Talon Therapeutics 10Q 2008 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarter ended September 30, 2008

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

For the transition period __________ to __________.

Commission file number 001-32626

Hana Biosciences, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware (State or other jurisdiction of incorporation or organization)	32-0064979 (I.R.S. Employer Identification No.)

7000 Shoreline Ct., Suite 370, South San Francisco, CA.	94080
(Address of principal executive offices)	(Zip Code)

(650) 588-6404

(Registrant's Telephone Number, Including Area Code)

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

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

	Large accelerated filer o		Accelerated filer o
	Non-accelerated filer o		Smaller reporting company x
	(Do not check if smaller reporting company)

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

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

INDEX

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements		4

	Unaudited Condensed Balance Sheets		4

	Unaudited Condensed Statements of Operations and Other Comprehensive Loss		5

	Unaudited Condensed Statement of Changes in Stockholders' Equity (Deficit)		6

	Unaudited Condensed Statements of Cash Flows		7

	Notes to Unaudited Condensed Financial Statements		8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3.	Quantitative and Qualitative Disclosure About Market Risk		27

Item 4T.	Controls and Procedures		27

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings		28

Item 1A.	Risk Factors		28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28

Item 3.	Defaults Upon Senior Securities		28

Item 4.	Submission of Matters to a Vote of Security Holders		28

Item 5.	Other Information		28

Item 6.	Exhibits		28

	Signatures		29

	Index of Exhibits Filed with this Report		30

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Forward-Looking Statements

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

	·	our ability to obtain adequate financing;

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

the regulatory approval of our drug candidates;

our use of clinical research centers and other contractors;

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

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

our ability to market any of our products;

our history of operating losses;

our ability to secure adequate protection for our intellectual property;

our ability to compete against other companies and research institutions;

the effect of potential strategic transactions on our business;

our ability to attract and retain key personnel; and

the volatility of our stock price.

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

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

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HANA BIOSCIENCES, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

	September 30, 2008			December 31, 2007

ASSETS
Current assets:
Cash and cash equivalents	$	3,743,357		$	20,795,398
Available-for-sale securities		72,000			96,000
Prepaid expenses and other current assets		738,491			489,293
Total current assets		4,553,848			21,380,691

Property and equipment, net		445,436			432,529
Restricted cash		125,000			125,000
Debt issuance costs		1,395,296			1,423,380
Total assets	$	6,519,580		$	23,361,600

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	270,311		$	1,682,739
Accrued other expenses		187,330			496,239
Accrued personnel related expenses		637,600			763,050
Leased equipment: short-term		48,085			13,919
Accrued clinical development costs		2,092,441			1,156,011
Total current liabilities		3,235,767			4,111,958

Notes payable		2,189,716			2,025,624
Warrant liabilities		2,032,523			4,232,355
Leased equipment: long-term		58,680			33,861
Total long term liabilities		4,280,919			6,291,840
Total liabilities		7,516,686			10,403,798
Commitments and contingencies (Note 9):

Stockholders' equity (deficit):
Common stock; $0.001 par value:
100,000,000 shares authorized, 32,386,130 and 32,169,553 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively		32,386			32,170
Additional paid-in capital		103,903,612			101,843,390
Accumulated other comprehensive loss		(20,000	)		(104,000	)
Accumulated deficit		(104,913,104	)		(88,813,758	)
Total stockholders' equity (deficit)		(997,106	)		12,957,802
Total liabilities and stockholders' equity (deficit)	$	6,519,580		$	23,361,600

See accompanying notes to unaudited condensed financial statements.

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HANA BIOSCIENCES, INC.

CONDENSED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
License revenue	$	--		$	1,150,000		$	--		$	1,150,000
Operating expenses:
General and administrative		973,414			481,155			4,623,889			6,553,502
Research and development		4,347,265			5,730,859			13,031,060			17,442,556
Total operating expenses		5,320,679			6,212,014			17,654,949			23,996,058

Loss from operations		(5,320,679	)		(5,062,014	)		(17,654,949	)		(22,846,058	)

Other income (expense):
Interest income		39,997			265,307			271,361			972,932
Interest expense		(254,569	)		(1,138	)		(756,211	)		(3,807	)
Other expense, net		(8,516	)		(42,418	)		(51,380	)		(61,057	)
Gain or loss on derivative		382,152			--			2,199,833			--
Realized loss on marketable securities		--			(260,000	)		(108,000	)		(436,000	)
Total other income (expense)		159,064			(38,249	)		1,555,603			472,068

Net loss	$	(5,161,615	)	$	(5,100,263	)	$	(16,099,346	)	$	(22,373,990	)

Net loss per share, basic and diluted	$	(0.16	)	$	(0.16	)	$	(0.50	)	$	(0.75	)

Weighted average shares used in computing net loss per share, basic and diluted		32,385,366			31,197,295			32,265,010			29,958,487
Comprehensive loss:
Net loss	$	(5,161,615	)	$	(5,100,263	)	$	(16,099,346	)	$	(22,373,990	)
Unrealized holdings gains (losses) arising during the period		(20,000	)		--			(128,000	)		(456,000	)
Less: reclassification adjustment for losses included in net loss		--			--			108,000			436,000

Comprehensive loss	$	(5,181,615	)	$	(5,100,263	)	$	(16,119,346	)	$	(22,393,990	)

See accompanying notes to unaudited condensed financial statements.

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HANA BIOSCIENCES, INC.

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

(Unaudited)

Period from January 1, 2008 to September 30, 2008

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

Balance at September 30, 2008		32,386,130	$	32,386	$	103,903,612		$	(20,000	)	$	(104,913,104	)	$	(997,106	)

See accompanying notes to unaudited condensed financial statements.

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HANA BIOSCIENCES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(16,099,346	)	$	(22,373,990	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		141,917			126,798
Share-based compensation to employees for services		1,882,539			4,006,878
Share-based compensation to nonemployees for services		(825	)		(150,165	)
Issuance of shares in partial consideration for license milestone payment		125,000			--
Amortization of discount and debt issuance costs		192,176			--
Realized loss on available for sale securities		108,000			436,000
Unrealized gain on derivative liability		(2,199,832	)		--
Loss on disposal of capital assets		5,781			--
Changes in operating assets and liabilities:
Increase(decrease) in prepaid expenses and other assets		(249,198	)		29,964
Decrease in accounts payable		(1,412,428	)		(863,791	)
Increase(decrease) in accrued and other current liabilities		502,071			(1,033,253	)
Net cash used in operating activities		(17,004,145	)		(19,820,507	)

Cash flows from investing activities:
Purchase of property and equipment		(80,378	)		(85,333	)
Purchase of marketable securities		--			(4,496,252	)
Sale of marketable securities		--			8,975,000
Net cash used in investing activities		(80,378	)		4,393,415

Cash flows from financing activities:
Repurchase of employee stock options		--			(117,000	)
Proceeds from exercise of warrants and options and issuance of shares under employee stock purchase plan		53,724			142,183
Proceeds from registered direct and private placements of preferred and common stock, net		--			3,850,000
Payments on capital leases		(21,242	)		--
Net cash used in financing activities		32,482			3,875,183

Net decrease in cash and cash equivalents		(17,052,041	)		(11,551,909	)
Cash and cash equivalents, beginning of period		20,795,398			29,127,850
Cash and cash equivalents, end of period	$	3,743,357		$	17,575,941
Supplemental disclosures of cash flow data:
Cash paid for interest	$	564,035		$	3,807
Supplemental disclosures of noncash financing activities:
Equipment financed with capital leases		80,227			--
Unrealized loss on available-for-sale securities		24,000			20,000
Common stock issued to as partial consideration for license agreement	$	125,000		$	--

See accompanying notes to unaudited condensed financial statements.

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

BUSINESS

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

Cancer Therapeutics

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

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

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

Supportive Care

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

BASIS OF PRESENTATION

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

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

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

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

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

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

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Use of Management's Estimates

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

Segment Reporting

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Loss Per Share

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per common share is the same as basic net loss per common share, since potentially dilutive securities from stock options, stock warrants and restricted stock would have an anti-dilutive effect because the Company incurred a net loss during each period presented. The number of shares potentially issuable at September 30, 2008 and 2007, upon exercise or conversion that were not included in the computation of net loss per share totaled 11,768,692 and 6,029,602, respectively.

Cash and Cash Equivalents and Concentration of Risk

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

Fair Value of Financial Instruments

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

Debt Issuance Costs

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

Warrant Liabilities

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Income Taxes

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the recognition, measurement, accounting and disclosure for uncertainty in tax positions. The Company is subject to the provisions of FIN 48 as of January 1, 2007, and has analyzed filing positions in federal and state jurisdictions where it has filed income tax returns, as well as all open tax years in these jurisdictions. The Company is subject to U.S. and California taxes for tax jurisdictions, as defined. The only periods subject to examination for the Company’s federal return are the 2004 through 2007 tax years. The periods subject to examination for the Company’s state returns in California are the 2003 through 2007 tax years. There are currently no ongoing examinations by the relevant tax authorities.

At the adoption date and as of September 30, 2008, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. There was no interest or penalties recognized related to uncertain tax positions. The Company will account for any interest related to uncertain tax positions as interest expense, and for penalties as tax expense.

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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NOTE 4. LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

NOTE 5. LOAN AGREEMENT

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

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

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

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

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

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

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

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

	Face Value of Notes Payable Outstanding		Allocation of Discount of Debt ¹			Carrying Value
Drawdown #1 - November 1, 2007	$	7,500,000	$	(1,868,166	)	$	5,631,384
Unallocated discount		—		(3,442,118	)		(3,442,118	)

Net carrying value of all notes outstanding	$	7,500,000	$	(5,310,284	)	$	2,189,716

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 6. STOCKHOLDERS' EQUITY (DEFICIT)

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

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

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

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

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

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

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

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

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

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

NOTE 7. FAIR VALUE MEASUREMENTS

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

•

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

•

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

•

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

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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

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

	Level 1		Level 2		Level 3		Total
Liabilities
Warrant liabilities		—		—	$	2,032,523	$	2,032,523
Total	$	—	$	—	$	2,032,523	$	2,032,523

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

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

NOTE 8. AVAILABLE-FOR-SALE SECURITIES

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

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

	Beginning Value		Unrealized Gain/(Loss), net of reclassification adjustment			Gross Realized Gain/(Loss)			Ending Value
Nine months ended September 30, 2007	$	656,000	$	(20,000	)	$	(436,000	)	$	200,000

Nine months ended September 30, 2008	$	96,000	$	84,000		$	(108,000	)	$	72,000

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HANA BIOSCIENCES, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 9. COMMITMENTS

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

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

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

NOTE 10. RESTRICTED CASH

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

NOTE 11. SUBSEQUENT EVENT

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

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

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

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

Overview

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

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

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

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

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

Menadione - We acquired the rights to Menadione in October 2006 pursuant to a license agreement with the Albert Einstein College of Medicine or AECOM. We have finalized an initial formulation of Menadione and completed essential IND-enabling studies. We initiated a Phase 1 clinical trial in cancer patients in April 2008 and another Phase 1 study in healthy volunteers in September 2008.

To date, we have not received regulatory approval and marketing authorization for any drug candidates in any market. However we have received revenues from a sublicense agreement entered into with Par Pharmaceuticals in July 2007 for Zensana. The successful development of our current product candidates is highly uncertain. Product development costs and timelines can vary significantly for each product candidate and are difficult to accurately predict. Various laws and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of each product. The lengthy process of seeking these approvals and the subsequent compliance with applicable statutes and regulations require the expenditure of substantial resources. Any failure by us to obtain, or any delay in obtaining, regulatory approvals could materially, adversely affect our business. Also, if we are unable to enter into strategic partnerships, we may not be able to develop or we may be forced to slow down development and commercialization of some or all our product candidates.

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We will not generate any product commercial sales until we receive approval from the FDA or equivalent foreign regulatory bodies to begin marketing and selling our pharmaceutical candidates. Developing pharmaceutical products, however, is a lengthy and very expensive process. In addition, as we continue the development of our remaining product pipeline, our research and development expenses will further increase. To the extent we are successful in acquiring additional product candidates for our development pipeline, our need to finance further research and development will continue increasing. Our successes depend not only on the safety and efficacy of our product candidates, but also on our ability to finance the development of these product candidates or in some instances, enter into strategic partnerships. Our major sources of working capital have been proceeds from various private financings, primarily private sales of our common stock and other equity securities.

Revenues

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

Research and Development Expenses

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

General and Administrative Expenses

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

Critical Accounting Policies and Estimates

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

Share Based Compensation

Effective January 1, 2006, we adopted the provisions of SFAS No. 123R requiring that compensation cost relating to all share-based employee payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the fair value of the award using the Black-Scholes-Merton option pricing model, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award).

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

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

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

The guidance in SFAS No. 123R, SAB No. 107 and SAB No. 110 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions. See Note 6 of our unaudited financial statements included elsewhere in this Form 10-Q report for further information regarding the SFAS No. 123R disclosures.

Warrant Liabilities

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

Licensed In-Process Research and Development

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

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

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

Recent Accounting Pronouncements

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

Results of Operations

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

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

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

Zensana.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Zensana.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Liquidity and Capital Resources

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

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

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

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

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

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

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

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

We believe that our cash, cash equivalents and marketable securities, which totaled $3.8 million as of September 30, 2008, along with the funds available through the Deerfield agreement, will be sufficient to meet our anticipated operating needs into the fourth quarter of 2009 based upon current operating and spending assumptions. However, we expect to incur substantial expenses as we continue our drug development efforts, particularly to the extent we advance our lead candidate Marqibo through a pivotal clinical study. We cannot guarantee that future financing will be available in amounts or on terms acceptable to us, if at all.

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

costs associated with conducting preclinical and clinical testing;

costs of establishing arrangements for manufacturing our product candidates;

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

costs, timing and outcome of regulatory reviews;

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

costs of increased general and administrative expenses.

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

Research and Development Projects

The discussion below describes for each of our development projects the research and development expenses we have incurred to date and, to the extent we are able to reasonably ascertain, the amounts we estimate we will have to expend in order to complete development of each project and the time we estimate it will take to complete development of each project. In addition to those risks identified in our Annual Report on Form 10-K for the year ended December 31, 2007, our assumptions relating to the expected costs of development and timeframe for completion are dependent on numerous risks and other factors, including the availability of capital, unforeseen safety issues, lack of effectiveness, and significant unforeseen delays in the clinical trial and regulatory approval process, any of which could be extremely costly. In addition, our estimates assume that we will be able to enroll a sufficient number of patients in clinical trials.

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

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

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

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

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

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Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Not applicable.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures .

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

Limitations on the Effectiveness of Controls

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

Changes in Internal Controls Over Financial Reporting

During the quarter ended September 30, 2008, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any legal proceeding.

Item 1A. Risk Factors

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

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

None

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibit No.		Description

31.1		Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).

32.1		Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

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SIGNATURES

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

	HANA BIOSCIENCES, INC.

Dated: November 14, 2008	By:	/s/ Steven R. Deitcher, MD
		Steven R. Deitcher, MD
		President and Chief Executive Officer


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

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Index to Exhibits Filed with this Report

Exhibit No.		Description

31.1		Certification of Chief Executive Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of Chief Financial Officer, as required by Rule 13a-14(a) or Rule 15d-14(a).

32.1		Certification of Chief Executive Officer and Chief Financial Officer, as required by Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	8th grade Avg

Talon Therapeutics (TLON) Inactive 10-Q2008 Q3 Quarterly report

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