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, 2009





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 14, 2009, there were 32,583,004 shares of the registrant's common
stock, $.001 par value, outstanding.









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 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
            17Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            25Item
      4T.
            Controls
      and Procedures
            25PART
      II
            OTHER
      INFORMATION
            26Item
      1.
            Legal
      Proceedings
            26Item
      1A.
            Risk
      Factors
            26Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            26Item
      3.
            Defaults
      Upon Senior Securities
            26Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            26Item
      5.
            Other
      Information
            26Item
      6.
            Exhibits
            26Signatures
            27Index
      of Exhibits Filed with this Report
            28




- 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 in our Annual Report on Form 10-K for the year
ended December 31, 2008 (the “2008 Form 10-K”), that could cause our actual
results to differ materially from those in the forward-looking statements.
Except as required by law, we undertake no obligation to publicly revise our
forward-looking statements to reflect events or circumstances that arise after
the filing of this report or documents incorporated by reference herein that
include forward-looking statements. The risks discussed in this report should be
considered in evaluating our prospects and future financial
performance.





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





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




- 3
-





PART
I - FINANCIAL INFORMATION




Item
1. Unaudited Condensed Financial Statements




HANA
BIOSCIENCES, INC.





CONDENSED
BALANCE SHEETS





June
      30,
              2009
            
            
            December
      31,
              2008ASSETS
            
            (Unaudited)Current
      assets:Cash
      and cash equivalents
            
            $
            8,190,250
            
            
            $
            13,999,080Available-for-sale
      securities
            
            
            124,000
            
            
            
            128,000Prepaid
      expenses and other current assets
            
            
            55,405
            
            
            
            131,663Total
      current assets
            
            
            8,369,655
            
            
            
            14,258,743Property
      and equipment, net
            
            
            310,574
            
            
            
            400,168Restricted
      cash
            
            
            125,000
            
            
            
            125,000Debt
      issuance costs
            
            
            1,286,141
            
            
            
            1,361,356Total
      assets
            
            $
            10,091,370
            
            
            $
            16,145,267LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued liabilities
            
            $
            3,559,038
            
            
            $
            4,225,863Other
      short-term liabilities
            
            
            53,508
            
            
            
            61,341Warrant
      liabilities, short-term
            
            
            2,927,761
            
            
            
            1,450,479Total
      current liabilities
            
            
            6,540,307
            
            
            
            5,737,683Notes
      payable, net of discount
            
            
            22,176,876
            
            
            
            16,851,541Other
      long-term liabilities
            
            
            28,726
            
            
            
            41,775Warrant
      liabilities, non-current
            
            
            679,827
            
            
            
            --Total
      long term liabilities
            
            
            22,885,429
            
            
            
            16,893,316Total
      liabilities
            
            
            29,425,736
            
            
            
            22,630,999Commitments
      and contingencies (Notes 4, 9 and 10):Stockholders'
      deficit:Common
      stock; $0.001 par value:100,000,000
      shares authorized, 32,451,184 and 32,386,130 shares issued and outstanding
      at June 30, 2009 and December 31, 2008, respectively
            
            
            32,451
            
            
            
            32,386Additional
      paid-in capital
            
            
            105,064,006
            
            
            
            104,431,469Accumulated
      other comprehensive income
            
            
            32,000
            
            
            
            36,000Accumulated
      deficit
            
            
            (124,462,823)
            
            
            
            (110,985,587)Total
      stockholders' deficit
            
            
            (19,334,366)
            
            
            
            (6,485,732)Total
      liabilities and stockholders' deficit
            
            $
            10,091,370
            
            
            $
            16,145,267




See
accompanying notes to unaudited condensed financial statements.




- 4
-





HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS


(Unaudited)





Three
      Months Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Operating
      expenses:General
      and administrative
            
            $
            934,637
            
            
            $
            1,749,555
            
            
            $
            2,042,526
            
            
            $
            3,650,475Research
      and development
            
            
            3,262,507
            
            
            
            4,419,464
            
            
            
            7,724,701
            
            
            
            8,683,796Total
      operating expenses
            
            
            4,197,144
            
            
            
            6,169,019
            
            
            
            9,767,227
            
            
            
            12,334,271Loss
      from operations
            
            
            (4,197,144
            )
            
            
            (6,169,019
            )
            
            
            (9,767,227
            )
            
            
            (12,334,271
            )Other
      income (expense):Interest
      income
            
            
            574
            
            
            
            60,457
            
            
            
            12,156
            
            
            
            231,365Interest
      expense
            
            
            (833,142
            )
            
            
            (252,477
            )
            
            
            (1,560,149
            )
            
            
            (501,641
            )Other
      expense, net
            
            
            --
            
            
            
            (36,802
            )
            
            
            (4,907
            )
            
            
            (42,864
            )Gain
      (loss) on derivative
            
            
            (2,821,169
            )
            
            
            1,827,611
            
            
            
            (2,157,109
            )
            
            
            1,817,681Realized
      loss on marketable securities
            
            
            --
            
            
            
            (108,000
            )
            
            
            --
            
            
            
            (108,000
            )Total
      other income (expense)
            
            
            (3,653,737
            )
            
            
            1,490,789
            
            
            
            (3,710,009
            )
            
            
            1,396,541Net
      loss
            
            $
            (7,850,881
            )
            
            $
            (4,678,230
            )
            
            $
            (13,477,236
            )
            
            $
            (10,937,730
            )Net
      loss per share, basic and diluted
            
            $
            (0.24
            )
            
            $
            (0.15
            )
            
            $
            (0.42
            )
            
            $
            (0.34
            )Weighted
      average shares used in computing net loss per share, basic and
      diluted
            
            
            32,451,184
            
            
            
            32,227,195
            
            
            
            32,450,465
            
            
            
            32,204,171Comprehensive
      loss:Net
      loss
            
            $
            (7,850,881
            )
            
            $
            (4,678,230
            )
            
            $
            (13,477,236
            )
            
            $
            (10,937,730
            )Unrealized
      holdings gains (losses) arising during the period
            
            
            28,000
            
            
            
            (28,000
            )
            
            
            (4,000
            )
            
            
            (4,000
            )Less:
      reclassification adjustment for losses included in net
loss
            
            
            --
            
            
            
            108,000
            
            
            
            --
            
            
            
            108,000Comprehensive
      loss
            
            $
            (7,822,881
            )
            
            $
            (4,598,230
            )
            
            $
            (13,481,236
            )
            
            $
            (10,833,730
            )





See
accompanying notes to unaudited condensed financial statements.




- 5
-





HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


(Unaudited)





Period
from January 1, 2009 to June 30, 2009





Common stock
            
            
            Additional
              paid-in
            
            
            Accumulated
              Other
              Comprehensive
            
            
            Accumulated
            
            
            Total
              stockholders'Shares
            
            
            Amount
            
            
            capital
            
            
            income
            
            
            deficit
            
            
            DeficitBalance
      at January 1, 2009
            
            
            32,386,130
            
            
            $
            32,386
            
            
            $
            104,431,469
            
            
            $
            36,000
            
            
            $
            (110,985,587)
            
            
            $
            (6,485,732)Share-based
      compensation of employees amortized over vesting period of stock
      options
            
            
            
            
            
            
            
            
            
            
            619,331
            
            
            
            
            
            
            
            
            
            
            
            619,331Issuance
      of shares under employee stock purchase plan
            
            
            65,054
            
            
            
            65
            
            
            
            13,206
            
            
            
            
            
            
            
            
            
            
            
            13,271Unrealized
      loss on available-for-sale securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,000)
            
            
            
            
            
            
            
            (4,000)Net
      loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (13,477,236)
            
            
            
            (13,477,236)Balance
      at June 30, 2009
            
            
            32,451,184
            
            
            $
            32,451
            
            
            $
            105,064,006
            
            
            $
            32,000
            
            
            $
            (124,462,823)
            
            
            $
            (19,334,366)




See
accompanying notes to unaudited condensed financial statements.




- 6
-





HANA
BIOSCIENCES, INC.





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (13,477,236
            )
            
            $
            (10,937,730
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            99,489
            
            
            
            91,245Share-based
      compensation to employees for services
            
            
            619,331
            
            
            
            1,435,314Share-based
      compensation to nonemployees for services
            
            
            --
            
            
            
            (825
            )Shares
      issued for license milestone
            
            
            --
            
            
            
            125,000Amortization
      of discount and debt issuance costs
            
            
            400,550
            
            
            
            127,647Realized
      loss on available for sale securities
            
            
            --
            
            
            
            108,000Unrealized
      (gain)loss on derivative liability
            
            
            2,157,109
            
            
            
            (1,817,681
            )Changes
      in operating assets and liabilities:Increase
      in prepaid expenses and other assets
            
            
            76,258
            
            
            
            341,833Decrease
      in accounts payable and accrued liabilities
            
            
            (666,825
            )
            
            
            (999,310
            )Net
      cash used in operating activities
            
            
            (10,791,324
            )
            
            
            (11,526,507
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            --
            
            
            
            (64,680
            )Net
      cash used in investing activities
            
            
            --
            
            
            
            (64,680
            )Cash
      flows from financing activities:Proceeds
      from exercise of warrants and options and issuance of shares under
      employee stock purchase plan
            
            
            13,271
            
            
            
            10,680Payments
      on capital leases
            
            
            (30,777
            )
            
            
            (17,550
            )Proceeds
      from issuances of notes payable
            
            
            5,000,000
            
            
            
            --Net
      cash provided by (used in) financing activities
            
            
            4,982,494
            
            
            
            (6,870
            )Net
      decrease in cash and cash equivalents
            
            
            (5,808,830
            )
            
            
            (11,598,057
            )Cash
      and cash equivalents, beginning of period
            
            
            13,999,080
            
            
            
            20,795,398Cash
      and cash equivalents, end of period
            
            $
            8,190,250
            
            
            $
            9,197,341Supplemental
      disclosures of cash flow data:Cash
      paid for interest
            
            $
            1,140,301
            
            
            $
            373,994Supplemental
      disclosures of noncash financing activities:Equipment
      financed with capital leases
            
            
            9,895
            
            
            
            64,476Unrealized
      loss on available-for-sale securities
            
            $
            (4,000
            )
            
            $
            (4,000
            )





See
accompanying notes to unaudited condensed financial
statements.




- 7
-





HANA
BIOSCIENCES, INC.


NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS





NOTE
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION





BUSINESS





Hana
Biosciences, Inc. (“Hana,” “we” or the “Company”) is a South San Francisco,
California-based biopharmaceutical company dedicated to developing and
commercializing new and differentiated cancer therapies designed to improve and
enable current standards of care. Our two lead product candidates target large
markets and are in pivotal and/or proof-of-concept clinical trials. We are
developing Marqibo ® for the treatment of acute lymphoblastic leukemia and
lymphomas. Menadione topical lotion is a first-in-class compound that we are
developing for the potential prevention and/or treatment of skin toxicity
associated with epidermal growth factor receptor inhibitors. We have additional
pipeline opportunities that, like Marqibo, we believe may improve delivery and
enhance the therapeutic benefits of well-characterized, proven chemotherapies
and enable high potency dosing without increased toxicity.





Our
product candidates consist of the following:




·
            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.





·
            Menadione,
      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 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.





BASIS
OF PRESENTATION AND LIQUIDITY





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, 2009 or any subsequent interim period.





As of
June 30, 2009, the Company has an accumulated deficit of approximately $124.5
million, and for the six months ended June 30, 2009, the Company experienced a
net loss of $13.5 million. The Company has financed operations primarily through
equity and debt financing and expects such losses to continue over the next
several years.  The Company currently has a limited supply of cash
available for operations. As of June 30, 2009, the Company had available $8.3
million in cash and cash equivalents and available-for-sale securities from
which to draw upon.  An additional $2.5 million will become available
to the Company if it reaches a clinical development milestone pursuant to a loan
facility with Deerfield Management.  We do not anticipate achieving
this milestone unless we are able to obtain additional
financing.   See Note 4 below.


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


- 8
-





NOTE
2. SIGNIFICANT ACCOUNTING POLICIES





Use
of Management's Estimates




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





Segment
Reporting




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





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, 2009 is $12.4 million.





Loss
Per Share





Basic net
loss per common share is calculated by dividing net loss by the weighted-average
number of common shares outstanding for the period. Diluted net loss per common
share is the same as basic net loss per common share, since potentially dilutive
securities from stock options and stock warrants would have an anti-dilutive
effect because the Company incurred a net loss during each period presented. The
number of shares potentially issuable at June 30, 2009 and 2008 upon exercise or
conversion that were not included in the computation of net loss per share
totaled 13,275,200 and 12,059,477, respectively.





Cash
and Cash Equivalents and Concentration of Risk




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




- 9
-





Warrant
Liabilities





On
October 30, 2007, the Company entered into a loan facility agreement with
certain affiliates of Deerfield Management (“Deerfield”). Deerfield has
committed funds to assist with the development of the Company’s product
candidates. The facility agreement allowed the Company to borrow from Deerfield
up to an aggregate of $30 million, of which $20 million was subject to being
drawn down by the Company in as many as four installments every six months
commencing October 30, 2007.  As additional consideration for the loan, the
Company also issued to Deerfield warrants to initially purchase 5,225,433 shares
of the Company’s common stock at an exercise price of $1.31 per
share.  The Company issued similar warrants to initially purchase
851,844 shares to Deerfield on October 14, 2008 upon drawing down funds related
to certain development milestones.  A certain portion of these
warrants includes an anti-dilution feature.  This feature requires that, as
the Company issues additional shares of its common stock during the term of the
warrant, the number of shares purchasable under these series is automatically
increased so that they always represent 17.625% of the Company’s then
outstanding common stock.  Pursuant to the facility agreement, the Company
also entered into a registration rights agreement, so that Deerfield may sell
their shares if the warrants are exercised. These financing transactions were
recorded in accordance with Emerging Issues Task Force Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock” and related interpretations.  Because
the warrants are redeemable in the event of a change in control or if the
Company’s shares become delisted, the fair value of the warrants based on the
Black-Scholes-Merton option pricing model is recorded as a liability.  The
Company updates its estimate of the fair value of the warrant liabilities in
each reporting period as new information becomes available and any gains or
losses resulting from the changes in fair value from period to period are
included as other income (expense).




Reclassification





Certain
prior year amounts have been reclassified to conform to the current year
presentation.





NOTE
3. RECENT ACCOUNTING PRONOUNCEMENTS




In
June 2009, FASB issued SFAS No. 168, “The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162,” or SFAS 168. SFAS 168
establishes the FASB
Accounting Standards Codification, or Codification, which will become the
source of authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The Codification will supersede all then-existing non-SEC
accounting and reporting standards. All other non-SEC accounting literature
which is not grandfathered or not included in the Codification will no longer be
authoritative. Once the Codification is in effect, all of its content will carry
the same level of authority. SFAS 168 will be effective for financial
statements for interim or annual reporting periods ending after
September 15, 2009. The Company expects to adopt SFAS 168 for the
quarter ending September 30, 2009.





In May
2009, FASB issued SFAS No. 165, Subsequent Events, or
SFAS 165. SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS 165 requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, that is, whether that date represents the
date the financial statements were issued or were available to be issued. The
adoption of SFAS 165 had no material effect on the Company’s financial condition
or presentation of financial statements.





In April
2009, the FASB issued FASB Staff Position (FSP) No. FAS 107-1 and APB 28-1,
Interim Disclosures about Fair
Value of Financial Instruments.FSP No. FAS 107-1 and APB 28-1
requires that publicly-traded companies enhance interim disclosures of fair
value instruments consistent with disclosures required for annual reporting
periods.  FSP No. FAS 107-1 and APB 28-1 is effective for periods
ending after June 15, 2009.  This FSP does not require disclosures for
earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, this FSP requires comparative disclosures only
for periods ending after initial adoption.  The adoption of FSP No.
FAS 107-1 and APB 28-1did not have a material effect on the Company’s financial
statements and disclosures.








NOTE
4.  FACILITY AGREEMENT





On
October 30, 2007, we entered into a Facility Agreement (the “loan agreement”)
with Deerfield under which Deerfield agreed to lend to us an aggregate principal
amount of up to $30 million. Of the total $30 million funds committed pursuant
to the loan agreement, $20 million is available for disbursement to us in four
installments every six months commencing October 30, 2007.  As of
June 30, 2009, we have drawn down the entire $20 million pursuant to these
funds.  The remaining $10 million is subject to disbursement
in three installments upon the achievement of clinical development milestones
relating to our Marqibo and Menadione product candidates, of which we have drawn
down $7.5 million as of June 30, 2009. Deerfield’s obligation to disburse loan
proceeds expires October 30, 2010, and we must repay all outstanding principal
and interest owing under the loan no later than October 30, 2013. We are also
required to make quarterly interest payments on outstanding principal, at a
stated annual rate of 9.85%. In accordance with and upon execution of the loan
agreement, we paid a loan commitment fee of $1.1 million to an affiliate of
Deerfield.  Our obligations under the loan are secured by all assets
owned (or that will be owned in the future) by us, both tangible and intangible.
The effective interest rate on the $20 million notes payable for funds available
on the six month installments, including discount on debt, is approximately
18.0%.  The effective interest rate on the $7.5 million notes payable
related to the achievement of development milestones, including discount on
debt, is approximately 11.6%.  As of June 30, 2009, we had accrued
$0.6 million in interest payable that was paid in July 2009.




- 10
-





As
additional consideration for the loan, on October 30, 2007, we issued to
Deerfield two series of 6-year warrants to purchase an aggregate of 5,225,433
shares of our common stock at an exercise price of $1.31 per share (subject to
adjustment for stock splits, combinations and similar events), which represented
the closing bid price of our common stock as reported on the Nasdaq Global
Market on the issuance date. One series of such warrants initially represented
the right to purchase 4,825,433 shares, which equaled 15% of our currently
issued and outstanding shares of common stock as of October 30, 2007. These
warrants contain an anti-dilution feature so that, as we issue additional shares
of our common stock during the term of the warrant, the number of shares
purchasable under this series is automatically increased so that they always
represent 15% of our then outstanding common stock. The exercise price for any
incremental shares that become purchasable due to this feature remains fixed at
$1.31 per share (subject to adjustment for stock splits, combinations and
similar events).  Pursuant to this anti-dilution feature and as a
result of additional shares of our common stock that we issued following October
30, 2007, this series of warrants represented the right to purchase an aggregate
of 4,867,678 shares of our common stock as of June 30, 2009. The second series
of warrants, representing the right to purchase an aggregate of 400,000 shares,
is identical in form except that it does not contain such anti-dilution feature.
When the Company drew down the $7.5 million of funds conditioned upon the
achievement of clinical development milestones relating to the Marqibo and
Menadione programs on October 14, 2008, it was required to issue to Deerfield
additional warrants to purchase up to an additional 2.625% of its then
outstanding common stock, which warrants will contain the same anti-dilution
feature as those issued by the Company on October 30, 2007.  These
warrants represented the right to purchase 851,844 shares of our common stock as
of June 30, 2009.  If the Company draws down the remaining funds
conditioned upon the achievement of clinical development milestones, it will be
required to issue to Deerfield additional warrants to purchase up to an
additional 0.875% of its then outstanding common stock, which warrants will
contain the same anti-dilution feature as those issued by the Company on October
30, 2007 and October 14, 2008.





As of
June 30, 2009, the Company had drawn down $27.5 million of the entire $30
million loan facility, which represented the entire amount available based on
installments and clinical development milestones achieved related to the Marqibo
and Menadione programs.




Fair Value of Warrants. The
aggregate fair values of the warrant series issued upon execution of the loan
agreement, under which an aggregate of the 5,225,433 shares of our common stock
were issuable upon purchase, pursuant to the loan agreement was $5.9 million.
$5.5 million of the total fair value, related to the warrant series to purchase
an aggregate of 4,825,433 shares with an anti-dilution feature, was recorded as
a discount to the note payable. The remaining $0.4 million fair value, relating
to the additional warrant series to purchase an aggregate of 400,000 shares of
common stock, was recorded as a debt issuance cost and is being amortized, using
the interest method, over the life of the loan.   The aggregate fair
values of the warrant series issued when we drew down the funds related to
clinical development milestones, under which an aggregate of the 850,136 shares
of our common stock were issuable upon purchase, pursuant to the loan agreement
was $0.5 million, which was accounted for as a discount to the notes payable in
the balance sheet.  Deerfield can elect a cashless exercise of any
portion of shares outstanding in which case they would receive shares equal to
the net settlement price on the date of exercise.  Additionally,
pursuant to the loan agreement, Deerfield has certain registration rights and we
would be obligated to make penalty payments to Deerfield in the event we were
unable to maintain effective registration with the SEC.





The
Company used a Black-Scholes-Merton option pricing model to obtain the fair
value of these warrants.  In order to estimate the fair value of the
anti-dilution feature, the Company estimated the number of additional shares
potentially purchasable under the warrant agreement using weighted probability
scenarios.  A summary of the assumptions used to estimate the fair
value of the warrants issued pursuant to the execution of the loan agreement as
well as the estimated additional shares purchasable under the warrants pursuant
to the anti-dilution feature as of June 30, 2009 and June 30, 2008 is as
follows:




June
      30
            
            
            June
      302009
            
            
            2008WarrantsRisk-free
      interest rate
            
            $
            1.2
            %
            
            $
            4.1
            %Expected
      life (in years)
            
            
            4.3
      – 5.3
            
            
            
            5.28Volatility
            
            
            134.0
            %
            
            
            69.3
            %Dividend
      yield
            
            
            0
            
            
            $
            0Estimated
      fair value of shares issuable under warrants
            
            $
            0.36
      – 0.39
            
            
            $
            0.36






Warrant Liabilities. The fair
value of the warrants issued pursuant to the loan agreement was recorded in
accordance with Emerging Issues Task Force Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock.” Accordingly, we determined that the fair value of the
warrants represented a liability because the warrants are redeemable in the
event of a change in control or if the Company’s shares become delisted.
 The fair value of the warrants is recalculated each reporting period with
the change in value taken as income or expense in the “Statement of Operations.”





On March
5, 2009, we received notice that our common stock would be subject
to delisting from the Nasdaq Capital Market as a result of a listing
requirement deficiency, of which we were previously notified on November 19,
2008.  Specifically,
we fail to comply with a Nasdaq listing rules that requires us to have
stockholders’ equity of at least $2.5 million or an aggregate market value of
all outstanding common stock of at least $35 million.  Following an
appeal by us to a Nasdaq hearings panel, we have until September 1, 2009 to
regain compliance with Nasdaq’s listing requirements, or our common stock will
be delisted.If our common stock is delisted from the Nasdaq Capital
Market, we may be required to redeem the warrants we have issued to Deerfield
pursuant to our October 2007 loan agreement.  Those warrants contain a
provision that would require us to redeem the warrants, at Deerfield’ s
election, in the event our common stock is no longer listed on the Nasdaq or
another national stock exchange.  The redemption price applicable to
the warrants is based upon a Black-Scholes-Merton calculation, as specified in
the warrant agreement.  As of June 30, 2009, the total redemption
price that would be applicable to all of the warrants issued to Deerfield is
approximately $2.9 million.  We have classified an amount equal to the
redemption value at June 30, 2009 as a short-term liability due to the
potential risk that, due to our Nasdaq listing status, Deerfield will have the
right to require redemption of these warrants within a one year period from June
30, 2009.  As the warrant redemption price is based on a
Black-Scholes-Merton calculation, the fair value of this liability is highly
dependent on the price of our common shares and the volatility of our
stock.  If Deerfield elects redemption of these warrants, the actual
redemption price may be materially different from the amount we have estimated
on June 30, 2009.




- 11
-





A summary
of the activity of the fair value of the warrant liability is as
follows:





Beginning
              Value of
              Warrant
              Liabilities
            
            
            Liability
              Incurred for
              Warrants Issued
              Pursuant to the
              Deerfield
              Agreement
            
            
            Realized
              (Gain)/Loss on
              Change in Fair
              Value of
              Warrant
              Liabilities
            
            
            Ending Fair
              Value of
              Warrant
              LiabilitiesFor
      the period ended June 30, 2009
            
            $
            1,450,479
            
            
            $
            —
            
            
            $
            2,157,109
            
            
            $
            3,607,588For
      the period ended June 30, 2008
            
            $
            4,232,355
            
            
            $
            —
            
            
            $
            (1,817,681
            )
            
            $
            2,414,674





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. On October 14, 2008 and November 12, 2008, the
Company drew down an additional $12.5 million and $2.5 million, respectively.
 The Company is not required to pay back any portion of the principal
amount until October 30, 2013. Of the $12.5 million borrowed on October 14,
2008, $7.5 million related to development milestones the Company had previously
achieved and was subsequently entitled to draw down additional funds pursuant to
the Deerfield agreement.  These warrants contained an anti-dilution
feature that provided Deerfield with the right to purchase shares of the
Company’s common stock equal to 2.625% of the total shares
outstanding.  Upon issuance of these shares, the fair value of the
warrants was determined and included as additional discount on the debt to
Deerfield.  Because the Company issued the warrants pursuant to the
loan, the Company recognized a discount on the note.  On May 20, 2009,
the Company drew down $5.0 million which was available pursuant to the terms of
the loan agreement.  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, 2009 and 2008:





Carrying
              Value at
              January 1,
            
            
            Gross
              Borrowings
              Incurred
            
            
            Debt
              Discount
              Incurred
            
            
            Amortized
              Discount
            
            
            Carrying
              Value at
              June
      30,2009Notes
      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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            22,176,8762008Notes
      payable
            
            $
            7,500,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            7,500,000Discount
      on debt
            
            
            (5,474,376)
            
            
            
            —
            
            
            
            —
            
            
            
            109,049
            
            
            
            (5,365,297)Carrying
      value
            
            $
            2,025,624
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,134,703





A summary
of the debt issuance costs and changes during the periods ending June 30, 2009
and 2008 is as follows:





Deferred
              Transaction
              Costs on
              January 1,
            
            
            Amortized
              Debt Issuance
              Costs
            
            
            Deferred
              Transaction
              Costs
      on
              June
      30,2009
            
            $
            1,361,356
            
            
            $
            (75,215)
            
            
            $
            1,286,1412008
            
            $
            1,423,380
            
            
            $
            (18,568)
            
            
            $
            1,404,812





NOTE 5. STOCKHOLDERS'
DEFICIT





Stock Incentive Plans. We
have two stockholder-approved stock incentive plans under which we grant or have
granted options to purchase shares of our common stock and restricted stock
awards to employees: the 2003 Stock Option Plan (the “2003 Plan”) and the 2004
Stock Incentive Plan (the “2004 Plan”). The Board of Directors or the Chief
Executive Officer, to the extent authorized by the Board, is responsible for
administration of the Company’s employee stock incentive plans and determines
the term, exercise price and vesting terms of each option. In general, stock
options issued under the 2003 Plan and 2004 Plan have a vesting period of three
years and expire ten years from the date of grant. We may grant a maximum of
7,000,000 shares for issuance under the 2004 plan and a maximum of 1,410,068
shares under the 2003 plan.




- 12
-





The
Company also has adopted the 2006 Employee Stock Purchase Plan (the “2006 Plan”)
under which the Company's eligible employees may purchase shares of the
Company’s common stock through lump sum payments or payroll deductions. The 2006
Plan is intended to qualify as an “employee stock purchase plan” under
Section 423 of the Internal Revenue Code. As adopted, the 2006 Plan
authorized the issuance of up to a maximum of 750,000 shares of common
stock.





Stock Options. The following
table summarizes information about stock options outstanding at June 30, 2009
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, 2009
            
            
            4,470,871
            
            
            $
            2.36Options
      granted
            
            
            1,265,000
            
            
            
            0.15Options
      cancelled
            
            
            (337,166
            )
            
            
            1.88Options
      exercised
            
            
            —
            
            
            
            —Outstanding
      June 30, 2009
            
            
            5,398,705
            
            
            
            1.87
            
            
            
            8.06
            
            
            $
            34,787Exercisable
      at June 30, 2009
            
            
            2,662,200
            
            
            $
            2.77
            
            
            
            7.15
            
            
            $
            32,897





Total
share-based compensation expense was approximately $0.6 million and $1.4 million
related to employee stock options recognized in the operating results for the
six months ended June 30, 2009 and 2008, respectively.




The
following table summarizes information about stock options outstanding at June
30, 2009:





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 - $ 0.14
            
            
            
            1,175,505
            
            
            $
            0.14
            
            9.3
      yrs
            
            
            70,505
            
            
            $
            0.07$0.21 - $ 1.18
            
            
            
            2,194,377
            
            
            
            0.98
            
            8.3
      yrs
            
            
            970,711
            
            
            
            1.02$1.33 - $ 2.41
            
            
            
            1,105,156
            
            
            
            1.69
            
            7.2
      yrs
            
            
            831,319
            
            
            
            1.68$4.51 - $ 10.98
            
            
            
            923,667
            
            
            
            6.41
            
            6.9
      yrs
            
            
            789,665
            
            
            
            6.34$0.07 - $10.98
            
            
            
            5,398,705
            
            
            $
            1.87
            
            8.1
      yrs
            
            
            2,662,200
            
            
            $
            2.77





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.  As of June 30,
2009, there were 553,324 shares available for issuance under this plan and an
additional 131,820 shares were issued on July 6, 2009.





Through
June 30, 2009, we have issued 198,676 shares under the 2006 Plan. For the six
months ended June 30, 2009 and 2008, the total share-based compensation expense
recognized related to the 2006 Plan under was approximately $9,000 and $62,000,
respectively.




- 13
-




Assumptions. The following
table summarizes the assumptions used in applying the Black-Scholes-Merton
option pricing model to determine the fair value of awards granted during the
three and six months ended June 30, 2009 and 2008, respectively:





Three Months Ended June 30,
            
            
            Six Months Ended June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008Employee stock
      optionsRisk-free
      interest rate
            
            
            1.90
            %
            
            
            2.65
            %
            
            
            1.90
            %
            
            
            2.65
            %Expected
      life (in years)
            
            
            5.5 –
      6.0
            
            
            
            5.5 –
      6.0
            
            
            
            5.5 –
      6.0
            
            
            
            5.5 –
      6.0Volatility
            
            
            0.85
            
            
            
            0.9
            
            
            
            0.85
      – 0.95
            
            
            
            0.9Dividend
      Yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Employee stock
      purchase planRisk-free
      interest rate
            
            
            0.27
      - 1.11
            %
            
            
            3.05-3.49
            %
            
            
            0.27
      - 1.11
            %
            
            
            3.05-49
            %Expected
      life (in years)
            
            
            0.5
      - 2.0
            
            
            
            0.5
      - 2.0
            
            
            
            0.5
      - 2.0
            
            
            
            0.5
      - 2.0Volatility
            
            
            1.73
      – 2.45
            
            
            
            0.75-0.80
            
            
            
            1.30
      – 2.45
            
            
            
            0.75-0.80Dividend
      Yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %





We estimate the fair value of each option award on the date of
grant using the Black-Scholes-Merton option-pricing model. As allowed by SFAS
No. 123R for companies with a short period of publicly traded stock
history, our estimate of expected volatility is based on the average expected
volatilities of a sampling of three companies with similar attributes to us,
including industry, stage of life cycle, size and financial leverage as well as
our own historical data. As we have so far only awarded “plain vanilla”
options as described by the SEC’s Staff Accounting Bulletin No. 107 (SAB
107), we used the “simplified method” for determining the expected life of the
options granted. Originally, under SAB 107, this method was allowed until
December 31, 2007.  However, on December 21, 2007, the SEC issued SEC’s
Staff Accounting Bulletin No. 110 (SAB 110), which will allow a Company to
continue to use the “simplified method” under certain circumstances, which we
will continue to use as we do not have sufficient historical data to estimate
the expected term of share-based award.  The risk-free rate for periods
within the contractual life of the option is based on the U.S. treasury yield
curve in effect at the time of grant valuation. SFAS No. 123R does not
allow companies to account for option forfeitures as they occur. Instead,
estimated option forfeitures must be calculated upfront to reduce the option
expense to be recognized over the life of the award and updated upon the receipt
of further information as to the amount of options expected to be forfeited.
Based on our historical information, we currently estimate that 22% annually of
our stock options awarded will be forfeited.





Warrants. As of June 30,
2009, all outstanding warrants were available for exercise. Warrants to acquire
258,927 shares of common stock at $1.85 per share expired in February of 2009.
 Warrants to acquire 892,326 shares of common stock at $1.57 per share
expire in April 2010. Warrants to acquire 864,648 shares of common stock at
$5.80 per share expire in October 2010.  Additionally, the Company has
issued warrants to acquire 6,119,521 shares of common stock to Deerfield in
accordance with the Company’s October 2007 loan agreement.  Certain of
these warrants contain an anti-dilution feature that automatically increases the
number of shares purchasable so that they always represent 17.625% of the
Company’s then outstanding common stock.  The majority of the warrants
issued to Deerfield expire in October 2013 with a smaller portion expiring in
October 2014.  The following table summarizes the warrants outstanding as
of June 30, 2009 and the changes in outstanding warrants in the period then
ended:





Number Of
              Shares Subject
              To Warrants
              Outstanding
            
            
            Weighted-Average
              Exercise PriceWarrants
      outstanding January 1, 2009
            
            
            8,123,956
            
            
            $
            1.83Warrants
      granted
            
            
            11,466
            
            
            
            1.31Warrants
      cancelled
            
            
            (258,927
            )
            
            
            1.85Warrants
      outstanding June 30, 2009
            
            
            7,876,495
            
            
            $
            1.83




- 14
-




NOTE
6. FAIR VALUE MEASUREMENTS




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




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




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




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




In
accordance with SFAS 157, the following table represents the fair value
hierarchy for our financial assets and liabilities held by the Company measured
at fair value on a recurring basis as of June 30, 2009:





Assets
            
            Level 1
            
            
            Level 2
            
            
            Level 3
            
            
            TotalMoney
      market funds
            
            $
            69,157
            
            
            $
            —
            
            
            $
            —
            
            
            $
            69,157Available-for-sale
      equity securities
            
            
            124,000
            
            
            
            —
            
            
            
            —
            
            
            
            124,000Total
            
            $
            193,157
            
            
            $
            —
            
            
            $
            —
            
            
            $
            193,157





Liabilities
            
            Level 1
            
            
            Level 2
            
            
            Level 3
            
            
            TotalWarrant
      liabilities
            
            
            —
            
            
            
            —
            
            
            $
            3,607,588
            
            
            $
            3,607,588Total
            
            $
            —
            
            
            $
            —
            
            
            $
            3,607,588
            
            
            $
            3,607,588





NOTE
7. AVAILABLE-FOR-SALE SECURITIES





On June
30, 2009, the Company had $124,000 in total marketable securities which
consisted of shares of NovaDel Pharma, Inc. (“NovaDel”) purchased in conjunction
with the Zensana license agreement.





During
the six months ended June 30, 2009, the Company recorded an unrealized loss of
$4,000, compared to an unrealized gain of $104,000 and a realized loss of
$108,000 for the six months ended June 30, 2008.  The following table
summarizes the NovaDel shares classified as available-for-sale securities during
the six months ended June 30, 2009 and 2008:





Beginning
              Value
            
            
            Net
              Unrealized
              Gain/(Loss)
            
            
            Gross
              Realized
              Gain/(Loss)
            
            
            Ending ValueSix
      months ended June 30, 2009
            
            $
            128,000
            
            
            $
            (4,000
            )
            
            $
            —
            
            
            $
            124,000Six
      months ended June 30, 2008
            
            $
            96,000
            
            
            $
            104,000
            
            
            $
            (108,000
            )
            
            $
            92,000








NOTE
8.  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities consist of the following at June 30, 2009 and
December 31, 2008:





June
      30,
              2009
            
            
            December
      31,
              2008Trade
      accounts payable
            
            $
            1,097,623
            
            
            $
            457,725Clinical
      research and other development related costs
            
            
            1,440,595
            
            
            
            2,554,374Accrued
      personnel related expenses
            
            
            223,554
            
            
            
            549,469Interest
      payable
            
            
            606,517
            
            
            
            478,332Accrued
      other expenses
            
            
            190,749
            
            
            
            185,963Total
            
            $
            3,559,038
            
            
            $
            4,225,863




- 15
-




NOTE
9. COMMITMENTS





Employment
Agreements.   On June 6, 2008, the Company entered into a new
employment agreement with its President and Chief Executive Officer. This
agreement provides for an employment term that expires in December 2010. The
minimum aggregate amount of gross salary compensation to be provided for over
the remaining term of the agreement amounted to approximately $0.6 million at
June 30, 2009.





The
Company entered into a written employment agreement with its Vice President and
Chief Financial Officer on December 18, 2006. As amended on October 31, 2008,
this agreement provides for an employment term that expires on October 31, 2009.
The minimum aggregate amount of gross salary compensation to be provided for
over the remaining term of the agreement amounted to approximately $0.1 million
at June 30, 2009.





Lease. The
Company entered into a three year sublease, which commenced on May 31, 2006, for
property at 7000 Shoreline Court in South San Francisco, California, where the
Company’s executive offices are located. In May 2008, the Company and its
sublessor entered into an amendment to the sublease agreement, which increased
the term of the lease from three years to four years. 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 $0.9 million at June 30, 2009.





NOTE
10. RESTRICTED CASH





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





NOTE
11. AMENDMENT TO TEKMIRA LICENSE AGREEMENT





On June
2, 2009, the Company and Tekmira executed an amendment to the license agreement
(the “Agreement”) originally entered into on May 6, 2006 and which was amended
on April 30, 2007.  The amendment, which was effective on May 27,
2009, makes the following material amendments to the Agreement:





·
            As
      amended, the amount of the milestone payment required to be made by the
      Company to Tekmira upon the FDA’s approval of a Marqibo new drug
      application (“NDA”) was increased.




·
            The
      Agreement previously required the Company to make milestone payments upon
      the dosing of the first patient in any clinical trial of each of Alocrest
      and Brakiva.  After giving effect to the Amendment, the
      Agreement now provides that such milestones are payable following the
      FDA’s acceptance for review of an NDA for such product
      candidates.  In addition, the milestone payments payable under
      the Agreement upon the FDA’s approval of an NDA for Alocrest and Brakiva
      were both increased in amount.




·
            The
      Amendment reduces the amount of Tekmira’s share of any payments received
      by the Company from third parties in consideration of sublicenses granted
      to such third parties or for royalties received by Hana from such third
      parties.




·
            The
      maximum aggregate amount of milestone payments for all product candidates
      was increased from $30.5 million to $37.0
  million.





As a
result of this amendment, the Company reversed recognition of a previously
accrued milestone payment to Tekmira which was achieved upon the enrollment of
the first patient in the Company’s phase 1 clinical trial in
Brakiva.





NOTE
12. SUBSEQUENT EVENT





The
Company performed an evaluation of subsequent events through the filing date
with the SEC or August 14, 2009.  No material subsequent events
occurred that have not been previously discussed or included in the financial
statements or the notes to the financial statements for this Form 10-Q for the
period ending June 30, 2009.




- 16
-





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




The following discussion of our
financial condition and results of operations should be read in conjunction with
the financial statements and the notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q. This discussion includes forward-looking
statements that involve risks and uncertainties. As a result of many factors,
such as those set forth under “Risk Factors” in Item 1A of Part I of the
2008 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.




·
            Menadione,
      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 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 anticipate that any revenues that we may recognize in
the near future will be related to upfront, milestone development funding
payments received pursuant to strategic license agreements or partnerships and
that we may have large fluctuations of revenue recognized from quarter to
quarter as a result of the timing and the amount of these payments. We may be
unable to control the development of commercialization of these products and may
be unable to estimate the timing and amount of revenue to be recognized pursuant
to these agreements. Revenue from these agreements and partnerships help us fund
our continuing operations. Our revenues may increase in the future if we are
able to develop and commercialize our products, license our technology and/or
enter into strategic partnerships. If we are unsuccessful, our future revenues
will decrease and we may be forced to limit our development of our product
candidates.




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 clinical development, manufacturing, legal
expenses resulting from intellectual property protection, business development
and organizational affairs and other expenses relating to the acquiring, design,
development, testing, and enhancement of our product candidates, including
milestone payments for licensed technology. We expense our research and
development costs as they are incurred.





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;




- 17
-





·
            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.




General
and Administrative Expenses





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





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




Share
Based Compensation




Effective
January 1, 2006, we adopted the provisions of SFAS No. 123R requiring that
compensation cost relating to all share-based employee payment transactions be
recognized in the financial statements. We adopted SFAS No. 123R using the
modified prospective method for share-based awards granted after we became a
public entity and the prospective method for share-based awards granted prior to
the time we became a public entity.  As allowed by SFAS No. 123R
for companies with a short period of publicly traded stock history, our estimate
of expected volatility is based on the average expected volatilities of a
sampling of three companies with similar attributes to us, including industry,
stage of life cycle, size and financial leverage as well as our own historical
data.  We use the “simplified method” for determining the expected
life of the options granted as permitted under the SEC’s Staff Accounting
Bulletin No. 110 (SAB 110), which will allow companies to continue to use the
“simplified method” under certain circumstances.  SFAS No. 123R
does not allow companies to account for option forfeitures as they occur.
Instead, estimated option forfeitures must be calculated upfront to reduce the
option expense to be recognized over the life of the award and updated upon the
receipt of further information as to the amount of options expected to be
forfeited. Based on our historical information, we currently estimate that 22%
annually of our stock options awarded will be forfeited.




See Note
5 of our unaudited financial statements included elsewhere in this Form 10-Q
report for further information regarding the SFAS No. 123R
disclosures.





Warrant
Liabilities





On
October 30, 2007, we entered into a loan facility agreement with certain
affiliates of Deerfield Management (“Deerfield”).  As partial consideration
for the loan, we also issued to Deerfield certain warrants to purchase shares of
our common stock.  Certain of these warrants include an anti-dilution
feature.  This feature requires that, as we issue additional shares of our
common stock during the term of the warrant, the number of shares purchasable
under this series is automatically increased so that they always represent a
fixed percentage of our then outstanding common stock.  Because the
warrants are redeemable if certain events occur, we record the fair value of the
warrants as a liability. We update our estimate of the fair value of the warrant
liabilities in each reporting period as new information becomes available and
any gains or losses resulting from the changes in fair value from period to
period are included as an increase or decrease of interest
expense.  See Note 4 of our unaudited financial statements included
elsewhere in this Form 10-Q report for further information regarding the warrant
liabilities.




- 18
-





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.





Recent
Accounting Pronouncements





Refer to
Note 3. “Recent Accounting Pronouncements,” in the accompanying notes to the
condensed consolidated financial statements for a discussion of recent
accounting pronouncements.





Results
of Operations





Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008




General and administrative
expenses. For the three months ended June 30, 2009, general and
administrative, or G&A, expense was $0.9 million, as compared to $1.7
million for the three months ended June 30, 2008.  The decrease of
$0.8 million is due to decreased personnel related expenses of $0.7 million and
decreased allocable expenses of $0.1 million.





The $0.7
million decrease in employee-related expenses includes:





·
            a
      decrease of $0.6 million in employee related share-based compensation
      expense due to decreased valuation of stock options issued to employees as
      a result of the decrease in value of the Company’s stock price
      and





·
            a
      decrease of $0.1 million in salary and benefits, due mainly to the
      reduction in headcount and decreased compensation measures.





The $0.1
million decrease of allocable expenses is mainly a result of cost reduction
measures undertaken by the Company to reduce our cash burn.




- 19
-




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, 2009 and 2008.  The table
also summarizes unallocated costs, which consist of personnel, facilities and
other costs not directly allocable to development programs.




For
      the Three Months
              Ended
      June 30,2009
            
            
            2008Product candidates
            
            ($
      in thousands)
            
            
            Annual %
              ChangeMarqibo
            
            $
            1,357
            
            
            $
            1,113
            
            
            
            22
            %Menadione
            
            
            142
            
            
            
            469
            
            
            
            -70
            %Brakiva
            
            
            89
            
            
            
            275
            
            
            
            -68
            %Alocrest
            
            
            6
            
            
            
            114
            
            
            
            -95
            %Discontinued/out-licensed
      product candidates
            
            
            0
            
            
            
            (19
            )
            
            
            -100
            %Total
      third party costs
            
            
            223
            
            
            
            984
            
            
            
            -77
            %Allocable
      costs and overhead
            
            
            297
            
            
            
            319
            
            
            
            -7
            %Personnel
      related expense
            
            
            1,090
            
            
            
            1,035
            
            
            
            5
            %Share-based
      compensation expense
            
            
            58
            
            
            
            129
            
            
            
            -55
            %Total
      research and development expense
            
            $
            3,262
            
            
            $
            4,419
            
            
            
            -26
            %




Marqibo.
 In the three
months ended June 30, 2009, we continued enrollment in our Phase 2,
registration-enabling, open-label trial in relapsed adult ALL, or rALLy study,
and our pilot Phase 2 trial in metastatic uveal melanoma. We plan to finish
enrollment in both of these trials by the end of 2009.  We plan to
initiate a confirmatory trial in the first half of 2010 and we also intend to
seek accelerated approval in the ALL indication by mid 2010, pending the results
of our Phase 2 study in relapsed adult ALL.  We expect to spend
approximately $4.0 million on external project costs relating to Marqibo in
2009, including the amounts expended in the first six months of 2009. We
estimate that we will need to expend at least an additional aggregate of
approximately $45 million in order for us to obtain full FDA approval for
Marqibo, if ever, which includes milestone payments that would be owed to our
licensor upon FDA approval.  Through June 30, 2009, we have spent
approximately $10.8 million on the development of Marqibo.  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.  For
the three months ended June 30, 2009, Marqibo costs increased by $0.2 million
compared to the same period in 2008, mostly related to increase spending on the
rALLy and uveal melanoma trials.





Menadione.
 In the three months ended June 30, 2009, we continued enrollment in our
Phase 1 clinical trials in Menadione in cancer patients which we plan to
complete by the end of 2009.  We plan to initiate a Phase 2 clinical
trial in cancer patients following the completion of the Phase 1
trial.  As this drug candidate is early in its clinical development,
both the registrational strategy and total expenditures to obtain FDA approval
are still being evaluated. Including the amounts expended in the first quarter
of 2009, we expect to spend approximately $3.0 million on external project costs
relating to Menadione in 2009, and we estimate that we will need to expend at
least an aggregate of approximately $40 million of additional funds in order for
us to obtain full FDA approval for Menadione, if ever, which includes milestone
payments that would be owed to our licensor upon FDA approval.  Through
June 30, 2009, we have spent approximately $6.6 million on the development of
Menadione.  We expect that it will take approximately two to three
years until we will have completed development and obtained FDA approval, if
ever. For the three months ended June 30, 2009, Menadione costs decreased by
$0.3 million.  The decrease was due to lower spending on the Phase 1
clinical trial as we reduced our costs to outside service providers for the
study and decreased manufacturing expenses.





Brakiva. We initiated a Phase 1 clinical trial in November 2008 and
continued enrollment in the six months ended June 30, 2009. We plan to complete
enrollment in this clinical trial in 2010 and expect that we will expend
approximately $0.5 million in 2009, including the amounts expended in the first
quarter of 2009.  We are exploring options for further development of
Brakiva beyond the phase 1 trial.  As this drug candidate is early in
its clinical development, both the registrational strategy and total
expenditures to obtain FDA approval are still being
evaluated.  Through June 30, 2009, we have spent approximately $3.7
million on the development of Brakiva.  For the three months ended
June 30, 2009, Brakiva costs decreased by $0.2 million.  The decrease
was due to lower spending on manufacturing the drug as most manufacturing for
the Phase 1 trial was performed in 2008.





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 2009.  Through June 30, 2009, we have
spent approximately $3.5 million on the development of Alocrest.  For
the three months ended June 30, 2009, Alocrest costs decreased by $0.1
million.  The decrease was due to the decreased cost of the Phase 1
clinical trail that finished enrollment in 2008.




- 20
-





Discontinued/Out-licensed
projects. We did not pursue development on our
discontinued/out-licensed product candidates in the three months ended June 30,
2009, which includes Zensana which was out-licensed in 2007, and IPdR and
Talvesta, which were terminated in 2006 and 2007, respectively.  We
may incur only incidental expenses in 2009 related to the continued disposition
of these terminated products.





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates decreased in the three months ended
June 30, 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 R&D functions including
data management, regulatory and clinical development.  We expect these
costs to remain low in 2009 compared to 2008 as we seek to reduce external costs
in order to reduce our cash burn rate.  If we are able to obtain our
desired funding, we expect these costs to rise in the next twelve months as we
finish the rALLy study in Marqibo and prepare for the Phase 2 study in Menadione
and the confirmatory study for Marqibo as well as prepare for a possible NDA
submission for Marqibo in the ALL indication.  Allocable costs
decreased slightly as a result of cost-cutting measures that we
pursued.  We expect these costs to decrease in 2009 compared to
2008.  Personnel related costs increased slightly in the three months
ended June 30, 2009 and we expect these costs to remain slightly higher in 2009
due to certain executive positions that have been filled in later 2008 and early
2009.  Stock compensation expense decreased the value of options
issued in recent periods is less then those issued in previous
periods.  We expect share-based compensation will continue to decrease
until our stock price increases or the amount of options issued
increases.





Interest income. For the
three months ended June 30, 2009, interest income was less than $1,000 compared
to interest income of $0.1 million for the three months ended June 30, 2008. The
change is a result of decreased cash balances in our interest bearing accounts
as well as decreasing interest rates.





Interest expense. For the
three months ended June 30, 2009, interest expense was $0.8 million as compared
to interest expense of $0.3 million for the three months ended June 30, 2008.
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 warrant liabilities. For the three months ended June 30,
2009, we recognized a loss related to the change in fair market value of the
warrant liabilities, pursuant to the warrants issued to Deerfield as part of the
Facility Loan Agreement (see Note 4) of $2.8 million.  In three months
ended June 30, 2008, we recognized a gain on this warrant liability of
approximately $1.8 million.  The value of these warrants is largely
dependent on the price of our common stock, and as the stock price increases,
the value of these warrants will increase and our loss on the change in market
value will increase.





Impairment on
investments.For the three months ended June 30, 2009, we did
not recognize any impairment on our available-for-sale
securities.  For three months ended June 30, 2008, we recognized an
other-than-temporary impairment in the available-for-sale securities of
$108,000.





Six Months Ended June 30, 2009 Compared to Six Months Ended June
30, 2008




General and administrative
expenses. For the six months ended June 30, 2009, general and
administrative, or G&A, expense was $2.0 million, as compared to $3.7
million for the six months ended June 30, 2008.  The decrease of $1.7
million is due to decreased personnel related expenses of $1.1 million,
decreased costs for outside services and professional services of $0.4 million
and decreased allocable expenses of $0.2 million.





The $1.1
million decrease in employee-related expenses includes:





·
            a
      decrease of $0.9 million in employee related share-based compensation
      expense due to decreased valuation of stock options issued to employees as
      a result of the decrease in value of the Company’s stock price
      and





·
            a
      decrease of $0.2 million in salary and benefits, due mainly to the
      reduction in headcount and decreased compensation measures.





The $0.4
million decrease in outside services and professional fees
includes:





·
            a
      decrease of $0.2 million in market research on our leading product
      candidates and





·
            a
      decrease of $0.2 million in legal, accounting and other consulting
      fees.





The $0.2
million decrease of allocable expenses is mainly a result of cost reduction
measures undertaken by the Company to decelerate our cash burn.




- 21
-




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, 2009 and 2008.  The table
also summarizes unallocated costs, which consist of personnel, facilities and
other costs not directly allocable to development programs.




For
      the Six Months
              Ended
      June 30,2009
            
            
            2008
            
            
            Annual %Product candidates ($ in thousands)for the six months ended June
      30
            
            ($
      in thousands)
            
            
            ChangeMarqibo
            
            $
            2,579
            
            
            $
            1,992
            
            
            
            29
            %Menadione
            
            
            573
            
            
            
            816
            
            
            
            -30
            %Brakiva
            
            
            224
            
            
            
            852
            
            
            
            -74
            %Alocrest
            
            
            (7
            )
            
            
            420
            
            
            NADiscontinued/out-licensed
      product candidates
            
            
            3
            
            
            
            (10
            )
            
            NATotal
      third party costs
            
            
            1,048
            
            
            
            1,467
            
            
            
            -29
            %Allocable
      costs and overhead
            
            
            603
            
            
            
            731
            
            
            
            -18
            %Personnel
      related expense
            
            
            2,439
            
            
            
            2,208
            
            
            
            10
            %Share-based
      compensation expense
            
            
            263
            
            
            
            208
            
            
            
            26
            %Total
      research and development expense
            
            $
            7,725
            
            
            $
            8,684
            
            
            
            -11
            %





Marqibo.
 For the six
months ended June 30, 2009, Marqibo costs increased by $0.6 million compared to
the same period in 2008, mostly related to increase spending on the rALLy and
uveal melanoma trials .





MenadioneFor
the six months ended June 30, 2009, Menadione costs decreased by $0.2
million.  The decrease was due to lower spending on the Phase 1
clinical trial as we reduced our costs to outside service providers for the
study and decreased manufacturing expenses.





Brakiva. For the six months ended June 30, 2009, Brakiva costs decreased by
$0.6 million.  The decrease was due to lower spending on manufacturing
the drug as most manufacturing for the Phase 1 trial was performed in
2008.





Alocrest. For the three months ended June 30, 2009, Alocrest costs decreased
by $0.4 million.  The decrease was due to the decreased cost of the
Phase 1 clinical trail that finished enrollment in 2008





Discontinued/Out-licensed
projects. We did not pursue development on our
discontinued/out-licensed product candidates in the six months ended June 30,
2009, which includes Zensana which was out-licensed in 2007, and IPdR and
Talvesta, which were terminated in 2006 and 2007, respectively.  We
may incur only incidental expenses in 2009 related to the continued disposition
of these terminated products.





Other R&D
expenses. Third-party costs related to indirect support of
our clinical trials and product candidates decreased by $0.4 million in the
three months ended June 30, 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 R&D
functions including data management, regulatory and clinical
development.  We expect these costs to remain low in 2009 compared to
2008 as we seek to reduce external costs in order to reduce our cash burn
rate.  If we are able to obtain our desired funding, we expect these
costs to rise in the next twelve months as we finish the rALLy study in Marqibo
and prepare for the Phase 2 study in Menadione and the confirmatory study for
Marqibo as well as prepare for a possible NDA submission for Marqibo in the ALL
indication.  Allocable costs decreased by $0.1 million as a result of
cost-cutting measures that we have pursued.  We expect these costs to
continue to decrease in 2009 compared to 2008.  Personnel related
costs increased slightly in the six months ended June 30, 2009 and we expect
these costs to remain slightly higher in 2009 due to certain executive positions
that have been filled in later 2008 and early 2009.  Stock
compensation expense increased slightly due to a large credit to expense when
certain key executives terminated last year and a portion of their previously
expensed stock compensation expense previously taken was
reversed.  This is partially off-set by the decrease in the value of
options issued in recent periods is less then those issued in previous
periods.  We expect share-based compensation will decrease in the
future until our stock price increases or the amount of options issued
increases.





Interest income. For the six
months ended June 30, 2009, interest income was approximately $12,000 compared
to interest income of $0.2 million for the six months ended June 30, 2008. The
change is a result of decreased cash balances in our interest bearing accounts
as well as decreasing interest rates.




- 22
-





Interest expense. For the six
months ended June 30, 2009, interest expense was $1.6 million as compared to
interest expense of $0.5 million for the six months ended June 30, 2008. 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 warrant liabilities. For the six months ended June 30,
2009, we recognized a loss related to the change in fair market value of the
warrant liabilities, pursuant to the warrants issued to Deerfield as part of the
Facility Loan Agreement (see Note 4) of $2.2 million.  In six months ended
June 30, 2008, we recognized a gain on this warrant liability of approximately
$1.8 million.  The value of these warrants is largely dependent on the
price of our common stock, and as the stock price increases, the value of these
warrants will increase and our loss on the change in market value will
increase.





Impairment on
investments.For the six months ended June 30, 2009, we did no
recognize any impairments on our available-for-sale securities.  For
six months ended June 30, 2008, we recognized an other-than-temporary impairment
in the available-for-sale securities of $108,000





Liquidity
and Capital Resources




As of
June 30, 2009, we had aggregate cash and cash equivalents and available-for-sale
securities of $8.3 million. In addition, pursuant to the Deerfield loan
facility, we have $2.5 million that may become available to us if we achieve a
certain milestone in the development of our product candidate
Menadione.  We anticipate that we will achieve this milestone by the
end of 2009.  As of June 30, 2009, we had drawn down $27.5 million of
the total $30 million available under the agreement.





Through
June 30, 2009, we have an accumulated deficit of $124.5
million.  Management expects this deficit to increase in future
periods as we continue to develop our product candidates.  We expect
to incur sizeable expenses in our Marqibo development program as we expect to
complete enrollment in the Phase 2 registration-enabling study in the second
half of 2009.  We also expect to incur considerable expenses in the
development of Menadione as we anticipate the initiation of a Phase 2 clinical
trial in the fourth quarter of 2009.  Our continued operations will
depend on whether we are able to raise additional funds through various
potential sources, such as equity and debt financing. Through June 30, 2009, a
significant portion of our financing has been and will continue to be through
private placements of common stock, preferred stock and debt
financing.





We can
give no assurances that any additional capital that we are able to obtain will
be sufficient to meet our needs which raises substantial doubt about our ability
to continue operating as a going concern.  Given the current and
desired pace of clinical development of our product candidates, we estimate that
we only have sufficient cash on hand to fund clinical development into the
fourth quarter of 2009.  We will be forced to raise additional capital
in 2009 in order to fund our future development activities, likely by selling
shares of our capital stock or through debt financing. If we are unable to raise
additional capital or enter into strategic partnerships and/or license
agreements, we will be required to cease operations or curtail our desired
development activities, which will delay the development of our product
candidates.  There can be no assurance that such capital will be
available to us on favorable terms or at all, particularly in light of the
general economic conditions, which have severely limited our access to the
capital markets. We will need additional financing thereafter until we can
achieve profitability, if ever.




Further,
the terms of certain warrants issued to Deerfield pursuant to our loan facility
provide that Deerfield may require us to redeem the warrants upon the occurrence
of certain events, including the delisting of our common stock from a national
securities exchange. We currently face being delisted from the Nasdaq Capital
Market, unless by September 1, 2009 we are able regain compliance with Nasdaq’s
continued listing rules, which require that we have at least $2.5 million in
stockholders’ equity or the aggregate value of our outstanding common stock is
at least $35 million.  Our estimates that we will have sufficient cash
to fund our planned operations into the fourth quarter of 2009 assume that we
would not be required to redeem the Deerfield warrants.  As of June
30, 2009, the redemption price that would be payable to Deerfield in the event
it made such election was approximately $2.9 million.  If one of the
events that triggers Deerfield’s right to require the Company to redeem the
warrants occurs, and Deerfield exercises such right, our remaining cash
resources available to fund our product development activities would be
substantially reduced and would have a material adverse impact on our business
prospects and financial condition.  In such event, we would be
required to significantly curtail our activities and may be required to cease
operating activities altogether, unless we are able to secure additional capital
from a financing or other strategic transaction.


Current and Future Financing
Needs. We currently do not have enough capital resources to fund our
entire development plan through 2009. Our plan of operation for the year ending
December 31, 2009 is to continue implementing our business strategy, including
the continued development of our four product candidates that are currently in
various clinical phases.  We expect our principal expenditures during the
next 12 months to include:




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




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




As part
of our planned research and development, we intend to use clinical research
organizations and third parties to help perform our clinical studies and
manufacturing. As indicated above, at our current and desired pace of clinical
development of our product candidates, over the next 12 months we expect to
spend approximately between $16.0 million and $18.0 million on clinical
development (including milestone payments of $0.3 million that we expect to be
triggered under the license agreements relating to our product candidates, half
of which can be satisfied through the issuance of new shares of our common stock
at our discretion).  We expect to spend approximately $4.0 million on
general corporate and administrative expenses as well as $0.6 million on
facilities and rent.





We
believe that our cash, cash equivalents and marketable securities, which totaled
$8.3 million as of June 30, 2009, will be sufficient to meet our anticipated
operating needs into the fourth quarter of 2009 based upon current operating and
spending assumptions. However, we expect to incur substantial expenses as we
continue our drug development efforts, particularly to the extent we advance our
lead candidate Marqibo through a pivotal clinical study. Additionally, if we are
required to make a warrant redemption payment to Deerfield (see Note 4 in the
“Notes to Unaudited Condensed Financial Statements” of the form 10-Q) this will
have a significant negative impact on our ability to continue as a going concern
into the fourth quarter of 2009.  We cannot guarantee that future
financing will be available in amounts or on terms acceptable to us, if at
all.




- 23
-





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 clinical
testing;




·
            costs
      of establishing arrangements for manufacturing our product
      candidates;




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




·
            costs,
      timing and outcome of regulatory
reviews;




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




·
            costs
      of increased general and administrative
  expenses.




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




- 24
-





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
4T. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation as of June 30, 2009, 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, 2009, 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.




- 25
-





PART
II - OTHER INFORMATION





Item
1. Legal Proceedings







Item 1A.  Risk Factors.
 
 Investment
in our common stock involves significant risk. You should carefully consider the
information described in the following risk factors, together with the other
information appearing elsewhere in this report, before making an investment
decision regarding our common stock. You should also consider the risk factors
set forth in our Annual Report on Form 10-K for the year ended December 31, 2008
(“2008 Annual Report”) under the caption “Item 1A. Risk Factors.”  If
any of the risks described below or our 2008 Annual Report actually occur, our
business, financial conditions, results of operation and future growth prospects
would likely be materially and adversely affected. In these circumstances, the
market price of our common stock could decline, and you may lose all or a part
of your investment in our common stock. Moreover, the risks described below and
in our 2008 Annual Report are not the only ones that we face. Additional risks
not presently known to us or that we currently deem immaterial may also affect
our business, operating results, prospects or financial
condition.
 
 We
need to raise additional capital to fund our planned operations for the
remainder of 2009 and beyond. If we are unable to raise additional capital when
needed, we will have to discontinue our product development programs or
relinquish our rights to some or all of our product candidates. The manner in
which we raise any additional funds may affect the value of your investment in
our common stock.
 
 Together
with our existing cash, cash equivalents, available for sale securities and
lending commitments, we believe that our currently available capital is only
sufficient to fund our operations through the third quarter of 2009 and into the
fourth quarter of 2009.  Given our desired clinical development plans
for the next 12 months, our financial statements reflect a going concern
uncertainty, which is also stated in the report from our auditors on the audit
of our financial statements as of and for the year ended December 31,
2008.  Accordingly, we need additional capital to fund our operations
beyond such point.  Further, our available capital may be consumed
sooner than we anticipate depending on a variety of factors,
including:
 
 ·
              costs
      associated with conducting our ongoing and planned clinical
      trials;
 
 ·
              costs,
      timing and outcome of regulatory
reviews;
 
 ·
              costs
      of establishing arrangements for manufacturing our product
      candidates;
 
 ·
              costs
      associated with commercializing our lead programs, including establishing
      sales and marketing functions;
 
 ·
              payments
      required under our current and any future license agreements and
      collaborations;
 
 ·
              costs
      of obtaining, maintaining and defending patents on our product candidates;
      and
 
 ·
              costs
      of acquiring any new drug
candidates.
 
 Since we
do not generate any recurring revenue, the most likely sources of such
additional capital include private placements of our equity securities,
including our common stock, debt financing or from a potential strategic
licensing or collaboration transaction involving the rights to one or more of
our product candidates.  To the extent that we raise additional
capital by issuing equity securities, our stockholders will likely experience
significant dilution. We may also grant future investors rights superior to
those of our current stockholders. If we raise additional funds through
collaborations and licensing arrangements, it may be necessary to relinquish
some rights to our technologies, product candidates or products, or grant
licenses on terms that are not favorable to us. If we raise additional funds by
incurring debt, we could incur significant interest expense and become subject
to covenants in the related transaction documentation that could affect the
manner in which we conduct our business.
 
 However,
we have no committed sources of additional capital and our access to capital
funding is always uncertain. This uncertainty is exacerbated due to the current
global economic turmoil, which has severely restricted access to the U.S. and
international capital markets, particularly for biopharmaceutical and
biotechnology companies. Accordingly, despite our ability to secure adequate
capital in the past, there is no assurance that additional equity or debt
financing will be available to us when needed, on acceptable terms or even at
all. If we fail to obtain the necessary additional capital when needed, we will
be forced to significantly curtail our planned research and development
activities, which will cause a delay in our drug development
programs.  If we do not obtain additional capital before we have
consumed our currently available resources, we may be forced to cease our
operations altogether, in which case you will lose your entire investment in our
company.
 
 
 We
must regain compliance with the continued listing requirements of the Nasdaq
Stock Market by September 1, 2009 or our common stock will be delisted from the
Nasdaq Capital Market.  Delisting of our common stock may trigger
significant payments to certain of our warrant holders, which would have a
serious adverse impact on our financial condition and business
prospects.
 
 Our
common stock is currently listed for trading on the Nasdaq Capital Market, and
the continued listing of our common stock on the Nasdaq Capital Market is
subject to our compliance with a number of listing standards. On November
19, 2008, we received notice from Nasdaq informing us that that we were not in
compliance with Nasdaq Marketplace Rule 5550(b), which requires us to have a
minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of
listed securities or $500,000 of net income from continuing operations for the
most recently completed fiscal year or two of the three most recently completed
fiscal years.  We received an extension until March 4, 2009
to regain compliance with these requirements, but were unable to
comply.  As a result, on March 5, 2009, we received notice that
our common stock would be subject to delisting from the Nasdaq Capital
Market.  On March 12, 2009, we submitted an appeal of the delisting
determination to a Nasdaq Hearings Panel pursuant to applicable Nasdaq rules and
in June 2009, that panel granted our request to have until September 1, 2009 in
which to regain compliance with Rule 5550(b).  We have been informed
that Nasdaq rules do not permit discretion for any further extension beyond
September 1, 2009.  Accordingly, unless we regain compliance with Rule
5550(b) by such date, we expect Nasdaq will delist our common stock from the
Nasdaq Capital Market.
 
 If our
common stock is delisted from the Nasdaq Capital Market, trading in our common
stock would likely be conducted on the OTC Bulletin Board, a regulated quotation
service, or the “Pink Sheets.”  If trading of our common stock is
conducted on the OTC Bulletin Board or Pink Sheets, the liquidity of our common
stock may be reduced, not only in terms of the number of shares that can be
bought and sold at a given price, but also through delays in the timing of
transactions and reduction in security analysts’ and the media’s coverage of us.
This may result in lower prices for our common stock than might otherwise be
obtained and could also result in a larger spread between the bid and asked
prices for our common stock.
 
 Additionally,
if our common stock is delisted from the Nasdaq Capital Market, we may be
required to redeem the warrants we have issued to affiliates of Deerfield
Management pursuant to our October 2007 loan agreement.  Those
warrants contain a provision that allows Deerfield to require us to redeem the
warrants in the event our common stock is no longer listed on the Nasdaq or
another national stock exchange.  The redemption price applicable to
the warrants is based upon a Black-Scholes-Merton calculation,  as
specified in the warrant agreement.  As of June 30, 2008, the total
redemption price that would be applicable to all of the warrants issued to
Deerfield is approximately $2.9 million.  Our estimates concerning the
timing of our need for additional capital, as discussed elsewhere in this
report, do not assume that will be required to redeem the Deerfield
warrants.  If we are required to redeem these warrants, we will
exhaust our available capital much sooner than anticipated, even as soon as
prior to the end of the third quarter of 2009, unless we obtain additional
capital before then.  Without additional capital, such reduction in
our available working capital will have a serious adverse effect on our ability
to fund our ongoing operations and may require us to significantly curtail, or
cease altogether, our operating activities.




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





None





Item
3. Defaults Upon Senior Securities





Not
applicable





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





We held
our Annual Meeting of Stockholders at the Radisson Sierra Point Hotel, 5000
Sierra Point Parkway in Brisbane, California on May 28, 2009. At the meeting,
our stockholders elected six directors to serve until the next Annual Meeting of
Stockholders. The stockholders present in person or by proxy cast the following
numbers of votes in connection with the election of directors, resulting in the
election of the six persons identified below:




Nominee
            
            Votes
      For
            
            Votes
      WithheldArie
      S. Belldegrun
            
            
            15,744,105
            
            
            826,224Steven
      R. Deitcher
            
            
            15,744,105
            
            
            826,204Paul
      V. Maier
            
            
            15,083,728
            
            
            1,486,601Leon
      E. Rosenberg
            
            
            15,736,207
            
            
            834,122Michael
      Weiser
            
            
            15,707,033
            
            
            863,296Linda
      E. Wiesinger
            
            
            15,658,949
            
            
            911,380




Item
5. Other Information
 
 As
previously disclosed, on May 6, 2006, the Company and Tekmira
Pharmaceuticals Corporation, formerly Inex Pharmaceuticals Corporation, entered
into a license agreement, which was amended and restated on April 30, 2007 (the
“Agreement”), pursuant to which the Company acquired exclusive, worldwide rights
to develop and commercialize Marqibo, Brakiva and Alocrest.  On June
2, 2009, the Company and Tekmira entered into Amendment No. 1 to the Agreement,
which was effective as of May 27, 2009 (the “Amendment”).  In its
Current Report on Form 8-K filed with the SEC on June 8, 2009, the Company
erroneously stated that the milestone payment triggered on the FDA’s acceptance
for review of a new drug application (“NDA”) for Marqibo had been removed from
the Agreement; such milestone payment, in fact, remains.
 
 The
following is a corrected summary of the material amendments to the Agreement as
a result of the Amendment:
  ·
              The
      amount of the milestone payment required to be made by the Company to
      Tekmira upon the FDA’s approval of a Marqibo NDA was
      increased.
  ·
              The
      Agreement previously required the Company to make milestone payments upon
      the dosing of the first patient in any clinical trial of each of Alocrest
      and Brakiva.  After giving effect to the Amendment, the
      Agreement now provides that such milestones are payable following the
      FDA’s acceptance for review of an NDA for such product
      candidates.  In addition, the milestone payments payable under
      the Agreement upon the FDA’s approval of an NDA for Alocrest and Brakiva
      were both increased in amount.
  ·
              The
      Amendment reduces the amount of Tekmira’s share of any payments received
      by the Company from third parties in consideration of sublicenses granted
      to such third parties or for royalties received by Hana from such third
      parties.
  ·
              The
      maximum aggregate amount of milestone payments for all product candidates
      was increased from $30.5 million to $37.0
  million.
  The
foregoing description of the material terms of the Amendment does not
purport to be a complete description of the rights and obligations of the
parties thereunder and is qualified in its entirety by reference to the
Amendment, a copy of which is filed as Exhibit 10.1 hereto.


Item
6. Exhibits





Exhibit No.
            
            Description10.1
            
            Amendment
      No. 1 dated June 2, 2009 to Amended and Restated License Agreement dated
      April 30, 2007 between Hana Biosciences, Inc. and Tekmira Pharmaceuticals
      Corp.++31.1
            
            Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
            
            Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).




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




- 26
-





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 14, 2009
            By:
            /s/ Steven
      R. Deitcher, MDSteven
      R. Deitcher, MDPresident
      and Chief Executive OfficerDated:
      August 14, 2009
            By:
            /s/ John
      P. IparraguirreJohn
      P. Iparraguirre
              Vice
      President, Chief Financial Officer




- 27
-





Index
to Exhibits Filed with this Report




Exhibit No.
            
            Description10.1
            
            Amendment
      No. 1 dated June 2, 2009 to Amended and Restated License Agreement dated
      April 30, 2007 between Hana Biosciences, Inc. and Tekmira Pharmaceuticals
      Corp.++31.1
            
            Certification
      of Chief Executive Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).31.2
            
            Certification
      of Chief Financial Officer, as required by Rule 13a-14(a) or Rule
      15d-14(a).32.1
            
            Certification
      of Chief Executive Officer and Chief Financial Officer, as required
      by Section 1350 of Chapter 63 of Title 18 of the United States Code (18
      U.S.C. 1350).





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




- 28
-