.0 million
that was available pursuant to the terms of the Facility Agreement.  The
Company is not required to pay back any portion of the principal amount until
June 30, 2015.  The table below is a summary of the change in carrying
value of the notes payable, including the discount on debt for the six months
ended June 30, 2010 and 2009:




Carrying
                            Value at
                            January 1,
                          
                          
                          Gross
                            Borrowings
                            Incurred
                          
                          
                          Debt
                            Discount
                            Incurred
                          
                          
                          Amortized
                            Discount
                          
                          
                          Carrying
                            Value at
                            June 30,2010Notes
      payable
                          
                          $
                          27,500,000
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          27,500,000Discount
      on debt
                          
                          
                          (4,902,950
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          445,629
                          
                          
                          
                          (4,457,321
                          )Carrying
      value
                          
                          $
                          22,597,050
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          23,042,6792009Notes
      payable
                          
                          $
                          22,500,000
                          
                          
                          $
                          5,000,000
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          27,500,000Discount
      on debt
                          
                          
                          (5,648,459
                          )
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          325,335
                          
                          
                          
                          (5,323,124
                          )Carrying
      value
                          
                          $
                          16,851,541
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          22,176,876




A summary
of the debt issuance costs and changes during the periods ending June 30, 2010
and 2009 is as follows:




Deferred
                                                      Transaction
                                                      Costs on
                                                      January 1,
                                                    
                                                    
                                                    Amortized
                                                      Deferred
                                                      Transaction
                                                      Costs
                                                    
                                                    
                                                    Deferred
                                                      Transaction
                                                      Costs on
                                                      June 30,2010
                                                    
                                                    $
                                                    1,193,594
                                                    
                                                    
                                                    $
                                                    (229,688
                                                    )1
                                                    
                                                    $
                                                    963,9062009
                                                    
                                                    $
                                                    1,361,356
                                                    
                                                    
                                                    $
                                                    (75,215
                                                    )
                                                    
                                                    $
                                                    1,286,141





NOTE
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK





Private
Placement of Preferred Stock


On June
7, 2010, the Company, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X
Partners, L.P. (collectively, “Warburg Pincus”) and Deerfield (together with
Warburg Pincus, the “Purchasers”) entered into an Investment Agreement pursuant
to which the Company issued and sold to the Purchasers an aggregate of 400,000
shares of its newly-designated Series A-1 Convertible Preferred Stock at the
stated value of $100 per share for an aggregate purchase price of
$40,000,000.





The
Investment Agreement provides that the Purchasers also have the right, but not
the obligation, to make additional investments in the Company if the Company
obtains Stockholder Approval (as defined below) of certain amendments to its
certificate of incorporation by December 7, 2010, as follows:




·
            at any time prior to the
      date the Company receives marketing approval from the U.S. Food and
      Drug Administration for the first of its product candidates (“Marketing
      Approval Date”), the Purchasers may purchase up to an additional 200,000
      shares of Series A-1 Preferred Stock at a purchase price of $100 per share
      for an aggregate purchase price of $20,000,000 (“Additional Investment”);
      and




·
            at any time beginning 15 days and
      within 120 days following the Marketing Approval Date, the Purchasers may
      purchase up to an aggregate of 400,000 shares of Series A-2 Convertible
      Preferred Stock at the stated value of $100 per share for an aggregate
      purchase price of $40,000,000 (“Subsequent
      Investment”).




1Includes approximately $0.1 million
expense related to unallocated long-term deferred transaction costs that were
expensed in the three months ended March 31, 2010 related to termination of the
commitment period of funding of the Facility Agreement.  The
commitment period expired in October 2009.


- 11
-





If the
Company does not obtain Stockholder Approval by December 7, 2010, then the
Investment Agreement provides that the Purchasers have the right, but not the
obligation, to purchase up to an additional 200,000 shares of Series A-1
Preferred Stock at any time prior to Marketing Approval, and up to an additional
400,000 shares of Series A-1 Preferred Stock at any time beginning 15 days and
within 120 days following the Marketing Approval Date, in each case at a price
per share of $100 (each, a “Subsequent Series A-1 Investment”).




The
Investment Agreement requires that the Company seek approval of its stockholders
to amend the Company’s certificate of incorporation to:  (i) increase
the authorized number of shares of Common Stock, (ii) effect a reverse split of
its Common Stock at a ratio to be agreed upon with the Purchasers, and (iii)
provide that the number of authorized shares of Common Stock may be increased or
decreased by the affirmative vote of the holders of a majority of the issued and
outstanding Common Stock and preferred stock, voting together as one class,
notwithstanding the provisions of Section 242(b)(2) of the Delaware General
Corporation Law (collectively, the “Stockholder Approval”). The Company has
called a special meeting of its stockholders for September 2, 2010 to consider
the proposed amendments to its certificate of incorporation.




Terms
of the Preferred Shares




Until the
Company obtains Stockholder Approval, the Series A-1 Preferred Stock will have
the following material terms (the “Initial A-1 Terms”):





·
            the stated value of the Series
      A-1 Preferred Stock, initially $100 per share, accretes at a rate of 12%
      per annum (increasing by 0.5% annually) for a seven-year term, compounded
      quarterly, and following such seven-year term, the holders are thereafter
      entitled to cash dividends at a rate of 15.5% of the accreted stated value
      per annum, payable
quarterly;





·
            each share of Series A-1
      Preferred Stock is convertible into shares of the Company’s Common Stock
      at a conversion price of $0.1288 per share, subject to the limitation on
      the number of shares of Common Stock then available for
      issuance;





·
            upon a liquidation of the
      Company, as defined, including a change in control of the Company, holders
      of the Series A-1 Preferred Stock would be entitled to receive a
      liquidation preference per share equal to the greater of (i) 250% of the
      then-accreted value of the Series A-1 Preferred Stock and (ii) the amount
      which the holder would have received if the Series A-1 Preferred Stock had
      been converted into common stock immediately prior to the liquidation;
      and





·
            the Series A-1 Preferred Stock is
      redeemable at the holders’ election any time after December 7, 2010, at a
      redemption price equal to the greater of (i) 250% of the then-accreted
      value of the Series A-1 Preferred Stock, plus any unpaid dividends accrued
      thereon and (ii) market value of common stock shares the holder would
      receive if the Series A-1 Preferred Stock are converted into common stock
      immediately prior to the
redemption.





If the
Company is unable to obtain Stockholder Approval prior to December 7, 2010,
these terms will continue to apply to the Series A-1 Preferred Stock, including
the remaining shares available under the terms of the Investment Agreement in
connection with the Additional and Subsequent Investments in Series A-1
Preferred Stock.





If the
Company obtains Stockholder Approval prior to December 7, 2010, then it expects
to conduct a second closing pursuant to the terms of the Investment Agreement,
which is referred to herein as the Second Closing. The Purchasers’ obligations
to complete the Second Closing are subject to a number of customary closing
conditions, including the continued accuracy of the representations and
warranties made by the Company in the Investment Agreement and the Company’s
compliance with its contractual obligations thereunder. At the Second Closing,
the shares of Series A-1 Preferred Stock that were originally sold and issued on
June 7, 2010 would no longer be subject to the Initial Series A-1 Terms and
would automatically become subject to the considerably more Company-favorable
Revised A-1 Terms (summarized below). In addition, the Purchasers would be
entitled to receive an additional number of shares of Series A-1 Preferred Stock
equal to the aggregate accretion that would have accrued on the shares of Series
A-1 Preferred Stock sold at the June 7, 2010 closing divided by
$100.





Following
the Second Closing, the major terms of the Series A-1 Preferred Stock (the
“Revised A-1 Terms”), including the initial 400,000 shares sold to the
Purchasers on June 7, 2010, will be as follows:





·
            the stated value of the Series
      A-1 Preferred Stock accretes at a rate of 9% per annum for a five-year
      term, compounded quarterly and following such five year term, the holders
      are thereafter entitled to cash dividends at a rate of 9% of the accreted
      stated value per annum, payable
  quarterly;





·
            each share of Series A-1
      Preferred Stock is convertible into Common Stock at a conversion price of
      $0.184 per share;




·
            upon
      a liquidation of the Company, as defined, including a change in control of
      the Company, holders of the Series A-1 Preferred Stock would be entitled
      to receive a liquidation preference per share equal to the greater of (i)
      100% of the then-accreted value of the Series A-1 Preferred Stock and (ii)
      the amount which the holder would have received if the Series A-1
      Preferred Stock had been converted into common stock immediately prior to
      the liquidation; and





·
            the
      Series A-1 Preferred Stock is not
  redeemable.





The terms
of the Series A-2 Preferred Stock are identical to the Revised A-1 Terms, except
the conversion price is $0.276 per
share.


- 12
-





Upon
closing of the initial investment on June 7, 2010, the Warburg Purchasers have
the right to designate five out of nine members of the Company’s Board of
Directors.  The Purchasers also received certain other rights including
registration rights for all securities contemplated in the Investment Agreement
and the right to participate in any future financing
transactions.





The
Purchasers are not permitted to transfer or sell preferred stock until the
earlier of (a) December 7, 2011 if the Company has not by then obtained
Stockholder Approval, (b) June 7, 2011 for the initial 400,000 shares of Series
A-1 Preferred Stock issued on June 7, 2010, and the applicable first anniversary
date of the applicable closing date for the future tranches of shares of Series
A-1 or Series A-2 Preferred Stock if the Company has obtained Stockholder
Approval by December 7, 2010, (c) June 7, 2012, or (d) the date following the
first period of 20 consecutive trading days during which the closing price of
the Company’s common stock exceeds 200% of the conversion price. Transfer and
sale restrictions could also lapse upon occurrence of certain other
events.





Additionally,
as a condition to the initial closing under the Investment Agreement, the
Company and Deerfield amended the Facility Agreement.  The maturity date of
the principal outstanding pursuant to the loan under the Facility Agreement was
extended from October 30, 2013 to June 30, 2015.   See Note
4.





Accounting
Treatment




The
Company has allocated the proceeds from the financing between Series A-1
Preferred Shares and the Purchasers’ rights to purchase additional shares of
Series A-1 and A-2 Preferred Stock in connection with the Additional Investments
and Subsequent Investments.





·
            Outstanding Series A-1
      Preferred Stock – Due to certain contingent redemption features of
      this instrument, the Company classified the 400,000 shares of Series A-1
      Preferred Stock sold on June 7, 2010 in the mezzanine section (between
      equity and liabilities) on the accompanying balance sheet.  The
      Company recorded the residual value of these shares as $29.9 million on
      June 7, 2010, net of amounts allocated to the rights to purchase
      additional shares of Preferred Stock and transaction costs of $1.4
      million and including $9.0 million accreted value of the Beneficial
      Conversion Feature.  These shares will become non-redeemable if
      we obtain Stockholder Approval before December 7, 2010; however there may
      be certain defined contingent events that could trigger redemption which
      are not currently considered probable.  Accordingly, the Company
      will not accrete these shares to redemption amounts in subsequent
      reporting periods unless and until such time it is probable that these
      securities will become
redeemable.





·
            Rights to
      Purchase Preferred Stockin the
      Additional and Subsequent Investments–The Companydeterminedthat the Purchasers’ rights to
      purchase future shares of Preferred Stock in connection with the
      Additional and Subsequent Investments arefreestanding
      instrumentsthat are
      required to be classified as liabilities and carried at fair
      value. The treatment
      of these instruments as a liability is due to certain redemption features
      of the underlying Preferred Stock.The Company estimated fair values
      of these rights using a probability weighted Black-Scholes-Merton pricing
      method with the following assumptions for the period from June 7, 2010 to
      June 30, 2010:risk-free interest rates of 0.3%
      - 0.5%, an expected life of 0.9 – 1.5 years, an expected volatility factor
      of 104% - 106% and a dividend yield of 8.4%.- 11.4%.The fair value of theserights was$8.7million and $9.0million on June 7, 2010 and June
      30, 2010,
      respectively.The change in fair
      value of $0.3 million was recorded as a loss on the Statement of
      Operations.The Companywillre-measurethe fair value of therightsin each reporting
      period,and any gains or losses
      resulting from the changes in fair valuewill beincludedinother income/(expense). 
      See Note8for further
      discussion.




·
            Beneficial Conversion
      Feature – At the time of initial issuance on June 7, 2010, shares
      of Series A-1 Preferred Stock were convertible into Common Stock at a rate
      determined by dividing the stated value of $100 by the Initial Series A-1
      Conversion Price of $0.1288.  Pursuant to the Initial Series A-1
      Terms, the total number of shares of Common Stock into which the Series
      A-1 Preferred Stock is convertible is limited to the total shares of
      authorized Common Stock available for issuance. On June 7, 2010, the
      amount of Common Stock available was 93.4 million shares, which was only
      sufficient to allow for conversion of approximately 0.1 million shares of
      Series A-1 Preferred Stock.  Because the conversion price of the
      shares of Preferred Stock was less than the fair market price of the
      Company’s common stock at the date Preferred Stock was sold and issued,
      the in-the-money conversion feature (Beneficial Conversion Feature, or
      BCF) requires separate recognition and is measured at the intrinsic value
      (i.e., the amount of the increase in value that preferred stockholders
      would realize upon conversion).  BCF is limited to the proceeds
      allocated to preferred shares and is initially recorded as a discount to
      preferred shares and included as additional paid-in
      capital.  Because there is not a stated redemption date of the
      shares of the convertible Series A-1 preferred stock, the BCF is
      immediately accreted to the Preferred Shares as a deemed preferred stock
      dividend.  During the quarter ended June 30, 2010, we recognized
      and accreted BCF of $9.0 million related to the 0.1 million convertible
      shares of Preferred Stock based on the total available shares of common
      stock, which was debited to additional paid-in capital since the Company
      has an accumulated deficit.  As a result, there is no net effect
      on the balance of additional paid-in capital related to the
      BCF.  As additional shares of Preferred Stock become convertible
      in the future, which would result from the resolution of the contingency
      relative to stockholder approval of additional authorized shares, we will
      recognize BCF amounts related to such Preferred Stock because the
      conversion right of such shares is contingent on shareholder
      approval.





·
            Accretion of Dividend-For the period from June 7, 2010 to June 30, 2010, the 400,000
      shares of Series A-1 preferred stock accreted value to the stated rate of
      $100 at an annual rate of 12%, compounded quarterly or a total accreted
      value of $0.3 million.  The Company will not recognize the value
      of the accretion to the preferred stock until such time that it becomes
      probable that the shares of preferred stock will become
      redeemable.  The accreted value is included, for loss per share
      purposes only, as a dividend to preferred stockholders and the loss
      attributable to common shareholders is increased by the value of the
      accretion for the period.


- 13
-




NOTE
6. STOCKHOLDERS’ DEFICIT





October
2009 Private Placement of Common Stock





On
October 7, 2009, the Company entered into a securities purchase agreement
pursuant to which it sold in a private placement an aggregate of 54,593,864
units of its securities, each unit consisting of (i) either (a) one share of
common stock, or (b) a seven-year warrant to purchase one share of common stock
at an exercise price of $0.01 per share (a “Series A Warrant”), and (ii) a
seven-year warrant to purchase one-tenth of one share of common stock at an
exercise price of $0.60 (a “Series B Warrant”), which represented the closing
bid price of the Company’s common stock on October 7, 2009.





Pursuant
to the securities purchase agreement, the Company sold 30,655,999 units for $8.5
million, or $0.30 per unit.  These units consisted of shares of common
stock and Series B Warrants, with a fair value of $7.8 million and $0.6 million,
respectively.  The Company also sold 11,031,722 units consisting of Series
A Warrants and Series B Warrants at a purchase price of $3.2 million, or $0.29
per unit.  The net cash proceeds were approximately $11.7 million. 
The Company also issued 12,906,146 units to Deerfield, consisting of shares
of common stock and Series B Warrants, with fair values of $3.6 million and $0.3
million, respectively.  These units were issued to satisfy a $3.9 million
warrant redemption obligation we owed to Deerfield.  All warrants
issued in the offering are classified as liabilities.





Stock
Incentive Plans




As of
June 30, 2010, the Company had three stockholder approved stock incentive plans
under which it grants or has granted options to purchase shares of our common
stock and restricted stock awards to employees: the 2010 Equity Incentive Plan
(the “2010 Plan”), the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2003
Stock Option Plan (the “2003 Plan”).   The Board of Directors, or the
Chief Executive Officer when designated by the Board, is responsible for
administration of the employee stock incentive plans and determines the term,
exercise price and vesting terms of each option. In general, stock options
issued under all the current plans have a vesting period of three years and
expire ten years from the date of grant. Additionally, the Company has an
Employee Stock Purchase Plan, the 2006 Employee Stock Purchase Plan (the “2006
Plan”).




On
February 16, 2010, the Company’s Board of Directors adopted the 2010 Equity
Incentive Plan.  Under the 2010 Plan, the Board or a committee appointed by
the Board may award nonqualified stock options, incentive stock options,
restricted stock, restricted stock units, performance awards, and stock
appreciation rights to participants.  Officers, directors, employees or
non-employee consultants or advisors (including our subsidiaries and affiliates)
are eligible to receive awards under the 2010 Plan. The total number of shares
of our common stock available for grants of awards to participants under the
2010 Plan is 8,000,000 shares.  Also, on February 16, 2010, the Board
adopted amendments to the 2003 and 2004 Plans.  Pursuant to the amendments,
the number of shares of common stock authorized for issuance under the 2003 Plan
was reduced from 1,410,068 to 528,342, of which 259,664 shares are reserved for
issuance pursuant to the exercise of outstanding stock options, and 268,678
shares have previously been issued under the 2003 Plan.  Similarly, the
number of shares of common stock authorized for issuance under the 2004 Plan was
reduced from 7,000,000 to 4,747,257, of which 4,279,661 shares are reserved for
issuance pursuant to the exercise of outstanding stock options, and 467,596
shares have previously been issued under the 2004 Plan.  The Company
intends for all future stock option awards to be issued under the 2010 Plan,
with no additional awards being issued under the 2003 Plan or 2004
Plan.





Stock
Options. The
following table summarizes information about stock options outstanding at June
30, 2010 and changes in outstanding options in the six months then ended, all of
which are at fixed prices:




Number of
                            Shares Subject
                            to Options
                            Outstanding
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price per
                            Share
                          
                          
                          Weighted
                            Average
                            Remaining
                            Contractual
                            Term
                            (in years)
                          
                          
                          Aggregate
                            Intrinsic
                            ValueOutstanding
      January 1, 2010
                          
                          
                          4,834,038
                          
                          
                          $
                          1.82Options
      granted
                          
                          
                          4,965,000
                          
                          
                          
                          0.19Options
      cancelled
                          
                          
                          (487,667
                          )
                          
                          
                          3.30Options
      exercised
                          
                          
                          —
                          
                          
                          
                          —Outstanding
      June 30, 2010
                          
                          
                          9,311,371
                          
                          
                          
                          0.88
                          
                          
                          
                          8.20
                          
                          
                          $
                          30,477Exercisable
      at June 30, 2010
                          
                          
                          3,326,206
                          
                          
                          $
                          1.97
                          
                          
                          
                          6.13
                          
                          
                          $
                          17,994





Total
share-based compensation expense was approximately $0.4 million and $0.6 million
related to employee stock options recognized in the operating results for the
six months ended June 30, 2010 and 2009,
respectively.


- 14
-


The
following table summarizes information about stock options outstanding at June
30, 2010:





Options Outstanding
                                  
                                  Options ExercisableExercise 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 - $ 0.20
                                  
                                  
                                  5,360,505
                                  
                                  
                                  $
                                  0.18
                                  
                                  9.2
      yrs
                                  
                                  
                                  605,172
                                  
                                  
                                  $
                                  0.14$0.21 - $ 1.32
                                  
                                  
                                  2,479,710
                                  
                                  
                                  
                                  0.79
                                  
                                  7.7
      yrs
                                  
                                  
                                  1,293,212
                                  
                                  
                                  
                                  1.00$1.33 - $ 4.44
                                  
                                  
                                  907,656
                                  
                                  
                                  
                                  1.67
                                  
                                  6.0
      yrs
                                  
                                  
                                  864,322
                                  
                                  
                                  
                                  1.67$4.54 - $ 10.98
                                  
                                  
                                  563,500
                                  
                                  
                                  
                                  6.63
                                  
                                  5.1
      yrs
                                  
                                  
                                  563,500
                                  
                                  
                                  
                                  6.63$0.07 - $10.98
                                  
                                  
                                  9,311,371
                                  
                                  
                                  $
                                  0.88
                                  
                                  8.2
      yrs
                                  
                                  
                                  3,326,206
                                  
                                  
                                  $
                                  1.97





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





Through
June 30, 2010, the Company has issued 466,811 shares under the 2006 Plan. The
Company has issued an additional 92,422 shares on July 1, 2010 to employees
pursuant to the 2006 Plan.  For the six months ended June 30, 2010 and
2009, the total share-based compensation expense recognized related to the 2006
Plan under SFAS 123(R) was less than $50,000.




Assumptions. The following table
summarizes the assumptions used in applying the Black-Scholes-Merton option
pricing model to determine the fair value of new awards granted during the three
and six months ended June 30, 2010 and 2009, respectively:





Three Months Ended June 30,
                                        
                                        
                                        Six Months Ended June 30,2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2009Employee stock optionsRisk-free
      interest rate
                                        
                                        
                                        3.00
                                        %
                                        
                                        
                                        1.90
                                        %
                                        
                                        
                                        3.00
                                        %
                                        
                                        
                                        1.90
                                        %Expected
      life (in years)
                                        
                                        
                                        5.85
                                        
                                        
                                        
                                        5.5 –
      6.0
                                        
                                        
                                        
                                        5.5 –
      5.85
                                        
                                        
                                        
                                        5.5 –
      6.0Volatility
                                        
                                        
                                        0.85
                                        
                                        
                                        
                                        0.85
                                        
                                        
                                        
                                        0.85
      – 0.95
                                        
                                        
                                        
                                        0.85
      – 0.95Dividend
      Yield
                                        
                                        
                                        0
                                        %
                                        
                                        
                                        0
                                        %
                                        
                                        
                                        0
                                        %
                                        
                                        
                                        0
                                        %Employee stock purchase
planRisk-free
      interest rate
                                        
                                        
                                        0.22
      – 0.61
                                        %
                                        
                                        
                                        0.27
      - 1.11
                                        
                                        
                                        
                                        0.20
      – 1.14
                                        %
                                        
                                        
                                        0.27
      - 1.11Expected
      life (in years)
                                        
                                        
                                        0.5
      - 2.0
                                        
                                        
                                        
                                        0.5
      - 2.0
                                        
                                        
                                        
                                        0.5
      - 2.0
                                        
                                        
                                        
                                        0.5
      - 2.0Volatility
                                        
                                        
                                        1.18
      – 1.89
                                        
                                        
                                        
                                        1.73
      – 2.45
                                        
                                        
                                        
                                        1.18
      – 2.12
                                        
                                        
                                        
                                        1.30
      – 2.45Dividend
      Yield
                                        
                                        
                                        0
                                        %
                                        
                                        
                                        0
                                        %
                                        
                                        
                                        0
                                        %
                                        
                                        
                                        0
                                        %





Common
Stock Warrants





As of
June 30, 2010, the Company had outstanding warrants to purchase an aggregate of
approximately 9.0 million shares of its Common Stock, all of which were
available for exercise. Warrants to purchase 0.9 million shares of common stock
at $1.57 per share expired on April 22, 2010.  Warrants to purchase
0.9 million shares of common stock at $5.80 per share expire in October of
2010.  On June 7, 2010, the Company issued a five-year warrant to
purchase 217,391 shares of common stock at an exercise price of $0.23 as partial
payment for financial advisory services provided in connection with the
transactions contemplated by the Investment Agreement.  In connection
with the Company’s October 2009 private placement, at June 30, 2010, there are
outstanding Series A warrants to purchase an aggregate of 2.5 million shares of
common stock and Series B warrants to purchase an aggregate of 5.5 million
shares of common stock.  On May 20, 2010, the Company issued 5.1
million shares in connection with the exercise of Series A
warrants.  Additionally, as a result of an anti-dilution provision
contained in the Series B Warrants issued in the Company’s October 2009 private
placement, the exercise price of the Series B Warrants was reduced to $0.30 per
share after giving effect to the issuance of Series A-1 Preferred Stock on June
7, 2010.


- 15
-


The
following table summarizes the warrants outstanding as of June 30, 2010 and the
changes in outstanding warrants in the years then ended:





Number Of
                                Shares Subject
                                To Warrants
                                Outstanding
                              
                              
                              Weighted-Average
                                Exercise PriceWarrants
      outstanding January 1, 2010
                              
                              
                              14,743,251
                              
                              
                              $
                              0.66Warrants
      granted
                              
                              
                              217,391
                              
                              
                              
                              0.23Warrants
      exercised
                              
                              
                              (5,056,551
                              )
                              
                              
                              0.01Warrants
      cancelled
                              
                              
                              (892,326
                              )
                              
                              
                              1.57Warrants
      outstanding June 30, 2010
                              
                              
                              9,011,765
                              
                              
                              $
                              0.93





NOTE
7. BASIC NET LOSS PER COMMON SHARE





Basic net
loss per share is based upon the weighted average number of common shares
outstanding during the period. Diluted net income or loss per share is based
upon the weighted average number of common shares outstanding during the period,
plus the effect of additional weighted average common equivalent shares
outstanding during the period when the effect of adding such shares is
anti-dilutive.





Basic and
diluted net loss per share were determined as follows:





Three Months Ended
                                                
                                                
                                                Six Months EndedJune 30,
                                                
                                                
                                                June 30,2010
                                                
                                                
                                                2009
                                                
                                                
                                                2010
                                                
                                                
                                                2009Net
      loss
                                                
                                                $
                                                (6,324,141
                                                )
                                                
                                                $
                                                (7,850,881
                                                )
                                                
                                                $
                                                (11,797,053
                                                )
                                                
                                                $
                                                (13,477,236
                                                )Deemed
      dividend to preferred shareholders
                                                
                                                
                                                (9,307,431
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (9,307,431
                                                )
                                                
                                                
                                                —Net
      loss applicable to Common Stock
                                                
                                                
                                                (15,631,572
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (21,104,484
                                                )
                                                
                                                
                                                —Weighted
      average shares used in computing net loss per share, basic and
      diluted
                                                
                                                
                                                82,066,490
                                                
                                                
                                                
                                                32,451,184
                                                
                                                
                                                
                                                80,930,614
                                                
                                                
                                                
                                                32,450,465Net
      loss per share, basic and diluted
                                                
                                                $
                                                (0.19
                                                )
                                                
                                                $
                                                (0.24
                                                )
                                                
                                                $
                                                (0.26
                                                )
                                                
                                                $
                                                (0.42
                                                )





The
securities in the table below were excluded from the computation of diluted net
loss per common share for the three and six months ended June 2010 and 2009
because such securities were anti-dilutive during the periods
presented:




2010
                                            
                                            
                                            2009Warrants
                                            
                                            
                                            9,011,765
                                            
                                            
                                            
                                            7,876,495Stock
      options
                                            
                                            
                                            9,311,371
                                            
                                            
                                            
                                            5,398,705Convertible
      redeemable preferred stock
                                            
                                            
                                            93,399,859
                                            
                                            
                                            
                                            —Total
                                            
                                            
                                            111,722,995
                                            
                                            
                                            
                                            13,275,200





NOTE
8. WARRANT LIABILITIES





The
Company had outstanding warrants to purchase 8.0 million and 6.1 million shares
of common stock that were classified as liabilities on the balance sheet as of
June 30, 2010 and 2009, respectively.  The fair value of the warrants
classified as liabilities was $1.0 million and $3.6 million on June 30, 2010 and
2009, respectively.


- 16
-





The
warrants outstanding as of June 30, 2010 that were classified as liabilities
were issued to various investors pursuant to the October 2009 private
placement.  The Company classified these warrants as liabilities based
on certain cash settlement provisions available to the warrant holders upon
certain reorganization events in the equity structure, including mergers. 
Specifically, in the event the Company is acquired in an all cash transaction, a
transaction whereby it ceases to be a publicly held entity under Rule 13e-3 of
the Securities Exchange Act of 1934, or a reorganization involving an entity not
traded on a national securities exchange, the warrant holders may elect to
receive an amount of cash equal to the value of the warrants as determined in
accordance with the Black-Scholes-Merton option pricing model with certain
defined assumptions.  At any time when the resale of the warrant shares is
not covered by an effective registration statement under the Securities Act of
1933, the warrant holders can elect a cashless exercise of all or any portion of
shares outstanding under a warrant, in which case they would receive a number of
shares with a value equal to the intrinsic value on the date of exercise of the
portion of the warrant being exercised.  Additionally, warrant holders have
certain registration rights and the Company would be obligated to make penalty
payments to them under certain circumstances if we were unable to maintain
effective registration of the shares underlying the warrants with the
SEC.





The
warrants outstanding as of June 30, 2009 that were classified as liabilities
were issued to Deerfield pursuant to the Facility Agreement.  These
warrants to Deerfield were redeemed and the redemption obligation satisfied by
issuing to Deerfield securities in connection with the October 2009 private
placement.





On May
20, 2010, the Company issued approximately 5.1 million shares of its common
stock pursuant to the exercise of a Series A Warrant issued pursuant to the
October 2009 securities purchase agreement, realizing total proceeds of
approximately $0.1 million.  The Company re-measured the warrants to
the fair value on the date of exercise and recognized a loss of $0.6 million
upon re-measurement of the warrant liability related to the exercised warrants,
which is included in the $0.4 million loss for the three and six months ended
June 30, 2010.





As of
June 30, 2010, the Company re-measured the fair value of the Series A and Series
B Warrants classified as liabilities with the following assumptions: 
risk-free interest rate of 2.42%, an expected life of 6.3 years, which is the
remaining contractual life of the instrument; an expected volatility factor of
96% and a dividend yield of 0.0%.  The Company recognized a loss of
approximately $0.4 million in the three and six months ended June 30, 2010 in
the Statement of Operations, representing an increase in the value of such
warrants during this period.  For additional details on the change in
value of these liabilities, see Note 9.





Changes
in the Company’s stock price or volatility would result in a change in the value
of the warrants and impact the Statement of Operations. A 10% increase in the
Company’s stock price would cause the fair value of the warrants and the warrant
liability to increase by approximately
10%.


- 17
-




NOTE
9. FAIR VALUE MEASUREMENTS




ASC 820
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and enhances disclosures about fair
value measurements. Fair value is defined under ASC 820 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 ASC 820 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.




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 June 30, 2010
                                
                                Level 1
                                
                                
                                Level 2
                                
                                
                                Level 3
                                
                                
                                TotalAssetsMoney
      market funds
                                
                                $
                                51,107
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                51,107Available-for-sale
      equity securities
                                
                                
                                76,000
                                
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                76,000Total
                                
                                $
                                127,107
                                
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                127,107LiabilitiesWarrant
      liabilities
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                $
                                1,040,991
                                
                                
                                $
                                1,040,991Right
      to purchase future Series A-1 and A-2 preferred stock
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                9,048,000
                                
                                
                                
                                9,048,000Total
                                
                                $
                                —
                                
                                
                                $
                                —
                                
                                
                                $
                                10,088,991
                                
                                
                                $
                                10,088,991





As of June 30, 2009
                      
                      Level 1
                      
                      
                      Level 2
                      
                      
                      Level 3
                      
                      
                      TotalAssetsMoney
      market funds
                      
                      $
                      69,157
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      69,157Available-for-sale
      equity securities
                      
                      
                      124,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      124,000Total
                      
                      $
                      193,157
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      193,157LiabilitiesWarrant
      liabilities
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      $
                      3,607,588
                      
                      
                      $
                      3,607,588Total
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      3,607,588
                      
                      
                      $
                      3,607,588




A summary
of the activity of the fair value of the Level 3 liabilities is as
follows:





Beginning
                                                  Value of
                                                  Level 3
                                                  Liabilities
                                                
                                                
                                                Additional
                                                  Level 3
                                                  Liabilities
                                                  Incurred
                                                
                                                
                                                Liabilities
                                                  extinguished
                                                
                                                
                                                Net
                                                  Loss on
                                                  Change in Fair
                                                  Value of
                                                  Level 3
                                                  Liabilities
                                                
                                                
                                                Ending Fair
                                                  Value of
                                                  Level 3
                                                  LiabilitiesFor
      the six months ended June 30, 2010:Warrant
      liabilities
                                                
                                                $
                                                2,145,511
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                (1,488,055
                                                )
                                                
                                                $
                                                383,535
                                                
                                                
                                                $
                                                1,040,991Right
      to purchase additional Series A preferred stock tranches
                                                
                                                
                                                —
                                                
                                                
                                                
                                                8,670,000
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                378,000
                                                
                                                
                                                $
                                                9,048,000Total
      level 3 liabilities
                                                
                                                $
                                                2,145,511
                                                
                                                
                                                $
                                                8,670,000
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                761,535
                                                
                                                
                                                $
                                                10,088,991For
      the six months ended June 30, 2009:Warrant
      liabilities
                                                
                                                $
                                                1,450,479
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                —
                                                
                                                
                                                $
                                                2,157,109
                                                
                                                
                                                $
                                                3,607,588


- 18
-


NOTE
10. AVAILABLE-FOR-SALE SECURITIES





On June
30, 2010, the Company had $76,000 in total marketable securities which consisted
of equity investments.  The following table summarizes the equity
investment classified as available-for-sale securities during the six months
ended June 30, 2010 and 2009:





Beginning
                                                                Value
                                                              
                                                              
                                                              Net
                                                                Unrealized
                                                                Gain/(Loss)
                                                              
                                                              
                                                              Gross
                                                                Realized
                                                                Gain/(Loss)
                                                              
                                                              
                                                              Ending ValueSix
      months ended June 30, 2010
                                                              
                                                              $
                                                              68,000
                                                              
                                                              
                                                              $
                                                              8,000
                                                              
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              $
                                                              76,000Six
      months ended June 30, 2009
                                                              
                                                              $
                                                              128,000
                                                              
                                                              
                                                              $
                                                              (4,000
                                                              )
                                                              
                                                              $
                                                              —
                                                              
                                                              
                                                              $
                                                              124,000





NOTE
11.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consist of the following at June 30, 2010 and
December 31, 2009:





June 30,
                        2010
                      
                      
                      December31,
                        2009Trade
      accounts payable
                      
                      $
                      816,465
                      
                      
                      $
                      1,008,560Clinical
      research and other development related costs
                      
                      
                      1,282,479
                      
                      
                      
                      1,232,291Accrued
      personnel related expenses
                      
                      
                      752,827
                      
                      
                      
                      979,963Interest
      payable
                      
                      
                      -
                      
                      
                      
                      682,753Accrued
      other expenses
                      
                      
                      639,655
                      
                      
                      
                      123,508Total
                      
                      $
                      3,491,426
                      
                      
                      $
                      4,027,075







NOTE 12.
COMMITMENTS





Lease Agreements. 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. Effective June 24, 2009,
the Company entered into a further amendment to the sublease, which extended the
term of the lease through March 2011 and reduced the monthly lease payments from
$2.80 per square foot to $2.45 per square foot for the eleven month period from
July 2009 through May 2010 and reduced the lease payments from $2.90 per square
foot to $1.95 per square feet for the ten month period from June 2010 through
March 2011.  The total cash payments due for the duration of the sublease
equaled approximately $0.3 million at June 30, 2010.





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 $0.2 million at June 30, 2010.





NOTE
13. 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 period of the
sub-lease.


- 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 unaudited condensed financial statements and the notes to those statements
included elsewhere in this Quarterly Report on Form 10-Q. This discussion
includes forward-looking statements that involve risks and uncertainties. As a
result of many factors, such as those set forth under “Risk Factors” in Item 1A
of Part I of the 2009 Form 10-K, our actual results may differ materially from
those anticipated in these forward-looking statements.





Overview





We are a
biopharmaceutical company dedicated to developing and commercializing new,
differentiated cancer therapies designed to improve and enable current standards
of care.  We currently have four product candidates in various stages
of development:




·
            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”).





·
            Menadione Topical Lotion, a novel
      supportive care product candidate, being developed for the prevention
      and/or treatment of the skin toxicities associated with the use of
      epidermal growth factor receptor inhibitors, a type of anti-cancer agent
      used in the treatment of certain
cancers.





·
            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.





·
            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.





Revenues





We do not
expect to generate any significant revenue from product sales or royalties in
the foreseeable future.   We may have revenues in the future only
if we are able to develop and commercialize our products, license our technology
and/or enter into strategic partnerships. If we are unsuccessful, our ability to
generate future revenues will be significantly diminished.




Research
and Development Expenses





Research
and development expenses, which account for the bulk of our expenses, consist
primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for laboratory development, manufacturing, and other
expenses relating to the acquiring, design, development, testing, and
enhancement of our product candidates, including milestone payments for licensed
technology. We expense research and development costs as they are
incurred.





While
expenditures on current and future clinical development programs are expected to
be substantial, particularly in light of our available resources, they are
subject to many uncertainties, including the results of clinical trials and
whether we develop any of our drug candidates with a partner or independently.
As a result of such uncertainties, we cannot predict with any significant degree
of certainty the duration and completion costs of our research and development
projects or whether, when and to what extent we will generate revenues from the
commercialization and sale of any of our product candidates. The duration and
cost of clinical trials may vary significantly over the life of a project as a
result of unanticipated events arising during clinical development and a variety
of factors, including:





·
            the number of trials and studies
      in a clinical program;





·
            the number of patients who
      participate in the trials;





·
            the number of sites included in
      the trials;





·
            the rates of patient recruitment
      and enrollment;





·
            the duration of patient treatment
      and follow-up;





·
            the costs of manufacturing our
      drug candidates; and





·
            the costs, requirements, timing
      of, and the ability to secure regulatory
  approvals.


- 20
-





General
and Administrative Expenses





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





Share-based
Compensation





Share-based
compensation expenses consist primarily of expensing the fair-market value of a
share-based award over the vesting term.  This expense is included in our
operating expenses for each reporting period.





Critical
Accounting Policies





The
accompanying discussion and analysis of our financial condition and results of
operations are based on our unaudited condensed 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 unaudited condensed 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 unaudited
condensed financial statements and related disclosures with the Audit Committee
of our Board of Directors. Our critical accounting policies and estimates are
described below.




Share-Based
Compensation




We have
adopted revised authoritative guidance related to stock-based compensation under
FASB ASC TOPIC 718 “Compensation – Stock Compensation .”  We have
adopted a Black-Scholes-Merton model to estimate the fair value of stock options
issued and the resultant expense is recognized in the statement of operations
each reporting period.  See Note 6 of our unaudited condensed
financial statements included elsewhere in this Form 10-Q for further
information regarding the required disclosures related to share-based
compensation.





Liabilities
Related to Financial Instruments





We have
issued certain warrants and rights to purchase future shares of Series A-1 and
A-2 Preferred Stock that have characteristics of both equity and
liabilities.  These instruments were evaluated to be classified as
liabilities at the time of issuance and are revalued at fair value from period
to period with the resulting change in value included in the Statement of
Operations.





Licensed
In-Process Research and Development




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





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




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.


- 21
-


Results
of Operations





Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009




General and administrative
expenses. For the three months ended June 30, 2010, general and
administrative, or G&A, expense was $1.9 million, as compared to $1.2
million for the three months ended June 30, 2009.  The increase of
$0.7 million is due to increased personnel related expenses of $0.3 million, and
increased costs for allocable expenses of $0.4 million.





The $0.3
million increase in employee-related expenses includes an increase of expenses
related to incentive compensation as well as increased salary
expense.





The $0.4
million increase in allocable expenses was mainly related to insurance costs
incurred as part of the June 7, 2010 Investment Agreement and changes to the
composition of our Board of Directors.





Research and development
expenses. The following table summarizes our R&D expenses incurred
for preclinical support, contract manufacturing for clinical supplies and
clinical trial services provided by third parties, as well as milestone payments
for in-licensed technology for each of our current major product development
programs for the three months ended June 30, 2010 and 2009.  The table
also summarizes unallocated costs, which consist of personnel, facilities and
other costs not directly allocable to development programs.





Product candidates ($ in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    Annual %
                      ChangeMarqibo
                    
                    $
                    531
                    
                    
                    $
                    1,357
                    
                    
                    
                    (61
                    )%Menadione
      Topical Lotion (MTL)
                    
                    
                    23
                    
                    
                    
                    142
                    
                    
                    
                    (83
                    )%Brakiva
                    
                    
                    -
                    
                    
                    
                    89
                    
                    
                    
                    N/AAlocrest
                    
                    
                    -
                    
                    
                    
                    6
                    
                    
                    
                    N/ATotal
      third party development costs
                    
                    
                    529
                    
                    
                    
                    58
                    
                    
                    
                    812
                    %Allocable
      costs and overhead
                    
                    
                    186
                    
                    
                    
                    282
                    
                    
                    
                    (34
                    )%Personnel
      related expense
                    
                    
                    1,366
                    
                    
                    
                    1,020
                    
                    
                    
                    34
                    %Share-based
      compensation expense
                    
                    
                    70
                    
                    
                    
                    48
                    
                    
                    
                    46
                    %Total
      research and development expense
                    
                    $
                    2,705
                    
                    
                    $
                    3,002
                    
                    
                    
                    (10
                    )%





Marqibo.
 Marqibo costs
decreased by $0.8 million in the three months ended June 30, 2010 compared to
the same period in 2009.  The main cause of the decrease costs was due
to the completion of enrollment in our Phase 2 clinical trial in adult
Philadelphia chromosome negative ALL patients in second relapse, or those who
have progressed following two prior lines of anti-leukemia therapy, or the rALLy
study, in the fourth quarter of 2009.  Costs incurred in 2010 include
preparation of a pre-New Drug Application, or NDA, meeting which was completed
on April 20, 2010, with the FDA.  The purpose of the meeting was to
discuss the proposed NDA and to confirm the clinical, non-clinical and
manufacturing requirements for the NDA submission.  Following the
pre-NDA meeting, we intend to proceed with our plan to submit a rolling NDA for
Marqibo in relapsed/refractory adult Philadelphia chromosome-negative ALL in the
second half of 2010 to seek accelerated approval.  In the second
quarter of 2010, we continued to finalize data for the rALLy study and continued
enrollment in our pilot Phase 2 trial in metastic uveal melanoma. We plan to
initiate a confirmatory trial of Marqibo in ALL as early as 2011.  We
expect to spend a total of approximately $12 million on external costs relating
to Marqibo in 2010. We estimate that we will need to expend at least an
additional $6 million of external project costs in order to obtain accelerated
approval that would permit us to sell Marqibo to a limited segment of the
market.  If we receive accelerated approval, we will need to run
additional trials to receive full FDA approval in order to sell Marqibo to a
larger segment of the market.  We estimate that the additional
external costs to run the trials needed to obtain full FDA approval are
approximately $62 million.  External costs include drug production,
clinical trial costs, data management and supporting activities not provided by
our full-time employees.  These costs are impacted by the size and
duration of the clinical trials.  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.





MTL.
 In the three months ended June 30, 2010, MTL costs decreased by $0.1
million compared to the same period in 2009, due largely to completion of
enrollment in a Phase 1 study in cancer patients in December 2009.  We
plan to initiate a Phase 2 clinical trial in cancer patients in mid 2011,
pending final results of the Phase 1 study.  As this drug is early in
its clinical development, both the registrational strategy and total
expenditures to obtain FDA approval are still being evaluated. However, we
expect to spend approximately $1 million on external project costs relating to
MTL in 2010, and while we are still evaluating the development plan for MTL, we
estimate that we will need to expend at least an aggregate of approximately $55
million of additional funds on external costs in order for us to obtain full FDA
approval for MTL, if ever.  External costs include drug manufacture,
clinical trial costs, data management and supporting activities not provided by
our full-time employees.





Brakiva. In the three months ended June 30, 2010, Brakiva costs decreased
by $0.1 million in compared to the same period in 2009, due to slow enrollment
in a Phase 1 clinical study, which we initiated in November 2008.  We
are exploring options for further development of Brakiva beyond the phase 1
trial.  As this drug is early in its clinical development, both the
registrational strategy and total expenditures to obtain FDA approval are still
being evaluated.





Alocrest. We completed enrollment in a Phase 1 clinical trial in early 2008.
This Phase 1 trial was designed to assess safety, tolerability and preliminary
efficacy in patients with advanced solid tumors. We are currently exploring
options for the continued development of Alocrest and do not expect to incur
significant project costs in 2010.


- 22
-





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates increased by $0.5 million in the
three months ended June 30, 2010 compared to the same period in
2009.  These costs are not directly allocable to an individual product
candidate and primarily relate to outside services and professional fees related
to indirect support of our research and development functions including data
management, regulatory and clinical development.  The main increase in
costs was due to increased consultants used to prepare for our intended NDA
submission of our product candidate Marqibo as well as consultants used to
collect the final data for our Phase 2 clinical trial, rALLy, in
Marqibo.





Personnel
related costs increased by $0.3 million in the three months ended June 30, 2010
compared to the same period in 2009, due to increased accruals for incentive
compensation.   We expect personnel costs to increase slightly in
2010 as we continue to put in place the resources necessary to submit our NDA to
the FDA.





Interest expense. For the
three months ended June 30, 2010, interest expense was $0.9 million as compared
to interest expense of $0.8 million for the three months ended June 30, 2009.
The increase resulted from a larger average balance outstanding on our loan
facility with Deerfield.  We originally entered into this loan
agreement in October 2007.





Gain or loss on change in fair
market value of liabilities re-measured at fair value. The Company has
certain financial instruments that are recorded as liabilities.  The
Company re-measures the fair value of these liabilities at each reporting period
with the subsequent gain or loss recognized in the Statement of
Operations.  For the three months ended June 30, 2010, we recorded a
net loss related to these liabilities of $0.8 million, compared to a net loss of
$2.8 million for the same period in 2009.  The value of these liabilities
is largely dependent on the price of our common stock, and as the stock price
increases, the value of these instruments will increase and our loss on the
change in market value will increase.  See Notes 5,6, 7 and 8 in the Notes
to the Unaudited Condensed Financial Statements for additional
details.





Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009




General and administrative
expenses. For the six months ended June 30, 2010, G&A expense was
$3.1 million, as compared to $2.6 million for the six months ended June 30,
2009.  The increase of $0.5 million is due to increased personnel
related expenses of $0.2 million, decreased professional and outside services of
$0.1 million and increased costs for allocable expenses of $0.4
million.





The $0.2
million increase in employee-related expenses includes an increase of expenses
related to incentive compensation as well as increased salary
expense.





The $0.1
million decrease in professional fees and outside services includes a decrease
in legal and accounting fees in an effort to reduce costs prior to our financing
transaction in June 2010.





The $0.4
million increase in allocable expenses was mainly related to insurance costs
incurred as part of the June 7, 2010 Investment Agreement and changes to the
composition of our Board of Directors.




- 23
-


Research and development
expenses. The following table summarizes our R&D expenses incurred
for preclinical support, contract manufacturing for clinical supplies and
clinical trial services provided by third parties, as well as milestone payments
for in-licensed technology for each of our current major product development
programs for the six months ended June 30, 2010 and 2009.  The table
also summarizes unallocated costs, which consist of personnel, facilities and
other costs not directly allocable to development programs.





Product candidates ($ in thousands)
                    
                    2010
                    
                    
                    2009
                    
                    
                    Annual %
                      ChangeMarqibo
                    
                    $
                    1,482
                    
                    
                    $
                    2,579
                    
                    
                    
                    (43
                    )%Menadione
      Topical Lotion (MTL)
                    
                    
                    39
                    
                    
                    
                    573
                    
                    
                    
                    (93
                    )%Brakiva
                    
                    
                    (10
                    )
                    
                    
                    224
                    
                    
                    
                    N/AAlocrest
                    
                    
                    (1
                    )
                    
                    
                    (7
                    )
                    
                    
                    N/ATotal
      third party development costs
                    
                    
                    1,394
                    
                    
                    
                    723
                    
                    
                    
                    93
                    %Allocable
      costs and overhead
                    
                    
                    447
                    
                    
                    
                    560
                    
                    
                    
                    (20
                    )%Personnel
      related expense
                    
                    
                    2,457
                    
                    
                    
                    2,295
                    
                    
                    
                    7
                    %Share-based
      compensation expense
                    
                    
                    154
                    
                    
                    
                    248
                    
                    
                    
                    (38
                    )%Total
      research and development expense
                    
                    $
                    5,964
                    
                    
                    $
                    7,195
                    
                    
                    
                    (17
                    )%





Marqibo.
 Marqibo costs
decreased by $1.1 million in the six months ended June 30, 2010 compared to the
same period in 2009.  The main cause of the decrease costs was due to
the completion of enrollment in our Phase 2 clinical trial in adult Philadelphia
chromosome negative ALL patients in second relapse, or those who have progressed
following two prior lines of anti-leukemia therapy, or the rALLy study, in the
fourth quarter of 2009.  Costs incurred in 2010 include preparation of
a pre-New Drug Application, or NDA, meeting that was completed on April 20,
2010, with the FDA.





MTL.
 In the six months ended June 30, 2010, MTL costs decreased by $0.5 million
in compared to the same period in 2009, due largely to completion of enrollment
in a Phase 1 study in cancer patients in December
2009.





Brakiva. In the six months ended June 30, 2010, Brakiva costs decreased by
$0.2 million in compared to the same period in 2009, due to decelerated
enrollment in a Phase 1 clinical study, which we initiated in November 2008, as
well as decreased manufacturing costs.




Alocrest. We completed enrollment in a Phase 1 clinical trial in early 2008.
This Phase 1 trial was designed to assess safety, tolerability and preliminary
efficacy in patients with advanced solid tumors. We are currently exploring
options for the continued development of Alocrest and do not expect to incur
significant project costs in 2010.





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates increased by $0.7 million in the six
months ended June 30, 2010 compared to the same period in 2009.  These
costs are not directly allocable to an individual product candidate and
primarily relate to outside services and professional fees related to indirect
support of our research and development functions including data management,
regulatory and clinical development.  The main increase in costs was
due to increased consultants used to collect and prepare data for our various
product candidates, including for our intended NDA submission of our product
candidate Marqibo as well as consultants used to collect the final data for our
Phase 2 clinical trial, rALLy, in Marqibo.





Personnel
related costs increased by $0.2 million in the six months ended June 30, 2010
compared to the same period in 2009, due to increased accruals for incentive
compensation.   We expect personnel costs to increase slightly in
2010 as we continue to put in place the resources necessary to submit our NDA to
the FDA.





Interest expense. For the six
months ended June 30, 2010, interest expense was $2.0 million as compared to
interest expense of $1.6 million for the six months ended June 30,
2009.  The increase resulted from a larger average balance outstanding
on our loan facility with Deerfield.  We originally entered into this
loan agreement in October 2007.





Gain or loss on change in fair
market value of liabilities re-measured at fair value. The Company has
certain financial instruments that are recorded as liabilities.  The
Company re-measures the fair value of these liabilities at each reporting period
with the subsequent gain or loss recognized in the Statement of
Operations.  For the six months ended June 30, 2010, we recorded a net
loss related to these liabilities of $0.8 million, compared to a net loss of
$2.2 million for the same period in 2009.  The value of these liabilities
is largely dependent on the price of our common stock, and as the stock price
increases, the value of these instruments will increase and our loss on the
change in market value will increase.  See Notes 5, 6, 7 and 8 in the Notes
to the Unaudited Condensed Financial Statements for additional
details.





Liquidity
and Capital Resources




As of
June 30, 2010, we had a stockholders’ deficit of approximately $27.3 million and
an accumulated deficit of $146.9 million.  For the six months ended
June 30, 2010, we recognized a net loss of $11.8 million. We have financed
operations primarily through equity and debt financing and expect such losses to
continue over the next several years.  As of June 30, 2010, we had
aggregate cash and cash equivalents and available-for-sale securities of $37.9
million and available working capital of $34.4 million, which we believe to be
sufficient to continue operations through 2011.  We have drawn down
$27.5 million of long-term debt under the loan facility agreement with Deerfield
Management.  On June 7, 2010, we entered into an Investment Agreement
with certain investors pursuant to which we sold 400,000 shares of convertible
preferred stock at the stated value of $100 per share, for gross proceeds of $40
million.


- 24
-





The
Investment Agreement provides that the investors have the right, but not the
obligation, to make additional investments, as follows:


·
              at any time prior to the
      date we receive marketing approval from the U.S. Food and Drug
      Administration for any of our product candidates (“Marketing Approval
      Date”), the Purchasers may purchase up to an additional 200,000 shares of
      Series A-1 Preferred Stock at a purchase price of $100 per share for an
      aggregate purchase price of $20,000,000 (“Additional Investment”);
      and
 
 ·
              at any time beginning 15 days and
      within 120 days following the Marketing Approval Date, the investors may
      purchase up to an aggregate of 400,000 shares of Series A-2 Convertible
      Preferred Stock (if we have obtained stockholder approval of certain
      amendments to our certificate of incorporation (“Stockholder Approval”) by
      December 7, 2010) or 400,000 shares of Series A-1 Convertible Preferred
      Stock (if Stockholder Approval has not been obtained by December 7, 2010),
      in either case, at the stated value of $100 per share for an aggregate
      purchase price of $40,000,000.   These amendments include
      (i) increasing the authorized number of shares of Common Stock, (ii)
      effecting a reverse split of our Common Stock at a ratio to be agreed upon
      with the investors, and (iii) providing that the number of authorized
      shares of Common Stock may be increased or decreased by the affirmative
      vote of the holders of a majority of the issued and outstanding Common
      Stock and preferred stock, voting together as one class, notwithstanding
      the provisions of Section 242(b)(2) of the Delaware General Corporation
      Law.
 Until we
obtain Stockholder Approval, the major terms of the Series A-1 Preferred Stock
(the “Initial A-1 Terms”) are as follows:





·
            the stated value of the Series
      A-1 Preferred Stock accretes at a rate of 12% per annum (increasing by
      0.5% annually) for a seven-year term, compounded
      quarterly.  Following such seven year term, the holders are
      thereafter entitled to cash dividends at a rate of 15.5% of the accreted
      stated value per annum, payable
  quarterly;





·
            the Series A-1 Preferred Stock
      are convertible into Common Stock at a conversion price of $0.1288 per
      share, subject to the limitation on the number of shares of Common Stock
      available for issuance;





·
            upon any liquidation event, as
      defined, including a change in control of the Company, holders of the
      Series A-1 Preferred Stock would be entitled to receive a liquidation
      preference per share equal to the greater of (i) 250% of the then-accreted
      value of the Series A-1 Preferred Stock and (ii) the amount which the
      holder would have received if the Series A-1 Preferred Stock had been
      converted into common stock immediately prior to the liquidation;
      and





·
            the Series A-1 Preferred Stock is
      redeemable at the holders’ election any time after December 7, 2010, at
      the amount equal to the greater of (i) 250% of the then-accreted value of
      the Series A-1 Preferred Stock and (ii) market value of common stock
      shares the holder would receive if the Series A-1 Preferred Stock are
      converted into common stock immediately prior to the
      redemption.




If we
obtain Stockholder Approval prior to December 7, 2010, then we expect that we
will conduct a second closing pursuant to the terms of the Investment Agreement,
which we refer to herein as the Second Closing. The investors’ obligations to
complete the Second Closing are subject to a number of customary closing
conditions, including the continued accuracy of the representations and
warranties we made in the Investment Agreement and our compliance with our
contractual obligations thereunder. At the Second Closing, the shares of Series
A-1 Preferred Stock that we originally sold and issued on June 7, 2010 would no
longer be subject to the Initial Series A-1 Terms and would automatically become
subject to the considerably more Company-favorable Revised A-1 Terms (summarized
below). In addition, the investors would be entitled to receive an additional
number of shares of Series A-1 Preferred Stock equal to the aggregate accretion
that would have accrued on the shares of Series A-1 Preferred Stock sold at the
June 7, 2010 closing divided by $100.





Following
the Second Closing, the major terms of the Series A-1 Preferred Stock (the
“Revised A-1 Terms”), including the initial 400,000 shares sold to the investors
on June 7, 2010 will be as follows:





·
            the stated value of the Series
      A-1 Preferred Stock accretes at a rate of 9% per annum for a five-year
      term, compounded quarterly.  Following such five year term, the
      holders are thereafter entitled to cash dividends at a rate of 9% of the
      accreted stated value per annum, payable
  quarterly;





·
            the Series A-1 Preferred Stock
      are convertible into Common Stock at a conversion price of $0.184 per
      share;




·
            upon any liquidation event, as
      defined, including a change in control of the Company, holders of the
      Series A-1 Preferred Stock would be entitled to receive a liquidation
      preference per share equal to the greater of (i) 100% of the then-accreted
      value of the Series A-1 Preferred Stock and (ii) the amount which the
      holder would have received if the Series A-1 Preferred Stock had been
      converted into common stock immediately prior to the liquidation;
      and





·
            the Series A-1 Preferred Stock is
      not redeemable.


- 25
-





The terms
of the Series A-2 Preferred Stock are identical to the Revised A-1 Terms, except
the conversion price is $0.276 per share.  We believe that the initial
$40 million provided by the Investment Agreement will allow us to submit a
rolling NDA for Marqibo in relapsed/refractory adult Philadelphia
chromosome-negative ALL and continue the development of our other product
candidates as described above.





We do not
generate any recurring revenue and will require substantial additional capital
before it will generate cash flow from our operating activities, if ever. 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.  If we raise
additional funds through collaborations and licensing arrangements, we may be
necessary to relinquish some rights to our technologies, product candidates or
products, or grant licenses on terms that are not favorable to us. If we raise
additional funds by incurring debt, we could incur significant interest expense
and become subject to covenants in the related transaction documentation that
could affect the manner in which we conduct our
business.





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 of our product
      candidates;





·
            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.





We have
based our estimate on assumptions that may prove to be wrong, in which case, we
may need to obtain additional funds sooner or in greater amounts than we
currently anticipate.


- 26
-


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 Disclosures About Market Risk




Not
applicable.




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation as of June 30, 2010, 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 June 30, 2010, there were no changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial
reporting.


- 27
-





PART
II - OTHER INFORMATION





Item
1. Legal Proceedings




None.




Item
1A.  Risk Factors





Not
applicable




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





On May
20, 2010, a holder of warrants issued by us in our October 2009 private
placement exercised its right to purchase 5.1 million shares of our common stock
at an exercise price of $0.01 per share.  The sale of these shares was
made pursuant to a private transaction that did not involve a public offering,
and accordingly, we believe this transaction was exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof and
the rules and regulations promulgated thereto, that the holder acquired the
shares for investment and not distribution, it could bear the risks of the
investment, and it could hold the securities for an indefinite period of time.
The holder received written disclosures that the securities had not been
registered under the Securities Act and any resale must be made pursuant to a
registration or an available exemption from such registration.





Item
3. Defaults Upon Senior Securities





Not
applicable





Item
4. [Removed and Reserved]




Item
5. Other Information





None


- 28
-


Item
6. Exhibits





Exhibit No.
            
            Description3.1
            
            Amended
      and Restated Bylaws of Hana Biosciences, Inc., as
  amended.10.1
            
            Investment
      Agreement dated June 7, 2010 among the Company and the Purchasers named
      therein (incorporated by reference to Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed June 11, 2010).10.2
            
            Form
      of Indemnification Agreement dated June 7, 2010 between the Company and
      each of Jonathan Leff, Nishan de Silva and Andrew Ferrer (incorporated by
      reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
      filed June 11, 2010).10.3
            
            Registration
      Rights Agreement dated June 7, 2010 among the Company and the Holders
      identified therein (incorporated by reference to Exhibit 10.3 to the
      Company’s Current Report on Form 8-K filed June 11,
  2010).10.4
            
            First
      Amendment dated June 7, 2010 to Facility Agreement dated October 30, 2007
      among the Company and the Lenders identified therein (incorporated by
      reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K
      filed June 11, 2010).31.1
            
            Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
            
            Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).




- 29
-


SIGNATURES




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




HANA
      BIOSCIENCES, INC.Dated:
      August 13, 2010
              By:
              /s/ Steven R. Deitcher,
    MDSteven
      R. Deitcher, MDPresident
      and Chief Executive OfficerDated:
      August 13, 2010
              By:
              /s/ Craig W. CarlsonCraig
      W. Carlson
                Vice
      President, Chief Financial
Officer




- 30
-


Index
to Exhibits Filed with this Report




Exhibit No.
            
            Description3.1
            
            Amended
      and Restated Bylaws of Hana Biosciences, Inc., as
  amended.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).


- 31
-