UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form 10-Q





(Mark
One)


þ
            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


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





Commission
File Number 001-33484





ZIOPHARM
Oncology, Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                  (State
      or other jurisdiction of
                  incorporation
      or organization)
                
                84-1475642
                  (I.R.S.
      Employer
                  Identification
      No.)




1180
Avenue of the Americas, 19th Floor,
New York, NY 10036


(646) 214-0700


(Address,
including zip code, and telephone number, including


area
code, of registrant’s principal executive offices)




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 than the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes: þNo:  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, 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:  ̈No:  ̈





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





Large accelerated filer  ̈
              Accelerated filer  ̈
              Non-accelerated filer  ̈
              Smaller reporting company þ(Do not check if a 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: þ





The
number of shares of the registrant’s Common Stock, $.001 par value, outstanding
as of August 10, 2009, was 21,790,964 shares.








ZIOPHARM
Oncology, Inc. (a development stage company)





Table
of Contents





PagePart
      I - Financial InformationItem 1.
                                                            Financial
      StatementsBalance
      Sheets as of June 30, 2009 and December 31, 2008
    (unaudited)
                                                            
                                                            
                                                            3Statements
      of Operations for the three and six months ended June 30, 2009 and 2008
      and the period from September 9, 2003 (date of inception) through June 30,
      2009 (unaudited)
                                                            
                                                            
                                                            4Statements
      of Cash Flows for the six months ended June 30, 2009 and 2008 and the
      period from September 9, 2003 (date of inception) through June 30, 2009
      (unaudited)
                                                            
                                                            
                                                            5Notes
      to Financial Statements (unaudited)
                                                            
                                                            
                                                            6Item 2.
                                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                            
                                                            
                                                            16Item 3.
                                                            Quantitative
      and Qualitative Disclosures about Market Risk
                                                            
                                                            
                                                            24Item 4.
                                                            Controls
      and Procedures
                                                            
                                                            
                                                            24Part
      II - Other InformationItem 1.
                                                            Legal
      Proceedings
                                                            
                                                            
                                                            25Item 1A.
                                                            Risk
      Factors
                                                            
                                                            
                                                            25Item 2.
                                                            Unregistered
      Sale of Equity Securities and Use of Proceeds
                                                            
                                                            
                                                            37Item 3.
                                                            Defaults
      upon Senior Securities
                                                            
                                                            
                                                            37Item 4.
                                                            Submission
      of Matters to a Vote of Security Holders
                                                            
                                                            
                                                            37Item 5.
                                                            Other
      Information
                                                            
                                                            
                                                            37Item 6.
                                                            Exhibits
                                                            
                                                            
                                                            37SIGNATURES
                                                            
                                                            
                                                            38


2


Part
I - Financial Information





Item 1.
Consolidated Financial Statements





ZIOPHARM
Oncology, Inc. (a development stage company)





BALANCE
SHEETS


(unaudited)





(in
thousands, except share and per share data)





June 30,
                
                
                December 31,2009
                
                
                2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                4,543
                
                
                $
                11,379Prepaid
      expenses and other current assets
                
                
                153
                
                
                
                327Total
      current assets
                
                
                4,696
                
                
                
                11,706Property
      and equipment, net
                
                
                406
                
                
                
                489Deposits
                
                
                87
                
                
                
                87Other
      non current assets
                
                
                242
                
                
                
                291Total
      assets
                
                $
                5,431
                
                
                $
                12,573LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                1,606
                
                
                $
                2,639Accrued
      expenses
                
                
                1,730
                
                
                
                3,137Deferred
      rent - current portion
                
                
                39
                
                
                
                -Total
      current liabilities
                
                
                3,375
                
                
                
                5,776Deferred
      rent
                
                
                90
                
                
                
                58Warrant
      liabilities
                
                
                288
                
                
                
                -Total
      liabilities
                
                
                3,753
                
                
                
                5,834Commitments
      and contingencies (note 4)Stockholders'
      equity:Common
      stock, $.001 par value; 280,000,000 shares authorized; 21,790,964 and
      21,860,464 shares issued and outstanding at June 30, 2009 and December 31,
      2008, respectively
                
                
                22
                
                
                
                22Preferred
      stock, $0.01 par value; 30,000,000 shares authorized and no shares issued
      and outstanding
                
                
                -
                
                
                
                -Additional
      paid-in capital
                
                
                72,024
                
                
                
                71,274Warrants
      issued
                
                
                18,865
                
                
                
                20,504Deficit
      accumulated during the development stage
                
                
                (89,233
                )
                
                
                (85,061
                )Total
      stockholders' equity
                
                
                1,678
                
                
                
                6,739Total
      liabilities and stockholders' equity
                
                $
                5,431
                
                
                $
                12,573







The
accompanying notes are an integral part of the unaudited interim financial
statements.


3


ZIOPHARM
Oncology, Inc. (a development stage company)





STATEMENTS
OF OPERATIONS


(unaudited)





(in
thousands, except share and per share data)





Period fromSeptember 9, 2003(date of inception)For the Three Months Ended June 30,
                        
                        
                        For the Six Months Ended June 30,
                        
                        
                        through2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        June 30, 2009Research
      contract revenue
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Operating
      expenses:Research
      and development, including costs of research contracts
                        
                        
                        501
                        
                        
                        
                        4,266
                        
                        
                        
                        2,109
                        
                        
                        
                        10,341
                        
                        
                        
                        56,459General
      and administrative
                        
                        
                        1,692
                        
                        
                        
                        2,350
                        
                        
                        
                        3,415
                        
                        
                        
                        5,094
                        
                        
                        
                        38,023Total
      operating expenses
                        
                        
                        2,193
                        
                        
                        
                        6,616
                        
                        
                        
                        5,524
                        
                        
                        
                        15,435
                        
                        
                        
                        94,482Loss
      from operations
                        
                        
                        (2,193
                        )
                        
                        
                        (6,616
                        )
                        
                        
                        (5,524
                        )
                        
                        
                        (15,435
                        )
                        
                        
                        (94,482
                        )Other
      income (expense), net
                        
                        
                        2
                        
                        
                        
                        115
                        
                        
                        
                        2
                        
                        
                        
                        311
                        
                        
                        
                        3,899Change
      in fair value of warrants
                        
                        
                        (208
                        )
                        
                        
                        -
                        
                        
                        
                        (216
                        )
                        
                        
                        -
                        
                        
                        
                        1,350Net
      loss
                        
                        $
                        (2,399
                        )
                        
                        $
                        (6,501
                        )
                        
                        $
                        (5,738
                        )
                        
                        $
                        (15,124
                        )
                        
                        $
                        (89,233
                        )Basic
      and diluted net loss per share
                        
                        $
                        (0.11
                        )
                        
                        $
                        (0.31
                        )
                        
                        $
                        (0.27
                        )
                        
                        $
                        (0.71
                        )Weighted
      average common shares outstanding used to compute basic and diluted net
      loss per share
                        
                        
                        21,307,297
                        
                        
                        
                        21,228,964
                        
                        
                        
                        21,305,824
                        
                        
                        
                        21,228,964





The
accompanying notes are an integral part of the unaudited interim financial
statements.


4





ZIOPHARM
Oncology, Inc. (a development stage company)





STATEMENTS
OF CASH FLOWS


(unaudited)





(in
thousands)




Period fromSeptember 9, 2003(date of inception)For the Six Months Ended June 30,
                
                
                through2009
                
                
                2008
                
                
                June 30, 2009Cash
      flows from operating activities:Net
      loss
                
                $
                (5,738
                )
                
                $
                (15,124
                )
                
                $
                (89,233
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                169
                
                
                
                189
                
                
                
                1,299Stock-based
      compensation
                
                
                749
                
                
                
                971
                
                
                
                7,473Change
      in fair value of warrants
                
                
                216
                
                
                
                -
                
                
                
                (1,350
                )Loss
      on disposal of fixed assets
                
                
                -
                
                
                
                -
                
                
                
                9Change
      in operating assets and liabilities:(Increase)
      decrease in:Prepaid
      expenses and other current assets
                
                
                174
                
                
                
                261
                
                
                
                (153
                )Other
      noncurrent assets
                
                
                48
                
                
                
                (3
                )
                
                
                (242
                )Deposits
                
                
                -
                
                
                
                (3
                )
                
                
                (87
                )Increase
      (decrease) in:Accounts
      payable
                
                
                (1,033
                )
                
                
                (1,009
                )
                
                
                1,606Accrued
      expenses
                
                
                (1,407
                )
                
                
                885
                
                
                
                1,730Deferred
      rent
                
                
                (13
                )
                
                
                9
                
                
                
                45Net
      cash used in operating activities
                
                
                (6,835
                )
                
                
                (13,824
                )
                
                
                (78,903
                )Cash
      flows from investing activities:Purchases
      of property and equipment
                
                
                (1
                )
                
                
                (119
                )
                
                
                (1,631
                )Proceeds
      from sale of property and equipment
                
                
                -
                
                
                
                1
                
                
                
                1Net
      cash used in investing activities
                
                
                (1
                )
                
                
                (118
                )
                
                
                (1,630
                )Cash
      flows from financing activities:Stockholders'
      capital contribution
                
                
                -
                
                
                
                -
                
                
                
                500Proceeds
      from exercise of stock options
                
                
                -
                
                
                
                -
                
                
                
                66Proceeds
      from issuance of common stock and warrants, net
                
                
                -
                
                
                
                -
                
                
                
                67,751Proceeds
      from issuance of preferred stock, net
                
                
                -
                
                
                
                -
                
                
                
                16,759Net
      cash provided by financing activities
                
                
                -
                
                
                
                -
                
                
                
                85,076Net
      increase (decrease) in cash and cash equivalents
                
                
                (6,836
                )
                
                
                (13,942
                )
                
                
                4,543Cash
      and cash equivalents, beginning of period
                
                
                11,379
                
                
                
                35,029
                
                
                
                -Cash
      and cash equivalents, end of period
                
                $
                4,543
                
                
                $
                21,087
                
                
                $
                4,543Supplementary
      disclosure of cash flow information:Cash
      paid for interest
                
                $
                -
                
                
                $
                -
                
                
                $
                -Cash
      paid for income taxes
                
                $
                -
                
                
                $
                -
                
                
                $
                -Supplementary
      disclosure of noncash investing and financing activities:Warrants
      issued to placement agents and investors, in connection with private
      placement
                
                $
                -
                
                
                $
                5,433
                
                
                $
                20,208Preferred
      stock conversion to common stock
                
                $
                -
                
                
                $
                -
                
                
                $
                16,760Warrants
      converted to common shares
                
                $
                -
                
                
                $
                -
                
                
                $
                18





The
accompanying notes are an integral part of the unaudited interim financial
statements.


5


ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS


(unaudited)





1.
Nature of the Business and Basis of Presentation





ZIOPHARM
Oncology, Inc. (“ZIOPHARM” or the “Company”) is a biopharmaceutical company that
seeks to acquire, develop and commercialize, on its own or with other commercial
partners, products for the treatment of important unmet medical needs in
cancer.





The
Company has had limited operations to date and its activities have consisted
primarily of raising capital and conducting research and
development.  Accordingly, the Company is considered to be in the
development stage at June 30, 2009, as defined by the Financial Accounting
Standards Board ("FASB") in Statement of Financial Accounting Standards ("SFAS")
No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company's fiscal year
ends on December 31.





The
Company has operated at a loss since its inception in 2003 and has no
revenues.  The Company anticipates that losses will continue for the
foreseeable future. At June 30, 2009, the Company’s accumulated deficit was
approximately $89.2 million.  The Company currently believes that it
has sufficient capital to fund development and commercialization activities,
principally for palifosfamide, into the second quarter of 2010.  The
Company’s ability to continue operations after its current cash resources are
exhausted depends on its ability to obtain additional financing and achieve
profitable operations, as to which no assurances can be given.  Cash
requirements may vary materially from those now planned because of changes in
the focus and direction of its research and development programs, competitive
and technical advances, patent developments or other
developments.  Additional financing will be required to continue
operations after the Company exhausts its current cash resources and to continue
its long-term plans for clinical trials and new product
development.  There can be no assurance that any such financing can be
realized by the Company, or if realized, what the terms thereof may be, or that
any amount that the Company is able to raise, will be adequate to support the
Company’s working capital requirements until it achieves profitable
operations.  The Company’s failure to raise capital as and when needed
would have a negative impact on its financial condition and its ability to
pursue its business strategies.  If adequate additional
funds are not available when required,or if unsuccessful in entering
into partnership agreements for the further development of its products,the Company will be
required to delay, reduce or eliminate planned preclinical and clinical
trialsand terminate
theapproval process for its product candidates from the FDA or other
regulatory authorities.  In addition, the Company could be forced to
discontinue product development, reduce or forego sales and marketing efforts,
forego attractive business opportunities or pursue merger or
divestiture strategies.There can be no assurances that
forecasted results will be achieved or that additional financing will be
obtained.  The financial statements do not include any adjustments
relating to the recoverability and classification of asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.





The
accompanying unaudited interim financial statements have been prepared in
accordance with the instructions to Form 10-Q pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and note disclosures required by generally accepted accounting
principles (“GAAP”) in the United States of America have been condensed or
omitted pursuant to such rules and regulations.





The
preparation of financial statements in conformity with GAAP requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses, and related disclosure of contingent liabilities at
the dates of the financial statements.  Actual amounts may differ from
these estimates.





It is
management’s opinion that the accompanying unaudited interim financial
statements reflect all adjustments (which are normal and recurring) that are
necessary for a fair statement of the results for the interim
periods.  The unaudited interim financial statements should be read in
conjunction with the unaudited financial statements and the notes thereto for
the year ended December 31, 2008 included in the Company’s Form
10-K.





The
year-end balance sheet data was derived from the audited financial statements
but does not include all disclosures required by accounting principles generally
accepted in the United States of America.





The
results disclosed in the Statements of Operations for the three and six months
ended June 30, 2009 are not necessarily indicative of the results to be expected
for the full fiscal year.


6


ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies





Except
for the policies listed below, our significant accounting policies were
identified in the Company’s Form 10-K for the fiscal year ended December 31,
2008.





Warrants





On
January 1, 2009, the Company adopted Emerging Issues Task Force Issue 07-05,
“Determining whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”,
(“EITF 07-05”).  This Issue prescribes the
methodology by which a company must determine whether a financial instrument is
a derivative within the meaning of Statement of Financial Accounting
Standard No. 133 Accounting
for Derivative Instruments and Hedging Activities (“SFAS No. 133”). In
applying the methodology contained in EITF 07-05 and FASB No. 133 it was
concluded that certain warrants issued by the Company in May 2005 have terms
that do not meet the criteria to be considered indexed to the Company’s own
stock and therefore should be re-classified from the equity section to the
liability section of the Balance Sheets. The warrant is subject to
re-measurement at each balance sheet date and any change in fair value is
recognized as a component of other income (expense). Fair value is measured
using the Black-Scholes valuation model. Adoption of this new standard decreased
equity warrants by $1,639,000, decreased deficit accumulated during the
development stage by $1,566,000 and increased warrant liability by $73,000. See
note 5, “warrants” for additional
disclosure.





Fair
Value Measurements




Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”). In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which provides a one year
deferral of the effective date of SFAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually.  SFAS 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 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 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.





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




The
adoption of these statements did not have a material impact on the Company’s
results of operations and financial condition.


7





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





Assets
and liabilities measured at fair value on a recurring basis as of June 30, 2009
are as follows:





($ in thousands)
                          
                          FairValueMeasurementsatReportingDateUsingDescription
                          
                          Balanceasof
                            June30,2009
                          
                          QuotedPricesin
                            ActiveMarketsfor
                            Identical
                            Assets/Liabiities
                            (Level1)
                          
                          SignificantOther
                            ObservableInputs
                            (Level2)
                          
                          Significant
                            UnobservablInputs
                            (Level3)Warrant
      liability
                          
                          $
                          288
                          
                          $
                          -
                          
                          $
                          288
                          
                          $
                          -





The
warrants were valued using a Black-Scholes valuation model.  See note
5 for additional disclosure on the valuation methodology and significant
assumptions.





Subsequent
Events




Effective
this quarter, the Company implemented Statement of Financial Accounting
Standards No. 165,“Subsequent Events” (“SFAS 165”). This standard establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. The adoption of
SFAS 165 did not impact the Company’s financial
position or results of operations.  The Company evaluated all events
or transactions that occurred after June 30, 2009 up through
August 14, 2009, the date the Company issued these financial statements.
 During this period we did not have any material recognizable subsequent
events.





Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS
141(R)”).  SFAS 141(R) expands the definition of a business
combination and requires the fair value of the purchase price of an acquisition,
including the issuance of equity securities, to be determined on the acquisition
date. SFAS 141(R) also requires that all assets, liabilities, contingent
considerations, and contingencies of an acquired business be recorded at fair
value at the acquisition date. In addition, SFAS 141(R) requires that
acquisition costs generally be expensed as incurred, restructuring costs
generally be expensed in periods subsequent to the acquisition date, changes in
accounting for deferred tax asset valuation allowances be expensed after the
measurement period, and acquired income tax uncertainties be expensed after t he
measurement period.  SFAS 141(R) is effective for fiscal years
beginning after December 15, 2008 with early adoption prohibited. SFAS
141(R) is effective for the Company beginning January 1, 2009 and did not have
an impact but may change accounting for business combinations on a prospective
basis.


8


ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





2.
Summary of Significant Accounting Policies – (continued)





In April
2008, the FASB issued EITF 07-05, “Determining whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”, (“EITF
07-05”).  EITF 07-05 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in paragraph 11(a) of SFAS 133.  EITF
07-05 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and early application is not permitted.





In April
2009, the FASB issued FASB Staff Position FAS 157-4,Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed, or FSP FAS 157-4; FSP
FAS 157-4 provides guidelines for making fair value measurements more
consistent with the principles presented in SFAS 157. FSP FAS 157-4
provides additional authoritative guidance in determining whether a market is
active or inactive, and whether a transaction is distressed, is applicable to
all assets and liabilities (i.e. financial and nonfinancial) and will require
enhanced disclosures.  This standard is effective for periods ending after
June 15, 2009.  Adoption of this new standard did not have a
material impact on the Company’s financial position, results of operations or
cash flows.





In April
2009 the FASB issued FASB Staff Position FAS 115-2, FAS 124-2,
and EITF 99-20-2,Recognition and Presentation of Other-Than-Temporary Impairments , or FSP
FAS 115-2, FAS 124-2, and EITF 99-20-2; and FSP FAS 115-2,
FAS 124-2, and EITF 99-20-2 provides additional guidance to provide
greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to more effectively communicate when
an other-than-temporary impairment event has occurred.  This FSP
applies to debt securities.  This standard is effective for periods
ending after June 15, 2009.  Adoption of this new standard did
not have a material impact on the Company’s financial position, results of
operations or cash flows.




In April
2009 the FASB issued FASB Staff Position FAS 107-1 and APB 28-1,Interim Disclosures about Fair
Value of Financial Instruments, or FSP FAS 107-1 and APB 28-1. FSP
FAS 107-1 and APB 28-1, amends FASB Statement No. 107,Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments in interim as well as in annual financial
statements.  This FSP also amends APB Opinion No. 28,Interim Financial Reporting,
to require those disclosures in all interim financial
statements.  This standard is effective for periods ending after
June 15, 2009.  Adoption of this new standard did not have a
material impact on the Company’s financial position, results of operations or
cash flows.





On June
29, 2009, the FASB issued SFAS No. 168 “Accounting Standards
Codification and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162” (or the “Codification”). The Codification is the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in preparation of financial statements in
conformity with generally accepted accounting principles in the United States.
SFAS No. 168 is effective for interim and annual periods ending after September
15, 2009. We do not expect the adoption of this standard to have an impact on
our financial position or results of operations.


9





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





3.
Net Loss per Share





Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. The Company's potential dilutive shares, which include
outstanding common stock options, unvested restricted stock and warrants, have
not been included in the computation of diluted net loss per share for any of
the periods presented as the result would be antidilutive.  Such
potential common shares at June 30, 2009 and 2008 consist of the
following:





June30,2009
                  
                  
                  2008Stock
      options
                  
                  
                  3,220,916
                  
                  
                  
                  2,880,500Unvested
      restricted stock
                  
                  
                  483,667
                  
                  
                  
                  170,000Warrants
                  
                  
                  5,039,659
                  
                  
                  
                  5,039,6598,744,242
                  
                  
                  
                  8,090,159





4.
Commitments and Contingencies





License
agreements and patents





Patent
and Technology License Agreement—The University of Texas M. D. Anderson Cancer
Center and the Texas A&M University System.





On August
24, 2004, the Company entered into a patent and technology license agreement
with The Board of Regents of the University of Texas System, acting on behalf of
The University of Texas M. D. Anderson Cancer Center and the Texas A&M
University System (collectively, the “Licensors”).  Under this
agreement, the Company was granted an exclusive, worldwide license to rights
(including rights to US and foreign patent and patent applications and related
improvements and know-how) for the manufacture and commercialization of two
classes of organic arsenicals (water- and lipid-based) for human and animal
use.  The class of water-based organic arsenicals includes
darinaparsin.


10





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
Commitments and Contingencies – (continued)





As
partial consideration for the license rights obtained, the Company made an
upfront payment of $125 thousand and granted the Licensors 250,487 shares of our
common stock.  The Company recorded expense for the $125 thousand
upfront payment and recognized research and development expense of $426 thousand
in connection with the issuance of the 250,487 shares of common stock in the
year ended December 31, 2004.  In addition, the Company issued options
to purchase an additional 50,222 shares outside the 2003 Stock Option Plan for
$0.002 per share following the successful completion of certain clinical
milestones.  Upon the filing of an Investigation New Drug Application
(“IND”) for darinaparsin in 2005, 12,555 shares vested and the Company
recognized compensation expense of $54 thousand.  Upon the completion
of dosing of the last patient for both Phase I clinical trials in 2007, 25,111
shares vested and the Company recognized expense of $120
thousand.  The remaining 12,556 shares will vest upon enrollment of
the first patient in a multi-center pivotal clinical trial (i.e., a human
clinical trial intended to provide the substantial evidence of efficacy
necessary to support the filing of an approvable New Drug Application (“NDA”)
for darinaparsin).  The options were subject to accounting pursuant to
EITF 96-18 Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, and therefore were valued at
the date which the milestones are achieved.  In addition, the
Licensors are entitled to receive certain milestone payments, including $100,000
that was paid upon the commencement of Phase I clinical trial for which the
Company recognized the expense in the year ended December 31, 2005 and $250
thousand upon the dosing of the first patient in the Registrant-sponsored Phase
II clinical trial for darinaparsin which was recognized in the year ended
December 31, 2006.  The Company may be required to make additional
payments upon achievement of certain other milestones, in varying amounts which
on a cumulative basis could total up to $4.5 million.  In
addition, the Licensors are entitled to receive royalty payments on sales from a
licensed product should such a product be approved for commercial sale and sales
of a licensed product be effected in the United States, Canada, the European
Union or Japan.  The Licensors also will be entitled to receive a
portion of any fees that the Company may receive from a possible sublicense
under certain circumstances.  For the years ended December 31, 2007
and 2006, the Company expensed $100 thousand for payments made to the Licensors
to conduct scientific research.  The Company has the exclusive right
to all intellectual property rights resulting from such research pursuant to the
terms of the license agreement.  These sponsored research agreements
and any related extensions expired in February 2008 with no payments being made
in 2008 or the six months ended June 30, 2009.





The
license agreement also contains other provisions customary and common in similar
agreements within the industry, such as the right to sublicense the Company
rights under the agreement.  However, if the Company sublicenses its
rights prior to the commencement of a pivotal study (i.e., a human clinical trial
intended to provide the substantial evidence of efficacy necessary to support
the filing of an approvable NDA), the Licensors will be entitled to receive a
share of the payments received by the company in exchange for the sublicense
(subject to certain exceptions).





License
Agreement with DEKK-Tec, Inc.





On
October 15, 2004, the Company entered into a license agreement with DEKK-Tec,
Inc., pursuant to which it was granted an exclusive, worldwide license for
palifosfamide. As part of the signing of license agreement with DEKK-Tec, the
Company expensed a $50 thousand up-front payment in the year ended December 31,
2004.





In
consideration for the license rights, DEKK-Tec is entitled to receive milestone
payments upon the occurrence of certain achievements of certain milestones, in
varying amounts which on a cumulative basis may total $3.9
million.  Of the aggregate milestone payments, most of the total
amount will be creditable against future royalty payments, as referenced
below.  During the year ended December 31, 2006, the Company recorded
a charge of $100 thousand for achieving Phase II
milestones.  Additionally in 2004, the Company issued DEKK-Tec an
option to purchase 27,616 shares of our common stock for $0.02 per
share.  The options were subject to accounting pursuant to EITF 96-18,
and therefore are valued at the date which the milestones are
achieved.  Upon the execution of the license agreement, 6,904 shares
vested and were exercised in the fiscal year ended December 31, 2005 and
resulted in a recorded charge of $12 thousand to research and development
expense.  The remaining options will vest upon certain milestone
events, culminating with final FDA approval of the first NDA submitted by the
Company (or by its sublicensee) for palifosfamide. None of the remaining options
have vested as of June 30, 2009.  DEKK-Tec is entitled to receive royalty
payments on the sales of palifosfamide should it be approved for commercial
sale.  There were no payments during the six months ended June 30,
2008 or 2009.


11





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





4.
Commitments and Contingencies – (continued)





Option
Agreement with Southern Research Institute (“SRI”)





On
December 22, 2004, the Company entered into an Option Agreement with SRI (the
“Option Agreement”), pursuant to which the Company was granted an exclusive
option to obtain an exclusive license to SRI’s interest in certain intellectual
property, including exclusive rights related to certain isophosphoramide mustard
analogs (the “SRI Option”).




Also on
December 22, 2004, the Company entered into a Research Agreement with SRI
pursuant to which, the Company agreed to spend a sum not to exceed $200 thousand
between the execution of the agreement and December 21, 2006, including a $25
thousand payment that was made simultaneously with the execution of the
agreement, to fund research and development work by SRI in the field of
isophosphoramide mustard analogs (the “SRI Research Program”).  The
option agreement was exercised on February 13, 2007 and annual payments of $25
thousand were made in the years ended December 31, 2008 and 2007 for maintenance
of this option agreement.  There were no payments during the six
months ended June 30, 2009.





License
Agreement with Baxter Healthcare Corporation





On
November 3, 2006, the Company signed a definitive Asset Purchase Agreement (for
indibulin) and License Agreement (to Baxter's proprietary nanosuspension
technology) with affiliates of Baxter Healthcare Corporation. Indibulin is a
novel anti-cancer agent that binds to tubulin, one of the essential proteins for
chromosomal segregation, and targets mitosis like the taxanes and vinca
alkaloids. It is being developed as an oral form.   Among the more well
known antimitotic drugs are the taxanes (paclitaxel, docetaxel) and the vinca
alkaloids (vincristine, vinblastine).  The terms of the agreement include
an upfront cash payment of approximately $1.1 million, which has been expensed
as purchased research and development in the year ended December 31,
2006.  In addition, $15 thousand was paid for annual patent and
license maintenance fee and $100 thousand was paid for existing inventory
during 2006.  During the year ended December 31, 2007, the Company
recorded an expense of $625 thousand related to the achievement of a milestone
for the successful US IND application for indibulin and also paid an additional
$15 thousand for the annual patent and license maintenance fee. In 2008, the
Company paid $15 thousand for the annual patent and license maintenance
fee.  In addition to the upfront costs, there will be additional
milestone payments that could amount to approximately $8 million in the
aggregate and royalties on net sales.  The purchase price includes the
entire indibulin intellectual property portfolio as well as existing drug
substance and capsule inventories.  There were no payments during the
six months ended June 30, 2009.





Collaboration
Agreement with Harmon Hill, LLC





On April
8, 2008, the Company signed a collaboration agreement for Harmon Hill, LLC
(“Harmon Hill) to provide consulting and other services for the development and
commercialization of oncology therapeutics by ZIOPHARM.  Under the
agreement the Company has agreed to pay Harmon Hill $20 thousand per month for
the consulting services and has further agreed to pay Harmon Hill (a) $500
thousand upon the first patient dosing of the Specified Drug in a pivotal trial,
which trial uses a dosing Regime introduced by Harmon Hill; and (b) provided
that the Specified Drug receives regulatory approval from the FDA, the EMEA or
another regulatory agency for the marketing of the Specified Drug, a 1% royalty
of the Company’s net sales will be awarded to Harmon Hill.  If the
Specified Drug is sublicensed to a third party, the agreement entitles Harmon
Hill to a 1% award of royalties received from a sublicense.  Subject
to renewal or extension by the parties, the term of the agreement was for a one
year period that expired April 7, 2009.  Although the Company and
Harmon Hill have not entered into a formal written renewal or extension, the
parties continued to operate under the terms of the agreement at June 30,
2009.  The Company paid and expensed $60 thousand and $120 thousand
during the six months ended June 30, 2008 and 2009, respectively,  for
consulting services per aforementioned agreement.  No milestones have
been reached or accrued during the year ended December 31, 2008 or the six
months ended June 30, 2009.


12





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





5.
Warrants





On
January 1, 2009, the Company adopted Emerging Issues Task Force Issue 07-05,
“Determining whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”,
(“EITF 07-05”).  This Issue prescribes the
methodology by which a company must determine whether a financial instrument is
a derivative within the meaning of Statement of Financial Accounting
Standard No. 133 Accounting
for Derivative Instruments and Hedging Activities (“FASB No.
133”).  In applying the methodology contained in EITF 07-05 and FASB
No. 133 it was concluded that certain warrants issued by the Company in May 2005
have terms that do not meet the criteria to be considered indexed to the
Company’s own stock and therefore should be re-classified from the equity
section to the liability section of the Balance Sheets.





In May
2005, the Company issued 419,786 placement warrants for services performed,
11,083 of which were subsequently exercised.  The remaining 408,703
warrants were originally valued at $1,639,000.  These warrants have a
provision for price protection should common stock or warrants be subsequently
issued at less than the warrants’ exercise price of $4.75 per
share.  This provision was triggered in 2006 when stock was sold at
$4.63 per share in a Private Investment in a Public Equity (“PIPE”)
financing.  Accordingly, the warrants were re-priced at
$4.69.  The application of FASB No. 133 requires that the warrants be
valued at each financial reporting period and the resulting gain or loss be
recorded as other income (expense) in the Statements of
Operations.  Using a Black-Scholes model, the warrants were valued at
$73,000 on January 1, 2009, when EITF 07-05 was adopted.  The
reclassification attributed to the adoption of EITF 07-05 had the following
cumulative effect on the Balance Sheets:





Liabilities
                    
                    
                    Stockholders' EquityWarrants
                    
                    
                    Warrants
                    
                    
                    Deficit Accumulated
                      During the
                      Development StageAs reported
      on December 31, 2008
                    
                    $
                    -
                    
                    
                    $
                    20,504
                    
                    
                    $
                    (85,061
                    )Re-classification
                    
                    
                    73
                    
                    
                    
                    (1,639
                    )
                    
                    
                    1,566Balance
      on January 1, 2009
                    
                    $
                    73
                    
                    
                    $
                    18,865
                    
                    
                    $
                    (83,495
                    )





On June
30, 2009, the warrants were valued at $288,000 using a Black-Scholes valuation
model.  The change in the fair value of the warrant liability of
$208,000 and $216,000 for the three and six months ended June 30, 2009,
respectively, was charged to other income (loss) in the Statements of
Operations.  The following assumptions were used at January 1, 2009
and June 30, 2009:





January 1, 2009
                  
                  
                  June 30, 2009Risk-free
      interest rate
                  
                  
                  1.55
                  %
                  
                  
                  1.64
                  %Expected
      life in years
                  
                  
                  3.42
                  
                  
                  
                  2.92Expected
      volatility
                  
                  
                  102
                  %
                  
                  
                  105
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0




13





ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





6.
Stock-Based Compensation





The
Company recognized stock-based compensation expense on all employee and
non-employee awards as follows:





For the three months ended June 30,
                      
                      
                      For the six months ended June 30,(in thousands)
                      
                      2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Research
      and development, including costs of research contracts
                      
                      $
                      87
                      
                      
                      $
                      205
                      
                      
                      $
                      155
                      
                      
                      $
                      385General
      and administrative
                      
                      
                      252
                      
                      
                      
                      298
                      
                      
                      
                      594
                      
                      
                      
                      586Share
      based employee compensation expense before tax
                      
                      
                      339
                      
                      
                      
                      503
                      
                      
                      
                      749
                      
                      
                      
                      971Income
      tax benefit
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      share based employee compensation expense
                      
                      $
                      339
                      
                      
                      $
                      503
                      
                      
                      $
                      749
                      
                      
                      $
                      971





Stock
options granted during the three and six months ended June 30, 2009 had a
weighted-average grant date fair value of $0.53 for both
periods.  Stock options granted during the three and six months ended
June 30, 2008 had weighted-average grant date fair values of $1.57 and $1.99,
respectively.





For the
six months ended June 30, 2009 and 2008, the fair value of stock options was
estimated on the date of grant using a Black-Scholes option valuation model with
the following assumptions:





For the six months ended June 30,2009
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  1.31-1.44
                  %
                  
                  
                  2.48
      - 3.49
                  %Expected
      life in years
                  
                  
                  5
                  
                  
                  
                  5Expected
      volatility
                  
                  
                  102-103
                  %
                  
                  
                  94
      - 96
                  %Expected
      dividend yield
                  
                  
                  0
                  
                  
                  
                  0




14




ZIOPHARM
Oncology, Inc. (a development stage company)





NOTES
TO FINANCIAL STATEMENTS (unaudited)





6.
Stock-Based Compensation – (continued)





Transactions
under the Company’s stock option plan for the six months ended June 30,
2009 are as follows:





Number of Shares
                
                
                Weighted-
                  Average Exercise
                  Price
                
                
                Weighted-
                  Average
                  Contractual
                  Term (Years)
                
                
                Aggregate
                  Intrinsic Value
                  (in thousands)Outstanding,
      December 31, 2008
                
                
                2,738,089
                
                
                $
                3.43Granted
                
                
                815,000
                
                
                $
                0.70Exercised
                
                
                -
                
                
                $
                -Cancelled
                
                
                (332,173
                )
                
                $
                2.99Outstanding,
      June 30, 2009
                
                
                3,220,916
                
                
                $
                2.78
                
                
                
                8.21
                
                
                $
                416Options
      exercisable, June 30, 2009
                
                
                2,001,916
                
                
                
                
                
                
                
                7.32
                
                
                $
                416Options
      available for future grant
                
                
                2,114,901





A summary
of the status of non-vested restricted stock for the six months ended June 30,
2009 is as follows:





Number of Shares
                    
                    
                    Weighted-Average
                      Grant Date Fair ValueOutstanding,
      December 31, 2008
                    
                    
                    586,500
                    
                    
                    $
                    1.15Granted
                    
                    
                    -
                    
                    
                    $
                    -Vested
                    
                    
                    (33,333
                    )
                    
                    $
                    2.73Cancelled
                    
                    
                    (69,500
                    )
                    
                    $
                    0.83Outstanding,
      June 30, 2009
                    
                    
                    483,667
                    
                    
                    $
                    1.09




15





Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations





Forward
Looking Statements





This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended.  In
particular, statements contained in this Form 10-Q, including but not limited
to, statements regarding our future results of operations and financial
position, business strategy and plan prospects, projected revenue or costs and
objectives of management for future research, development or operations, are
forward-looking statements.  These statements relate to our future
plans, objectives, expectations and intentions and may be identified by words
such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “intends,”
“targets,” “projects,” “contemplates,” “believes,” “seeks,” “goals,”
“estimates,” “predicts,” “potential” and “continue” or similar
words.  Readers are cautioned that these forward-looking statements
are only predictions and are subject to risks, uncertainties, and assumptions
that are difficult to predict, including those identified below, under Part II,
Item 1A. “Risk Factors” and elsewhere herein.  Therefore, actual
results may differ materially and adversely from those expressed in any
forward-looking statements.  We undertake no obligation to revise or update
any forward-looking statements for any reason.





Business
Overview





ZIOPHARM
Oncology, Inc. is a biopharmaceutical company that is seeking to develop and
commercialize a diverse, risk-sensitive portfolio of in-licensed cancer drugs
that can address unmet medical needs through enhanced efficacy and/or safety and
quality of life. Our principal focus is on the licensing and development of
proprietary small molecule drug candidates that are related to cancer
therapeutics already on the market or in development and can be administered by
intravenous (“IV”) and/or oral capsule forms.  We believe this
strategy will result in lower risk and expedited drug development programs with
product candidates having a low cost of manufacturing to address changing
reimbursement requirements around the world.  While we may
commercialize our products on our own in North America, we recognize that
favorable clinical trial results can be better addressed by partnering with
companies with the requisite financial resources.  The Company could
also negotiate the right to complete development and marketing in certain
geographies especially for certain limited (niche) indications. Although we are
currently in Phase I and/or II studies for three product candidates identified
as darinaparsin (ZinaparTM,
ZIO-101), palifosfamide (ZymafosTM,
ZIO-201), and indibulin (ZybulinTM,
ZIO-301), the Company’s current focus is on palifosfamide and more specifically
on completing initial enrollment of the ongoing randomized Phase II trial with
palifosfamide to support a registration trial for palifosfamide in combination
with doxorubicin in the front- and second-line setting of soft tissue
sarcoma.  We anticipate the initiation of such a trial as early as the
first half of 2010.





·
            ZIO-101,
      or darinaparsin (ZinaparTM),
      is an anti-mitochondrial (organic arsenic) compound covered by
      issued patents and pending patent applications in the U.S. and in
      foreign countries.  A form of commercially available inorganic
      arsenic (arsenic trioxide [Trisenox ®];
      “ATO”) has been approved in the United States and the European Union for
      the treatment of acute promyelocytic leukemia (“APL”), a precancerous
      condition. ATO is on the compendia listing for the therapy of multiple
      myeloma, and has been studied for the treatment of various other
      cancers.  Nevertheless, ATO has been shown to be toxic to the
      heart, liver, and brain, which limits its use as an anti-cancer
      agent.  ATO carries a “black box” warning for ECG abnormalities
      since arsenic trioxide has been shown to cause QT interval prolongation
      and complete atrioventricular block.  QT prolongation can lead
      to a torsade de
      pointes-type ventricular arrhythmia, which can be
      fatal.  Inorganic arsenic has also been shown to cause cancer of
      the skin and lung in humans.  The toxicity of arsenic is
      generally correlated to its accumulation in organs and
      tissues.  Our preclinical and clinical studies to date have
      demonstrated that darinaparsin is considerably less toxic than inorganic
      arsenic, particularly with regard to cardiac toxicity.  In vitro testing of
      darinaparsin using the National Cancer Institute’s human cancer cell panel
      detected activity against a series of tumor cell lines including lung,
      colon, brain, melanoma, ovarian, and kidney cancer.  Moderate
      activity was detected against breast and prostate cancer.  In
      addition to solid tumors, in vitro testing in
      both the National Cancer Institute’s cancer cell panel and in vivo testing in a
      leukemia animal model demonstrated substantial activity against
      hematological cancers (cancers of the blood and blood-forming tissues)
      such as leukemia, lymphoma, myelodysplastic syndromes, and multiple
      myeloma.  Results indicate significant activity against the HuT
      78 cutaneous T-cell lymphoma, the NK-G2MI natural killer-cell NHL,
      KARPAS-299 T-cell NHL, SU-DHL-8 B-cell NHL, SU-DHL-10 B-cell NHL and
      SU-DHL-16 B-cell NHL cell lines. Preclinical studies have also established
      anti-angiogenic properties of darinaparsin and provided support for the
      development of an oral capsule form of the drug, and established synergy
      of darinaparsin in combination with other approved anti-cancer
      agents.




16




Phase I
testing of the intravenous form of darinaparsin in solid tumors and
hematological cancers has been completed.  The Company reported
clinical activity and, importantly, a safety profile from these studies as
predicted by preclinical results.  The Company subsequently completed
Phase II studies in advanced myeloma and primary liver cancer and is nearing
completion of a Phase II study in certain other hematological
cancers.  In addition, the Company is completing two Phase I studies
with an oral capsule form of darinaparsin.  At the May 2009 annual
meeting of the American Society of Clinical Oncology (“ASCO”), the Company
reported favorable results from the trial with IV-administered darinaparsin in
lymphoma, particularly peripheral T-cell lymphoma (“PTCL”).  In the
ongoing Phase I trials, also reported at the ASCO annual meeting, preliminary
data primarily in solid tumors indicate the oral form is active and well
tolerated.  The Company is actively seeking a partner or other sources
of funding to progress the IV program into a potentially pivotal trial in PTCL
as early as the first half of 2010 as well as to complete the oral Phase I
program.  If we cannot find a partner or otherwise raise the capital
for continuing the darinaparsin programs, our intent is to complete the ongoing
studies included in the Company’s current estimate of expenses and then place
the development program for darinaparsin on hold.





·
              ZIO-201,
      or palifosfamide (ZymafosTM),
      is the active metabolite of ifosfamide, a compound chemically related to
      cyclophosphamide.  Patent applications covering proprietary
      forms of palifosfamide for pharmaceutical composition and method of use
      have been filed in the U.S. and internationally.  Like
      cyclophosphamide and ifosfamide, palifosfamide is an alkylating
      agent.  The Company believes that cyclophosphamide is the most
      widely used alkylating agent in cancer therapy, with significant use in
      the treatment of breast cancer and non-Hodgkin’s lymphoma.  More
      importantly, ifosfamide has been shown to be effective at high doses in
      the treatment of sarcoma and lymphoma, either by itself or in combination
      with other anticancer agents.  Ifosfamide is approved by
      the U.S. Food and Drug Administration ("FDA") as a treatment for
      testicular cancer while ifosfamide-based treatment is a standard of care
      for sarcoma, although it is not licensed for this indication by the
      FDA.  Preclinical studies have shown that palifosfamide has
      activity against leukemia and solid tumors.  These studies also
      indicate that palifosfamide may have a better safety profile than
      ifosfamide or cyclophosphamide because it does not appear to produce known
      toxic metabolites of ifosfamide, such as acrolein and
      chloroacetaldehyde.  Acrolein, which is toxic to the kidneys and
      bladder, can mandate the administration of a protective agent called
      mesna, which is inconvenient and expensive.  Chloroacetaldehyde
      is toxic to the central nervous system, causing “fuzzy brain” syndrome for
      which there is currently no protective measure.  Similar
      toxicity concerns pertain to high-dose cyclophosphamide, which is widely
      used in bone marrow and blood cell transplantation. Palifosfamide has
      evidenced activity against ifosfamide- and/or cyclophosphamide-resistant
      cancer cell lines.  Also in preclinical cancer models,
      palifosfamide was shown to be orally active and encouraging results have
      been obtained with palifosfamide in combination with doxorubicin, an agent
      approved to
treat sarcoma.





Following
Phase I study, Phase II testing of the intravenous form of palifosfamide as a
single agent to treat advanced sarcoma has been completed.  In both
Phase I and Phase II testing, palifosfamide has been administered without the
“uroprotectant” mesna, and the toxicities associated with acrolein and
chloroacetaldehyde have not been observed.  The Company reported
clinical activity of palifosfamide when used alone in the Phase II study
addressing advanced sarcoma.  Following review of the preclinical
combination studies, clinical data, and discussion with sarcoma experts, the
Company initiated a Phase I dose escalation study of palifosfamide in
combination with doxorubicin in patients with metastatic or unresectable soft
tissue sarcoma.  The Company reported favorable results and
safety profile from this study at the ASCO annual meeting.  In light
of reported favorable Phase II clinical activity data and with the combination
of palifosfamide with doxorubicin well tolerated in the Phase I trial and
evidencing activity, the Company initiated a Phase II randomized controlled
trial in the second half of last year to compare doxorubicin plus palifosfamide
to doxorubicin alone in patients with front and second-line metastatic or
unresectable soft tissue sarcoma.  Data from the initial patients
in this trial are expected to shape a registration trial in the same setting
which is expected to initiate as early as the first half of 2010.  The
study is currently actively enrolling and, in conjunction with ASCO, the initial
drug safety monitoring committee meeting concluded to continue enrollment as
planned.  The Company is also developing an oral capsule form of
palifosfamide to be studied clinically following further data from the IV trials
and partnering or other sources of funding.  The Company is also
considering additional Phase II trials in other solid tumors as funding becomes
available.  Orphan Drug Designation for palifosfamide has been
obtained in both the United States and the European Union for the treatment of
soft tissue sarcomas.




17




·
            ZIO-301,
      or indibulin (ZybulinTM),
      is a novel, orally available small molecular-weight inhibitor of
      tubulin polymerization that was acquired from Baxter Healthcare and is the
      subject of numerous patents worldwide, including the United States, the
      European Union and Japan.  The microtubule component, tubulin,
      is one of the more well established drug targets in
      cancer.  Microtubule inhibitors interfere with the dynamics of
      tubulin polymerization, resulting in inhibition of chromosome segregation
      during mitosis and consequently inhibition of cell division.  A
      number of marketed IV anticancer drugs target tubulin, such as the taxane
      family members, paclitaxel (Taxol®),
      docetaxel (Taxotere®) ,
      the Vinca alkaloid family
      members, vincristine and vinorelbine, and the new class of epothilones
      with IxempraTMmarketed.  This class of agents is typically the mainstay
      of therapy in a wide variety of indications. In spite of their
      effectiveness, the use of these drugs is associated with significant
      toxicities, notably peripheral
neurotoxicity.




Preclinical
studies with indibulin demonstrate significant and broad antitumor activity,
including activity against taxane-refractory cell lines.  The
cytotoxic activity of indibulin was demonstrated in several rodent and human
tumor cell lines derived from prostate, brain, breast, pancreas, lung, ovary,
and cervical tumor tissues and in rodent tumor and human tumor xenograft
models.  In addition, indibulin was effective against multidrug
resistant tumor cell lines (breast, lung, and leukemia) both in vitro and in vivo. Indibulin is
potentially safer than other tubulin inhibitors.  No neurotoxicity has
been observed at therapeutic doses in rodents and in the ongoing Phase I
trials.  Indibulin has also demonstrated synergy with approved
anti-cancer agents in preclinical studies. The availability of an oral capsule
formulation of indibulin creates significant commercial opportunity because no
oral capsule formulations of microtubulin inhibitors are currently on the market
in the United States.





Indibulin,
as a single agent, has completed a Phase I trial in Europe and additional Phase
I trials are nearing completion in the U.S. in patients with advanced solid
tumors and the Company has reported clinical activity at well-tolerated doses
using a continuous dosing scheme without the development of clinically relevant
peripheral neuropathy.  Following encouraging results obtained with
indibulin in combination with erlotinib, and 5-FU in preclinical models,
two Phase I combination studies were initiated with Tarceva® in one
and Xeloda® in
another and are reaching completion.  Favorable activity and safety
profile of oral indibulin with oral Xeloda® were
reported at ASCO’s annual meeting in May 2009.  Preclinical work with
consultant Dr. Larry Norton to explore dose scheduling for the clinical setting
have been completed and were also reported at the ASCO meeting, supporting the
Company’s plan, subject to the availability of additional funding, to initiate a
Phase I/II breast cancer trial using a dose schedule established
preclinically.




Subject
to obtaining appropriate funding, we intend to continue with clinical
development of IV palifosfamide for soft tissue sarcoma and to initiate a
clinical study with the oral form following the United States Food and Drug
Administration approval; with IV darinaparsin, for PTCL and with the further
development of the oral form; and with oral indibulin, for solid tumors and in
particular breast cancer.  However, the successful development of our
product candidates is highly uncertain.  Product development costs and
timelines can vary significantly for each product candidate, are difficult to
accurately predict, and will require us to obtain additional funding, either
alone or in connection with partnering arrangements.  Various statutes
and regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of each product.  The lengthy
process of seeking approval and the subsequent compliance with applicable
statutes and regulations require the expenditure of substantial
resources.  Any failure by us to obtain, or any delay in obtaining,
regulatory approvals could materially, adversely affect our
business.  To date, we have not received approval for the sale of any
drug candidates in any market and, therefore, have not generated any revenues
from our drug candidates.




Development
Plan




Without
additional resources from partnering or other sources, our development plan for
the next twelve months remains focused on completing the first 60 patients in
our randomized Phase II trial for IV palifosfamide, preparing for a potential
end-of-Phase II meeting with the FDA for a potential pivotal trial of IV
darinaparsin, and designing an oral indibulin Phase I/II trial in breast
cancer.  We expect our principal expenditures to be predominately for
palifosfamide clinical trial expense, employment expense (we currently have 14
full time employees) and other expenses associated with clinical trials already
completed but not fully expensed.





We
continue to use senior advisors, consultants, clinical research organizations,
and other third parties to perform certain aspects of product development,
manufacturing, clinical, and preclinical development, and regulatory, safety and
quality assurance functions.




18


With the
planned development of palifosfamide and with the intention of partnering or
otherwise raising additional resources to support development activities for
darinaparsin and indibulin, we expect to incur the following expenses during the
next twelve months: Approximately $0.9 million on preclinical and regulatory
expenses; approximately $1.5 million on clinical expenses; approximately
$0.5 million on manufacturing expenses; approximately $1.4 million on
facilities, rent, and other facilities-related expenses; and approximately $2.6
million on general corporate and administrative expenses.  With
our current cash position, previous adjustments in staffing and ongoing
aggressive cash management strategy, we believe that we currently have
sufficient capital that will support our current operations into the second
quarter of 2010.  Our forecast of the period
of time through which our financial resources will be adequate to support our
operations, the costs to complete development of products and the cost to
commercialize our future products are forward-looking statements and involve
risks and uncertainties, and actual results could vary materially and negatively
as a result of a number of factors, including the factors discussed in the "Risk
Factors" section of this report.  We have based these estimates on
assumptions that may prove to be wrong, and we could exhaust our available
capital resources sooner than we currently expect.





Product
Candidate Development and Clinical Trials





Intravenous darinaparsin, an
organic arsenic, has been tested in patients with advanced myeloma, other
hematological malignancies, and liver cancer.  Two separate Phase II
trials have been completed while one is still ongoing.  Recently
reported at the May 2009 ASCO meeting, positive results in patients with
lymphoma, particularly PTCL, have led to the planning of a pivotal trial in PTCL
as early as the first half of 2010, subject to the availability of sufficient
financial resources.  The Phase I trials with an oral form of
darinaparsin are ongoing in solid tumors and have been expanded to include
non-Hodgkin’s lymphoma patients.  The Company is actively seeking
partners and other sources of funding for continuing the development program of
the IV form in a pivotal trial for PTCL and for completing the oral Phase I
studies.  If funding or partnering is not accomplished, the Company
intends to place the project on hold.





Intravenous palifosfamide,
the proprietary stabilized form of isophosphoramide mustard, is being developed
presently to treat soft tissue sarcoma.  A Phase II trial in
advanced sarcoma has been completed with very favorable activity and with the
expected safety profile.  Favorable activity and safety data from a
Phase I trial of IV palifosfamide in combination with doxorubicin were reported
at the ASCO meeting in May.  The Company has initiated a randomized
Phase II trial designed to compare palifosfamide in combination with doxorubicin
to doxorubicin alone in the front or second-line treatment of metastatic or
unresectable soft tissue sarcoma and is presently treating initial patients
with the intention to develop the design of a registration trial to initiate as
early as the first half of 2010.  An oral formulation has also been
developed preclinically and, following further IV study results, additional
funding or partnering, a Phase I trial is expected to initiate.  Other
trials in solid tumors are under consideration pending further
funding.  Orphan Drug Designation has been obtained for both the
United States and the European Union for the treatment of soft tissue
sarcomas.  Technology transfer and scale-up for the commercial
manufacture of the active pharmaceutical ingredient and final product
specification will continue as resources allow.




Indibulin, a novel
anti-cancer agent that targets mitosis by inhibiting tubulin polymerization,
is administered as an oral capsule formulation.  Indibulin has
completed Phase I trials with favorable results of activity and safety profile
reported for all trials.  Phase I trials of indibulin in combination
with Tarceva® and also
with Xeloda ® have
been initiated.  At the ASCO annual meeting in May, the Company
presented favorable preliminary activity and safety data of oral indibulin with
oral  Xeloda®.  Preclinical
studies under the direction of Dr. Larry Norton to support clinical study of
“dose dense” dosing are completed and were also reported at
ASCO.  Subject to available funding, the Company intends to pursue a
Phase I/II study in breast cancer with a schedule identified preclinically to
determine maximum tolerated dose in the Phase I portion prior to formal Phase II
testing.  If sufficient funding is not available, the Company intends
to place the project on hold.




19


Financial
Overview





Overview
of Results of Operations





Three
and six months ended June 30, 2009 compared to three and six months ended June
30, 2008





Revenue.  We had no
revenues for the three and six months ended June 30, 2009 and 2008.





Research and development
expenses.  Research and development expenses during the three
and six months ended June 30, 2009 and 2008 were as follows:





Three months ended June
                    30,
                  
                  
                  
                  
                  
                  Six months ended June
                    30,2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Change($
      in thousands)Research
      and development
                  
                  $
                  501
                  
                  
                  $
                  4,266
                  
                  
                  $
                  (3,765
                  )
                  
                  
                  -88
                  %
                  
                  $
                  2,109
                  
                  
                  $
                  10,341
                  
                  
                  $
                  (8,232
                  )
                  
                  
                  -80
                  %





Research
and development expenses decreased by $3.8 million from the three months ended
June 30, 2008 to the three months ended June 30, 2009.  The decrease
was primarily due to reduced manufacturing costs of $1.7 million, reduced
clinical project costs of $912,000, reduced salaries of $558,000, reduced
consulting costs of $278,000 and other reductions totaling $322,000.  These
reductions and savings resulted from the cost cutting initiatives we put in
place in order to extend our operations.





Research
and development expenses decreased by $8.2 million from the six months ended
June 30, 2008 to the six months ended June 30, 2009.  The decrease was
primarily due to reduced manufacturing costs of $4.5 million, reduced clinical
project costs of $1.7 million, reduced salaries of $932,000, reduced consulting
costs of $321,000 and other reductions of $750,000. These reductions and
savings resulted from the cost cutting initiatives we put in place in order to
extend our operations.





We expect
our research and development expenses to continue to decrease as patient costs
related to indibulin and darinaparsin end.




20


General and administrative
expenses.  General and administrative expenses during the three
and six months ended June 30, 2009 and 2008 were as follows:





Three
      months ended June
                    30,
                  
                  
                  
                  
                  
                  Six
      months ended June
                    30,2009
                  
                  
                  2008
                  
                  
                  Change
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Change($
      in thousands)General
      and administrative
                  
                  $
                  1,692
                  
                  
                  $
                  2,350
                  
                  
                  $
                  (658
                  )
                  
                  
                  -28
                  %
                  
                  $
                  3,415
                  
                  
                  $
                  5,094
                  
                  
                  $
                  (1,679
                  )
                  
                  
                  -33
                  %





Similar
to the decrease in research and development expenses, the decrease in general
and administrative expenses of $658,000 from the three months ended June 30,
2008 to the three months ended June 30, 2009 was primarily due to decreased
headcount which lead to a decrease in our salary and benefit expenses and stock
based compensation expense of $480,000.  The decrease is also
attributable to reductions in legal and patent costs of $64,000, consulting
costs of $103,000 and other cost reductions totaling $11,000.





The
decrease in general and administrative expenses of $1.7 million from the six
months ended June 30, 2008 to the six months ended June 30, 2009 was primarily
due to decreased headcount which lead to a decrease in our salary and benefit
expenses and stock based compensation expense of $937,000.  The
decrease is also attributable to reductions in legal and patent costs of
$304,000, consulting of $230,000 and other cost reductions totaling
$208,000.




We expect
our selling, general and administrative expenses to level off over the remainder
of the year.





Other income
(expense).  Other income (expense) for the three and six months
ended June 30, 2009 and 2008 was as follows:





Three
      months ended June
                                30,
                              
                              
                              
                              
                              
                              Six
      months ended June
                                30,2009
                              
                              
                              2008
                              
                              
                              Change
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              Change($
      in thousands)Other
      income (expense), net
                              
                              $
                              2
                              
                              
                              $
                              115
                              
                              
                              $
                              (113
                              )
                              
                              
                              -98
                              %
                              
                              $
                              2
                              
                              
                              $
                              311
                              
                              
                              $
                              (309
                              )
                              
                              
                              -99
                              %Change
      in fair value of warrants
                              
                              
                              (208
                              )
                              
                              
                              -
                              
                              
                              $
                              (208
                              )
                              
                              
                              -100
                              %
                              
                              
                              (216
                              )
                              
                              
                              -
                              
                              
                              $
                              (216
                              )
                              
                              
                              -100
                              %Total
                              
                              $
                              (206
                              )
                              
                              $
                              115
                              
                              
                              $
                              (321
                              )
                              
                              
                              
                              
                              
                              $
                              (214
                              )
                              
                              $
                              311
                              
                              
                              $
                              (525
                              )





The
decrease in other income (expense) from the three and six months ended June 30,
2008 compared to the three and six months ended June 30, 2009 was due primarily
to lower cash balances during the three and six months ended June 30,
2009.  Additionally, there were no warrants being marked to market
during 2008.




21





Liquidity
and Capital Resources





As of
June 30, 2009, we had approximately $4.5 million in cash and cash equivalents,
down from $11.4 million in cash and cash equivalents as of December 31,
2008.  Given the rate that we have historically used cash, the limited
amount of cash for use in operations and the recent instability in the capital
markets, we have taken measures to reduce our near term expenses while we seek
additional financing and partnering arrangements for the development of certain
drug candidates.  We have reduced staffing and other personnel and
project related expenses and may have to continue to do
so.  Additional funding would support the further development of
darinaparsin and indibulin.  If additional resources remain
unavailable, we intend to place the development of darinaparsin and indibulin on
hold following the completion of ongoing trials for which associated expenses
are included in our current forecast.  Based on our current costs, we
believe that we currently have sufficient capital to fund the development
programs for palifosfamide into the second quarter of 2010 (see Development
Plan).  Because our business does not generate any cash flow, however,
we will need to raise additional capital to continue development of the
palifosfamide beyond that time or to continue development of our other product
candidates.  To the extent additional capital is not available when we
need it, or if we cannot successfully enter into partnership agreements for the
further development of our products, we may be forced to abandon some or all of
our development efforts, which would have a material adverse effect on the
prospects of our business. In addition, the Company could be forced to forego
attractive business opportunities or pursue merger or
divestiture strategies.Further, our assumptions relating to the expected
costs of development and commercialization and timeframe for completion are
dependent on numerous factors other than available financing, including
significant unforeseen delays in the clinical trial and regulatory approval
process, which could be extremely costly.  In addition, our estimates
assume that we will be able to enroll a sufficient number of patients in each
clinical trial.





The
following table summarizes our net decrease in cash and cash equivalents for the
six months ended June 30, 2009 and 2008:





Six
      months ended June 30,2009
                  
                  
                  2008($
      in thousands)Net
      cash provided by (used in):Operating
      activities
                  
                  $
                  (6,835
                  )
                  
                  $
                  (13,824
                  )Investing
      activities
                  
                  
                  (1
                  )
                  
                  
                  (118
                  )Financing
      activities
                  
                  
                  -
                  
                  
                  
                  -Net
      decrease in cash and cash equivalents
                  
                  $
                  (6,836
                  )
                  
                  $
                  (13,942
                  )





Net cash
used in operating activities was $6.8 million for the six months ended June 30,
2009 compared to $13.8 million for the six months ended June 30,
2008.  The $6.8 million decrease was primarily due to a $9.4 million
decrease in the net loss partially offset by changes to accounts payable,
accruals and other assets and liabilities.





Net cash
used in investing activities was $1,000 for the six months ended June 30, 2009
compared to net cash used in investing activities of $118,000 for the six months
ended June 30, 2008.  The decrease was primarily due to a reduction in
spending for purchases of property and equipment.





There was
no net cash provided by financing activities for the six months ended June 30,
2009 and 2008.




22





Operating
capital and capital expenditure requirements





The
Company anticipates that losses will continue for the foreseeable future. At
June 30, 2009, the Company’s accumulated deficit was approximately $89.2
million.  Our actual cash requirements may vary materially from those
planned because of a number of factors including:





·
            Changes
      in the focus and direction of our development
  programs;





·
            Competitive
      and technical advances;





·
            Costs
      associated with the further development of palifosfamide, darinaparsin and
      indibulin; and





·
            Costs
      of filing, prosecuting, defending and enforcing any patent claims and any
      other intellectual property rights, or other
  developments.





In order
to continue our long-term plans for clinical trials and new product development,
we will need to raise additional capital to continue to fund our research and
development as well as operations after we exhaust our current cash
resources.  We expect to finance our cash needs through the sale of
equity securities and strategic collaborations or debt financings or through
other sources that may be dilutive to existing stockholders.  There
can be no assurance that any such financing can be realized by the Company, or
if realized, what the terms thereof may be, or that any amount that the Company
is able to raise will be adequate to support the Company’s working capital
requirements until it achieves profitable operations.  Currently, we
have no committed sources of additional capital.  Recently, capital
markets have experienced a period of unprecedented instability that we expect
may severely hinder our ability to raise capital within the time periods needed
or on terms we consider acceptable, if at all.  If we are unable to
raise additional funds when needed, we may not be able to market our products as
planned or continue development and regulatory approval of our products, or we
could be required to delay, scale back or eliminate some or all our research and
development programs.





Working
capital as of December 31, 2008 was $5.9 million, consisting of
$11.7 million in current assets and $5.8 million in current
liabilities. Working capital as of June 30, 2009 was $1.3 million,
consisting of $4.7 million in current assets and $3.4 million in current
liabilities.





Contractual
obligations





The
following table summarizes our outstanding obligations as of June 30, 2009 and
the effect those obligations are expected to have on our liquidity and cash
flows in future periods:





Less
      than
                  
                  
                  
                  
                  
                  
                  
                  
                  More
      than($
      in thousands)
                  
                  Total
                  
                  
                  1
      year
                  
                  
                  2
      - 3 years
                  
                  
                  4
      - 5 years
                  
                  
                  5
      yearsOperating
      Leases
                  
                  $
                  821
                  
                  
                  $
                  413
                  
                  
                  $
                  376
                  
                  
                  $
                  32
                  
                  
                  $
                  -




Our
commitments for operating leases relate to the lease for our corporate
headquarters in New York, NY and our operations center in Boston,
Massachusetts.


23





Off-balance
sheet arrangements





During
the six months ended June 30, 2009 and 2008, we did not engage in any
off-balance sheet arrangements.





Critical
Accounting Policies and Estimates





In our
Form 10-K for the fiscal year ended December 31, 2008, our most critical
accounting policies and estimates upon which our financial status depends were
identified as those relating to stock-based compensation; net operating losses
and tax credit carryforwards; and impairment of long-lived assets.  We
reviewed our policies and determined that those policies remain our most
critical accounting policies for the six months ended June 30,
2009.  During the six months ended June 30, 2009, we have added an
accounting policy for valuing our warrant liability.  See footnotes 2
and 5 herein for additional disclosure.





Item 3.
Quantitative and Qualitative Disclosures about Market Risk





Our
exposure to market risk is limited to our cash.  The goals of our
investment policy are preservation of capital, fulfillment of liquidity needs
and fiduciary control of cash.  We also seek to maximize income from
our investments without assuming significant risk. To achieve our goals, we
maintain our cash in interest-bearing bank accounts.  As all of our
investments are cash deposits in a global bank, it is subject to minimal
interest rate risk.





Item 4.
Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the
end of the period covered by this report.  Based on such evaluation,
our principal executive officer and principal financial officer have concluded
that, as of the end of such period, our disclosure controls and procedures were
effective in ensuring that information required to be disclosed by ZIOPHARM in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported, on a timely basis, and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding
required disclosure.





No change
in our internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) occurred during the period covered by
this quarterly report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




24





Part
II - Other Information





Item 1.
Legal Proceedings





Not
applicable.





Item 1A.
Risk Factors





The
following important factors could cause our actual business and financial
results to differ materially from those contained in forward-looking statements
made in this Quarterly Report on Form 10-Q or elsewhere by management from
time to time.   The risk factors in this report have been revised
to incorporate changes to our risk factors from those included in our annual
report on Form 10-K for the year ended December 31, 2008.  The risk
factors set forth below with an asterisk (*) next to the title are new risk
factors or risk factors containing changes, including any material changes, from
the risk factors previously disclosed in Item 1A of our Annual Report on Form
10-K for the year ended December 31, 2008, as filed with the Securities and
Exchange Commission.




RISKS
RELATED TO OUR BUSINESS




*
We may not be able to raise sufficient capital to continue clinical testing our
product candidates.




If we do
not succeed in raising additional funds on acceptable terms or if we cannot
successfully enter into partnership agreements for the further development of
our products, we will be unable to continue our planned preclinical and clinical
trials or obtain approval for any of our product candidates from the FDA or
other regulatory authorities.  In addition, we could be forced to
discontinue product development, reduce or forego sales and marketing efforts
and forego attractive business opportunities. In the event that we are unable to
continue as a going concern, we may be forced to cease operations altogether or
may elect or be required to seek protection from our creditors by filing a
voluntary petition in bankruptcy or may be subject to an involuntary petition in
bankruptcy.





We
believe we have sufficient capital to continue enrolling patients in our ongoing
randomized Phase II trial for palifosfamide as we are currently seeking a
partner, or other sources of capital, to fund the further development of
darinaparsin and indibulin.  If we are unable to obtain sufficient
additional capital, these programs will be placed on hold.  We are
currently devoting a significant portion of our resources to the development of
palifosfamide.  Accordingly, the resources that we are devoting to the
development of indibulin and darinaparsin have significantly
diminished.  As a result, further progress with the development of
darinaparsin and indibulin, if any, may be significantly delayed and may depend
on the success of our ongoing clinical trials involving
palifosfamide.





*
We may not be able to commercialize any products, generate significant revenues,
or attain profitability.





We have
never generated revenue and have incurred significant net losses in each year
since our inception.  For the six months ended June 30, 2009, we had a
net loss of $5.7 million and we had incurred approximately $89.2 million of
cumulative net losses since our inception in 2003.  We expect to
continue to incur significant operating and capital
expenditures.  Although we have taken near-term cost cutting measures
aimed at preserving capital while we pursue sources of potential additional
financing, further development of our product candidates will likely require
substantial increases in our expenses as we:




·
            Continue
      to undertake clinical trials for product
  candidates;





·
            Scale-up
      the formulation and manufacturing of our product
    candidates;





·
            Seek
      regulatory approvals for product
candidates;





·
            Implement
      additional internal systems and infrastructure;
  and





·
            Hire
      additional personnel.





Even if
we succeed in developing and commercializing one or more of our product
candidates, for which success is not assured, we may not be able to generate
significant revenues.  If we do generate significant revenues, we may
never achieve or maintain profitability. Our failure to achieve or maintain
profitability could negatively impact the trading price of our common
stock.




25


If
we are not able to successfully develop and commercialize our product
candidates, we may not generate sufficient revenues to continue our business
operations.





To date,
none of our product candidates have been approved for commercial sale in any
country.  The process to develop, obtain regulatory approval for, and
commercialize potential drug candidates is long, complex, and
costly.  Unless and until we receive approval from the FDA and/or
other regulatory authorities for our product candidates, we cannot sell our
drugs and will not have product revenues.  Even if we obtain
regulatory approval for one or more of our product candidates, if we are unable
to successfully commercialize our products, we may not be able to generate
sufficient revenues to continue our business without raising significant
additional capital, which may not be available.





*
We  need to raise additional capital to fund our
operations.  The manner in which we raise any additional funds may
affect the value of your investment in our common stock.




As of
June 30, 2009, we had incurred approximately $89.2 million of cumulative net
losses and had approximately $4.5 million of cash and cash
equivalents.  Currently and anticipating additional reductions in
expense with no additional capital, we anticipate we will have sufficient cash
to fund our operations, principally related to the development of palifosfamide,
into the second quarter of 2010.  However, changes may occur that
would consume our existing capital prior to that time, including the progress of
our research and development efforts and changes in governmental
regulation.





Currently,
we have no committed sources of additional capital.  We do not know
whether additional financing will be available on terms favorable or acceptable
to us when needed, if at all.  Our business is highly cash-intensive
and our ability to continue operations after our current cash resources are
exhausted depends on our ability to obtain additional financing and achieve
profitable operations, as to which no assurances can be given.





If adequate additional
funds are not available when required,or if unsuccessful in entering
into partnership agreements for the further development of its products,we will be required to
delay, reduce or eliminate planned preclinical and clinical trialsand terminate theapproval process for our product candidates from the FDA or other
regulatory authorities.  In addition, we could be forced to
discontinue product development, reduce or forego sales and marketing efforts,
forego attractive business opportunities or pursue merger or
divestiture strategies.





Recently,
capital markets have experienced a period of unprecedented instability that we
expect may severely hinder our ability to raise capital within the time periods
needed or on terms we consider acceptable, if at all.  Moreover, if we
fail to advance one or more of our current product candidates to later-stage
clinical trials, successfully commercialize one or more of our product
candidates, or acquire new product candidates for development, we may have
difficulty attracting investors that might otherwise be a source of additional
financing.





In the
current economic environment, our need for additional capital and limited
capital resources may force us to accept financing terms that could be
significantly more dilutive than if we were raising capital when the capital
markets were more stable.  To the extent that we raise additional
capital by issuing equity securities, our stockholders may experience
dilution.  This dilution could be particularly substantial because the
price of our stock is trading at historically low prices.  In
addition, we may grant future investors rights superior to those of our common
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.


26


We
have a limited operating history upon which to base an investment
decision.





We are a
development-stage company that was incorporated in September 2003.  To
date, we have not demonstrated an ability to perform the functions necessary for
the successful commercialization of any product candidates.  The
successful commercialization of any product candidates will require us to
perform a variety of functions, including:




·
            Continuing
      to undertake preclinical development and clinical
  trials;





·
            Participating
      in regulatory approval processes;





·
            Formulating
      and manufacturing products; and





·
            Conducting
      sales and marketing activities.





Our
operations have been limited to organizing and staffing our Company, acquiring,
developing, and securing our proprietary product candidates, and undertaking
preclinical and clinical trials of our product candidates: darinaparsin,
palifosfamide, and indibulin. These operations provide a limited basis for you
to assess our ability to commercialize our product candidates and the
advisability of investing in our securities.





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





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





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





We
actively evaluate additional product candidates to acquire for development. Such
additional product candidates, if any, could significantly increase our capital
requirements and place further strain on the time of our existing personnel,
which may delay or otherwise adversely affect the development of our existing
product candidates.  We must manage our development efforts and
clinical trials effectively, and hire, train and integrate additional
management, administrative, and sales and marketing personnel.  We may
not be able to accomplish these tasks, and our failure to accomplish any of them
could prevent us from successfully growing our Company.


27


We
may not be able to successfully manage our growth.





In the
future, if we are able to advance our product candidates to the point of, and
thereafter through, clinical trials, we will need to expand our development,
regulatory, manufacturing, marketing and sales capabilities or contract with
third parties to provide for these capabilities.  Any future growth
will place a significant strain on our management and on our administrative,
operational, and financial resources.  Therefore, our future financial
performance and our ability to commercialize our product candidates and to
compete effectively will depend, in part, on our ability to manage any future
growth effectively.  To manage this growth, we must expand our
facilities, augment our operational, financial and management systems, and hire
and train additional qualified personnel. If we are unable to manage our growth
effectively, our business may be harmed.





Our
business will subject us to the risk of liability claims associated with the use
of hazardous materials and chemicals.





Our
contract research and development activities may involve the controlled use of
hazardous materials and chemicals.  Although we believe that our
safety procedures for using, storing, handling and disposing of these materials
comply with federal, state and local laws and regulations, we cannot completely
eliminate the risk of accidental injury or contamination from these
materials.  In the event of such an accident, we could be held liable
for any resulting damages and any liability could have a materially adverse
effect on our business, financial condition, and results of
operations.  In addition, the federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
hazardous or radioactive materials and waste products may require our
contractors to incur substantial compliance costs that could materially
adversely affect our business, financial condition, and results of
operations.





We
rely on key executive officers and scientific and medical advisors, and their
knowledge of our business and technical expertise would be difficult to
replace.





We are
highly dependent on Dr. Jonathan Lewis, our Chief Executive Officer and Chief
Medical Officer, Richard Bagley, our President, Chief Operating Officer and
Chief Financial Officer, and our principal scientific, regulatory, and medical
advisors.  Dr. Lewis’ and Mr. Bagley’s employment are governed by
written employment agreements that provide for terms that expire in January 2011
and July 2011, respectively.  Dr. Lewis and Mr. Bagley may terminate
their employment with us at any time, subject, however, to certain non-compete
and non-solicitation covenants.  The loss of the technical knowledge
and management and industry expertise of Dr. Lewis and Mr. Bagley, or any of our
other key personnel, could result in delays in product development, loss of
customers and sales, and diversion of management resources, which could
adversely affect our operating results.  We do not carry “key person”
life insurance policies on any of our officers or key employees.





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





We will
need to hire additional qualified personnel with expertise in preclinical and
clinical research and testing, government regulation, formulation and
manufacturing, and eventually, sales and marketing.  We compete for
qualified individuals with numerous biopharmaceutical companies, universities,
and other research institutions. Competition for such individuals is intense and
we cannot be certain that our search for such personnel will be
successful.  Attracting and retaining qualified personnel will be
critical to our success. If we are unable to hire additional qualified
personnel, our ability to grow our business may be harmed.




28




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





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





·
            Decreased
      demand for our product candidates;





·
            Injury
      to our reputation;





·
            Withdrawal
      of clinical trial participants;





·
            Withdrawal
      of prior governmental approvals;





·
            Costs
      of related litigation;





·
            Substantial
      monetary awards to patients;





·
            Product
      recalls;





·
            Loss
      of revenue; and





·
            The
      inability to commercialize our product
  candidates.





We
currently carry clinical trial insurance and product liability insurance.
However, our inability to renew our policies or to obtain sufficient insurance
at an acceptable cost could prevent or inhibit the commercialization of
pharmaceutical products that we develop, alone or with
collaborators.




RISKS
RELATED TO THE CLINICAL TESTING, REGULATORY APPROVAL AND MANUFACTURING OF OUR
PRODUCT CANDIDATES




If
we are unable to obtain the necessary U.S. or worldwide regulatory approvals to
commercialize any product candidate, our business will suffer.





We may
not be able to obtain the approvals necessary to commercialize our product
candidates, or any product candidate that we may acquire or develop in the
future for commercial sale. We will need FDA approval to commercialize our
product candidates in the U.S. and approvals from regulatory authorities in
foreign jurisdictions equivalent to the FDA to commercialize our product
candidates in those jurisdictions. In order to obtain FDA approval of any
product candidate, we must submit to the FDA a New Drug Application,
demonstrating that the product candidate is safe for humans and effective for
its intended use. This demonstration requires significant research and animal
tests, which are referred to as preclinical studies, as well as human tests,
which are referred to as clinical trials. Satisfaction of the FDA’s regulatory
requirements typically takes many years, depending upon the type, complexity,
and novelty of the product candidate, and will require substantial resources for
research, development, and testing. We cannot predict whether our research,
development, and clinical approaches will result in drugs that the FDA will
consider safe for humans and effective for their intended uses. The FDA has
substantial discretion in the drug approval process and may require us to
conduct additional preclinical and clinical testing or to perform post-marketing
studies. The approval process may also be delayed by changes in government
regulation, future legislation, or administrative action or changes in FDA
policy that occur prior to or during our regulatory review. Delays in obtaining
regulatory approvals may:





·
            Delay
      commercialization of, and our ability to derive product revenues from, our
      product candidates;





·
            Impose
      costly procedures on us; and





·
            Diminish
      any competitive advantages that we may otherwise
  enjoy.




29




Even if
we comply with all FDA requests, the FDA may ultimately reject one or more of
our NDAs.  We cannot be sure that we will ever obtain regulatory clearance
for any of our product candidates. Failure to obtain FDA approval for our
product candidates will severely undermine our business by leaving us without a
saleable product, and therefore without any potential revenue source, until
another product candidate can be developed. There is no guarantee that we will
ever be able to develop or acquire another product candidate or that we will
obtain FDA approval if we are able to do so.





In
foreign jurisdictions, we similarly must receive approval from applicable
regulatory authorities before we can commercialize any drugs. Foreign regulatory
approval processes generally include all of the risks associated with the FDA
approval procedures described above.




Our
product candidates are in early stages of clinical trials, which are very
expensive and time-consuming. We cannot be certain when we will be able to file
an NDA with the FDA and any failure or delay in completing clinical trials for
our product candidates could harm our business.





Our
product candidates are in early stages of development and require extensive
clinical testing. Notwithstanding our current clinical trial plans for each of
our existing product candidates, we may not be able to commence additional
trials or see results from these trials within our anticipated timelines. As
such, we cannot predict with any certainty if or when we might submit an NDA for
regulatory approval of our product candidates or whether such an NDA will be
accepted. Because we do not anticipate generating revenues unless and until we
submit one or more NDAs and thereafter obtain requisite FDA approvals, the
timing of our NDA submissions and FDA determinations regarding approval thereof,
will directly affect if and when we are able to generate revenues.





Clinical
trials are very expensive, time-consuming, and difficult to design and
implement.





Human
clinical trials are very expensive and difficult to design and implement, in
part because they are subject to rigorous regulatory requirements. The clinical
trial process itself is also time consuming. We estimate that clinical trials of
our product candidates will take at least several years to complete.
Furthermore, failure can occur at any stage of the trials, and we could
encounter problems that cause us to abandon or repeat clinical trials. The
commencement and completion of clinical trials may be delayed by several
factors, including:




·
            Unforeseen
      safety issues;





·
            Determination
      of dosing issues;





·
            Lack
      of effectiveness during clinical
trials;





·
            Slower
      than expected rates of patient
recruitment;





·
            Inability
      to monitor patients adequately during or after treatment;
    and





·
            Inability
      or unwillingness of medical investigators to follow our clinical
      protocols.





We have
received “Orphan Drug” status for palifosfamide in both the United States and
Europe and we are hopeful that we may be able to obtain “Fast Track” and/or
Orphan Drug status from the FDA for our other product candidates. Fast Track
allows the FDA to facilitate development and expedite review of drugs that treat
serious and life-threatening conditions so that an approved product can reach
the market expeditiously. Fast Track status does not apply to a product alone,
but applies to a combination of a product and the specific indications for which
it is being studied. Therefore, it is a drug’s development program for a
specific indication that receives Fast Track designation. Orphan Drug status
promotes the development of products that demonstrate the promise for the
diagnosis and treatment of one disease or condition and affords certain
financial and market protection benefits to successful applicants. However,
there is no guarantee that any of our product candidates, other than
palifosfamide, will be granted Orphan Drug status or will be granted Fast Track
status by the FDA or that, even if such product candidate is granted such
status, the product candidate’s clinical development and regulatory approval
process will not be delayed or will be successful.




30




In
addition, we or the FDA may suspend our clinical trials at any time if it
appears that we are exposing participants to unacceptable health risks or if the
FDA finds deficiencies in our IND submission or in the conduct of these trials.
Therefore, we cannot predict with any certainty the schedule for future clinical
trials.





The
results of our clinical trials may not support our product candidate
claims.




Even if
our clinical trials are completed as planned, we cannot be certain that their
results will support approval of our product candidates. Success in preclinical
testing and early clinical trials does not ensure that later clinical trials
will be successful, and we cannot be certain that the results of later clinical
trials will replicate the results of prior clinical trials and preclinical
testing. The clinical trial process may fail to demonstrate that our product
candidates are safe for humans and effective for the indicated uses. This
failure would cause us to abandon a product candidate and may delay development
of other product candidates. Any delay in, or termination of, our clinical
trials will delay the filing of our NDAs with the FDA and, ultimately, our
ability to commercialize our product candidates and generate product revenues.
In addition, our clinical trials involve small patient populations. Because of
the small sample size, the results of these clinical trials may not be
indicative of future results.





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





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





·
            Cost-effectiveness
      of our products relative to competing
products;





·
            Availability
      of reimbursement for our products from government or other healthcare
      payers; and





·
            Effectiveness
      of marketing and distribution efforts by us and our licensees and
      distributors, if any.




Because
we expect sales of our current product candidates, if approved, to generate
substantially all of our product revenues for the foreseeable future, the
failure of a drug to find market acceptance would harm our business and could
require us to seek additional financing in order to fund the development of
future product candidates.





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





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




31




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





We do not
have experience in drug formulation or manufacturing and do not intend to
establish our own manufacturing facilities. We lack the resources and expertise
to formulate or manufacture our own product candidates. We currently are
contracting for the manufacture of our product candidates. We intend to contract
with one or more manufacturers to manufacture, supply, store, and distribute
drug supplies for our clinical trials. If a product candidate we develop or
acquire in the future receives FDA approval, we will rely on one or more
third-party contractors to manufacture our drugs. Our anticipated future
reliance on a limited number of third-party manufacturers exposes us to the
following risks:





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





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





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





·
            Drug
      manufacturers are subject to ongoing periodic unannounced inspection by
      the FDA, the Drug Enforcement Administration the “DEA”), and corresponding
      state agencies to ensure strict compliance with good manufacturing
      practices and other government regulations and corresponding foreign
      standards. We do not have control over third-party manufacturers’
      compliance with these regulations and
standards.





·
            If
      any third-party manufacturer makes improvements in the manufacturing
      process for our products, we may not own, or may have to share, the
      intellectual property rights to the
innovation.





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




RISKS
RELATED TO OUR ABILITY TO COMMERCIALIZE OUR PRODUCT CANDIDATES




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





We
currently have no marketing, sales, or distribution capabilities. If and when we
become reasonably certain that we will be able to commercialize our current or
future products, we anticipate allocating resources to the marketing, sales and
distribution of our proposed products in North America; however, we cannot
assure that we will be able to market, sell, and distribute our products
successfully. Our future success also may depend, in part, on our ability to
enter into and maintain collaborative relationships for such capabilities and to
encourage the collaborator’s strategic interest in the products under
development, and such collaborator’s ability to successfully market and sell any
such products. Although we intend to pursue certain collaborative arrangements
regarding the sale and marketing of our products, there are no assurances that
we will be able to establish or maintain collaborative arrangements or, if we
are able to do so, whether we would be able to conduct our own sales efforts.
There can also be no assurance that we will be able to establish or maintain
relationships with third-party collaborators or develop in-house sales and
distribution capabilities. To the extent that we depend on third parties for
marketing and distribution, any revenues we receive will depend upon the efforts
of such third parties, and there can be no assurance that such efforts will be
successful. In addition, there can also be no assurance that we will be able to
market and sell our products in the United States or overseas.




32




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





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





The
market for our product candidates is characterized by intense competition and
rapid technological advances. If a product candidate receives FDA approval, it
will compete with a number of existing and future drugs and therapies developed,
manufactured and marketed by others. Existing or future competing products may
provide greater therapeutic convenience or clinical or other benefits for a
specific indication than our products, or may offer comparable performance at a
lower cost. If our products fail to capture and maintain market share, we may
not achieve sufficient product revenues and our business will
suffer.





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





·
            Developing
      drugs;





·
            Undertaking
      preclinical testing and human clinical
trials;





·
            Obtaining
      FDA and other regulatory approvals of
drugs;





·
            Formulating
      and manufacturing drugs; and





·
            Launching,
      marketing, and selling drugs.





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





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





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





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





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





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





·
            The
      price at which we sell our
products.




33




Our
ability to generate product revenues will be diminished if our drugs sell for
inadequate prices or patients are unable to obtain adequate levels of
reimbursement.





Our
ability to commercialize our drugs, alone or with collaborators, will depend in
part on the extent to which reimbursement will be available from:




·
            Government
      and health administration
authorities;





·
            Private
      health maintenance organizations and health insurers;
  and





·
            Other
      healthcare payers.





Government
and other healthcare payers increasingly attempt to contain healthcare costs by
limiting both coverage and the level of reimbursement for drugs. As a result, we
cannot provide any assurances that third-party payors will provide adequate
coverage of and reimbursement for any of our product candidates. If we are
unable to obtain adequate coverage of and payment levels for our product
candidates from third-party payors, physicians may limit how much or under what
circumstances they will prescribe or administer them and patients may decline to
purchase them. This in turn could affect our ability to successfully
commercialize our products and impact our profitability and future
success.





In both
the United States and certain foreign jurisdictions, there have been a number of
legislative and regulatory policies and proposals in recent years to change the
healthcare system in ways that could impact our ability to sell our products
profitably. On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”), which
contains, among other changes to the law, a wide variety of changes that have
and will impact Medicare reimbursement of pharmaceuticals to physicians and
hospitals.





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





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





RISKS
RELATED TO OUR INTELLECTUAL PROPERTY





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





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




·
            To
      date, we have exclusive rights to certain U.S. and foreign intellectual
      property. We anticipate filing additional patent applications both in the
      U.S. and in other countries, as appropriate. However, we cannot
      predict:





·
            The
      degree and range of protection any patents will afford us against
      competitors, including whether third parties will find ways to invalidate
      or otherwise circumvent our
patents;





·
            If
      and when patents will be issued;





·
            Whether
      or not others will obtain patents claiming aspects similar to those
      covered by our patents and patent applications;
  or





·
            Whether
      we will need to initiate litigation or administrative proceedings that may
      be costly whether we win or lose.




34




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





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





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





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





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





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





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





OTHER
RISKS RELATED TO OUR COMPANY





We
are subject to Sarbanes-Oxley and the reporting requirements of federal
securities laws, which can be expensive.





As a
public reporting company, we are subject to the Sarbanes-Oxley Act of 2002, as
well as to the information and reporting requirements of the Securities Exchange
Act of 1934, as amended, and other federal securities laws. As a result, we
incur significant legal, accounting, and other expenses that we did not incur as
a private company, including costs associated with our public company reporting
requirements and corporate governance requirements. As an example of public
reporting company requirements, we evaluate the effectiveness of disclosure
controls and procedures and of our internal control over financing reporting in
order to allow management to report on such controls. Pursuant to
Sarbanes-Oxley, our independent registered public accounting firm will be
required to attest to the effectiveness of our internal control over financial
reporting, as of December 31, 2009, in our Annual Report on Form 10-K for the
fiscal year ending December 31, 2009. While management has not currently
identified any material weaknesses in our internal control over financial
reporting, there can be no assurance that our systems will be deemed effective
when our independent registered public accounting firm reviews the systems
during 2009 and tests transactions. In addition, any updates to our finance and
accounting systems, procedures and controls, which may be required as a result
of our ongoing analysis of internal controls, or results of testing by our
independent auditor, may require significant time and expense.




35




As a
company with limited capital and human resources, our management has identified
that there is a potential for a lack of segregation of duties due to the limited
number of employees within our company’s financial and administrative functions.
Management believes that, based on the employees involved and the control
procedures in place, risks associated with such lack of segregation are not
significant and that the potential benefits of adding employees to segregate
duties more clearly do not justify the associated added expense. However, our
management is working to continuously monitor and improve internal controls and
has set in place controls to mitigate the potential segregation of duties risk.
We have engaged the services of a Sarbanes-Oxley consultant to tighten our
internal controls and ensure adherence to the regulations. In the event
significant deficiencies or material weaknesses are indentified in our internal
control over financial reporting that we cannot remediate in a timely manner,
investors and others may lose confidence in the reliability of our financial
statements and the trading price of our common stock and ability to obtain any
necessary equity or debt financing could suffer. In addition, in the event that
our independent registered public accounting firm is unable to rely on our
internal controls over financial reporting in connection with its audit of our
financial statements, and in the further event that it is unable to devise
alternative procedures in order to satisfy itself as to the material accuracy of
our financial statements and related disclosures, we may be unable to file our
periodic reports with the Securities and Exchange Commission. This would likely
have an adverse affect on the trading price of our common stock and our ability
to secure any necessary additional equity or debt financing, and could result in
the delisting of our common stock from the NASDAQ Capital Market, which would
severely limit the liquidity of our common stock.




There
is not now, and there may not ever be an active market for shares of our common
stock.





In
general, there has been limited trading activity in shares of the Company’s
common stock. The small trading volume may make it more difficult for our
stockholders to sell their shares as and when they choose. Furthermore, small
trading volumes generally depress market prices. As a result, you may not always
be able to resell shares of our common stock publicly at the time and prices
that you feel are fair or appropriate.





*
Our common stock could be delisted from The NASDAQ Capital Market, which could
negatively impact the price of our common stock and our ability to access the
capital markets.





Our
common stock is listed on The NASDAQ Capital Market. The listing standards of
The NASDAQ Capital Market provide, among other things, that a company may be
delisted if the bid price of its stock drops below $1.00 for a period of 30
consecutive business days. In addition, our total stockholders’ equity at June
30, 2009 was approximately $1.7 million. So long as our stockholders’ equity is
less than $2.5 million, we will fail to comply with The NASDAQ Capital Market’s
listing standards if shares of our common stock fail to have an aggregate market
value of at least $35 million (or $1.61 per share based on our common stock
outstanding at June 30, 2009) for 10 consecutive business days. If we fail to
comply with these or other listing standards applicable to us, our common stock
may be delisted from The NASDAQ Capital Market. The delisting of our common
stock would significantly affect the ability of investors to trade our
securities and would significantly negatively affect the value and liquidity of
our common stock. In addition, the delisting of our common stock could
materially adversely affect our ability to raise capital on terms acceptable to
us or at all. Delisting from The NASDAQ Capital Market could also have other
negative results, including the potential loss of confidence by suppliers and
employees, the loss of institutional investor interest and fewer business
development opportunities.





Anti-takeover
provisions in our charter documents and under Delaware law may make an
acquisition of us, which may be beneficial to our stockholders, more
difficult.





Provisions
of our amended and restated certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders. These provisions
authorize the issuance of “blank check” preferred stock that could be issued by
our board of directors to increase the number of outstanding shares and hinder a
takeover attempt, and limit who may call a special meeting of stockholders. In
addition, Section 203 of the Delaware General Corporation Law, which prohibits
business combinations between us and one or more significant stockholders unless
specified conditions are met, may discourage, delay or prevent a third party
from acquiring us.





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




We have
never paid dividends on our capital stock and we do not anticipate that we will
pay any dividends for the foreseeable future. Accordingly, any return on an
investment in our Company will be realized, if at all, only when you sell shares
of our common stock.




36




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





Not
applicable.





Item
3. Defaults upon Senior Securities





Not
applicable.




Item
4. Submission of Matters to a Vote of the Security Holders





The
Company’s Annual Meeting of Stockholders was held on April 24, 2009. The
proposals submitted to our stockholders and the results of voting on such
proposals were as noted below:





Proposal 1:





Election
of Directors: The following eight persons were elected as directors for a
one-year term expiring at the Annual Meeting to be held in 2010.





Affirmative
      Votes
                          
                          Authority
      Withheld
                          
                          AbstainedJonathan
      Lewis, M.D., Ph.D.
                          
                          13,878,629
                          
                          256,802
                          
                          0Richard
      E. Bagley
                          
                          13,768,604
                          
                          366,827
                          
                          0Murray
      Brennan, M.D.
                          
                          13,877,529
                          
                          257,902
                          
                          0James
      Cannon
                          
                          13,867,265
                          
                          268,166
                          
                          0Senator
      Wyche Fowler, Jr., J.D.
                          
                          13,875,529
                          
                          259,902
                          
                          0Gary
      S. Fragin
                          
                          13,865,643
                          
                          269,788
                          
                          0Timothy
      McInerney
                          
                          13,746,897
                          
                          388,534
                          
                          0Michael
      Weiser, M.D., Ph.D.
                          
                          13,703,437
                          
                          431,994
                          
                          0





Proposal
2:





Increase
to Stock Option Plan: The stockholders approved an amendment to the Company’s
2005 Stock option Plan to increase the number of shares of common stock reserved
for issuance thereunder from 4,002,436 shares to 6,002,436 shares. The voting
results were as follows:





Affirmative Votes
              
              Votes Against
              
              Abstentions7,939,557
              
              310,167
              
              79,881





Proposal
3:





Ratification
of Independent Auditors: The stockholders ratified the selection of Vitale,
Caturano & Company, P.C. (now Caturano and Company, P.C.) as the independent
registered public accounting firm of the Company for fiscal 2009. The voting
results were as follows:





Affirmative Votes
              
              Votes Against
              
              Abstentions13,872,796
              
              62,731
              
              199,905





Item 5.
Other Information





None.





Item 6.
Exhibits





The
exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this report and such Exhibit Index is incorporated herein by
reference.




37




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





/s/
      Jonathan LewisJonathan
      Lewis, M.D., Ph.D.
                  Chief
      Executive Officer(Principal
      Executive Officer)


Dated:
August 14, 2009





/s/
      Richard E. BagleyRichard
      E. Bagley
                  President
      and Chief Financial Officer(Principal
      Financial and Accounting
Officer)


Dated:
August 14, 2009




38




EXHIBIT
INDEX





4.1
                  
                  Amendment
      No. 3 to the ZIOPHARM Oncology, Inc. 2003 Stock Option Plan (incorporated
      by reference to Exhibit 4.4 to the Registrant's registration statement on
      Form S-8 filed July 9, 2009).31.1*
                  
                  Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200231.2*
                  
                  Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  200232.1*
                  
                  Certifications
      pursuant to 18 U.S.C. Section
1350





*       
     Filed herewith




39