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

Overview

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

· Marqibo® (vincristine sulfate liposomes injection), a novel, targeted 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.

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

· 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.

· 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).

Revenues

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

Research and Development Expenses

Research and development expenses, which account for the bulk of our expenses, consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for 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.

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

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

· the number of patients who participate in the trials;

· the number of sites included in the trials;

· the rates of patient recruitment and enrollment;

· the duration of patient treatment and follow-up;

· the costs of manufacturing our drug candidates; and

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

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.

Share-based Compensation

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

Critical Accounting Policies

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

Share Based Compensation

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

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

Warrant Liabilities

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

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

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

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

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements." SFAS No. 160 requires all entities to report non-controlling (minority) interests in subsidiaries as equity in the consolidated financial statements. SFAS No. 160 requires that transactions between an entity and non-controlling interests are treated as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company does not own subsidiaries and as such, adoption of SFAS No. 160 had no impact on its financial position and results of operations.

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 adoption of SFAS 161 did not have a material effect on the Company's 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 adoption of EITF Issue No. 07-05 did not have a material effect on the Company's financial statements.

Results of Operations

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

General and administrative expenses. For the three months ended March 31, 2009, general and administrative, or G&A, expense was $1.1 million, as compared to $1.9 million for the three months ended March 31, 2008. The decrease of $0.8 million is due to decreased personnel related expenses of $0.4 million, decreased costs for outside services and professional services of $0.3 million and decreased allocable expenses of $0.1 million.

The $0.4 million decrease in employee-related expenses includes:

· a decrease of $0.3 million in employee related share-based compensation expense due to decreased valuation of stock options issued to employees as a result of the decrease in value of the Company's stock price and

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

The $0.3 million decrease in outside services and professional fees includes:

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

· a decrease of $0.1 million in legal, accounting and other consulting fees.

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

Research and development expenses. The following table summarizes our R&D expenses incurred for preclinical support, contract manufacturing for clinical supplies and clinical trial services provided by third parties, as well as milestone payments for in-licensed technology for each of our current major product development programs for the three months ended March 31, 2009 and 2008. The table also summarizes unallocated costs, which consist of personnel, facilities and other costs not directly allocable to development programs.

                                                                            Annual %
    Product candidates ($ in thousands)             2009         2008        Change
    Marqibo                                        $ 1,221      $   878            39 %
    Menadione                                          431          349            23 %
    Brakiva                                            136          576           -76 %
    Alocrest                                           (13 )        305           N/A
    Discontinued/out-licensed product candidates         5            8           -38 %
    Total third party costs                            823          483            70 %
    Allocable costs and overhead                       305          412           -26 %
    Personnel related expense                        1,349        1,174            15 %
    Share-based compensation expense                   205           79           159 %
    Total research and development expense         $ 4,462      $ 4,264             5 %

Marqibo. In the three months ended March 31, 2009, we continued enrollment in our Phase 2, registration-enabling, open-label trial in relapsed adult ALL and our pilot Phase 2 trial in metastic uveal melanoma. We plan to finish enrollment in both of these trials by mid-2009. We plan to initiate a confirmatory trial in the first half of 2010 and we also intend to seek limited approval in the ALL indication in early 2010, pending the results of our Phase 2 study in relapsed adult ALL. We expect to spend approximately $6.7 million on external project costs relating to Marqibo in 2009, including the amounts expended in the first quarter of 2009. We estimate that we will need to expend at least an additional aggregate of approximately $45 million in order for us to obtain full FDA approval for Marqibo, if ever, which includes milestone payments that would be owed to our licensor upon FDA approval. Through of March 31, 2009, we have spent approximately $9.6 million on the development of Marqibo. We expect that it will take approximately three to four years until we will have completed development and obtained full FDA approval of Marqibo, if ever.

Menadione. In the three months ended March 31, 2009, we continued enrollment in our Phase 1 clinical trials in Menadione in cancer patients. We completed the healthy volunteer trial in late 2008 and plan to complete the trial in cancer patients by mid-2009. We plan to initiate a Phase 2 clinical trial in cancer patients in mid 2009. As this drug is early in its clinical development, both the registrational strategy and total expenditures to obtain FDA approval are still being evaluated. Including the amounts expended in the first quarter of 2009, we expect to spend approximately $3.2 million on external project costs relating to Menadione in 2009, and we estimate that we will need to expend at least an aggregate of approximately $40 million of additional funds in order for us to obtain full FDA approval for Menadione, if ever, which includes milestone payments that would be owed to our licensor upon FDA approval. Through of March 31, 2009, we have spent approximately $6.1 million on the development of Menadione. We expect that it will take approximately two to three years until we will have completed development and obtained FDA approval, if ever.

Brakiva. We initiated a Phase 1 clinical trial in November 2008 and continued enrollment in the three months ended March 31, 2009. We plan to complete enrollment in this clinical trial in 2009 and expect that we will expend approximately $0.5 million in 2009, including the amounts expended in the first quarter of 2009. We are exploring options for further development of Brakiva beyond the phase 1 trial. As this drug is early in its clinical development, both the registrational strategy and total expenditures to obtain FDA approval are still being evaluated. Through of March 31, 2009, we have spent approximately $3.5 million on the development of Brakiva.

Alocrest. We completed enrollment in a Phase 1 clinical trial in early 2008. This Phase 1 trial was designed to assess safety, tolerability and preliminary efficacy in patients with advanced solid tumors. We are currently exploring options for the continued development of Alocrest and do not expect to incur significant project costs in 2009. Through of March 31, 2009, we have spent approximately $3.4 million on the development of Alocrest.

Discontinued/Out-licensed projects. We did not pursue development on our discontinued/out-license product candidates in the three months ended March 31, 2009. These include Zensana which was out-licensed in 2007, IPdR and Talvesta, which were terminated in 2006 and 2007, respectively. We may incur only incidental expenses in 2009 related to the continued disposition of these terminated products.

Other R&D expenses. Third-party costs related to indirect support of our clinical trials and product candidates increased in the three months ended March 31, 2009. These costs are not directly allocable to an individual product candidate and primarily relate to outside services and professional fees related to indirect support of our r&d functions including data management, regulatory and clinical development. We expect these costs to stay consistent in 2009 with the totals for 2008 as we finish the rALLy study in Marqibo and prepare for the Phase 2 study in Menadione and the confirmatory study for Marqibo. Allocable costs decreased as a result of cost-cutting measures pursued by the Company. We expect these costs to decrease in 2009 compared to 2008. Personnel related costs increased in the three months ended March 31, 2009 and we expect these costs to remain slightly higher in 2009 due to certain executive positions that have been filled in later 2008 and early 2009. Stock compensation expense increased due to a large credit in the three months ended March 31, 2008 due to the termination of certain executives with large stock option grants which were cancelled upon termination. We expect share-based compensation will continue to decrease until our stock price increases or the amount of options issued increases.

Interest income. For the three months ended March 31, 2009, interest income was less than $12,000 compared to interest income of $0.2 million for the three months ended March 31, 2008. The decrease is a result of decreased cash balances in our interest bearing accounts as well as decreasing interest rates.

Interest expense. For the three months ended March 31, 2009, interest expense was $0.7 million as compared to interest expense of $0.2 million for the three months ended March 31, 2008. The increase resulted from a larger average balance outstanding on our loan facility with Deerfield. We originally entered into this loan agreement in October 2007.

Gain or loss on change in fair market value of warrant liabilities. For the three months ended March 31, 2009, 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 4) of $0.7 million.
In three months ended March 31, 2008, we recognized a loss on this warrant liability of approximately $10,000. The value of these warrants is largely dependent on the price of our common stock, and as the stock price is reduced, the value of these warrants will decrease and our gain on the change in market value will increase.

Liquidity and Capital Resources

As of March 31, 2009, we had aggregate cash and cash equivalents and available-for-sale securities of $8.6 million. In addition, pursuant to the Deerfield loan facility, we have $5.0 million in funds that became available to us on April 30, 2009 and $2.5 million that may become available to us if we achieve a certain milestone in the development of our product candidate Menadione. As of March 31, 2009, we had drawn down $22.5 million of the total $30 million available under the agreement.

Through March 31, 2009, we have an accumulated deficit of $116.6 million. Management expects this deficit to increase in future periods as we continue to develop our product candidates. We expect to incur sizeable expenses in our Marqibo development program as we expect to complete enrollment in the Phase 2 registration-enabling study in the first half of 2009. We also expect to incur considerable expenses in the development of Menadione as we anticipate the initiation of a Phase 2 clinical trial in mid 2009. Our continued operations will depend on whether we are able to raise additional funds through various potential sources, such as equity and debt financing. Through March 31, 2009, a significant portion of our financing has been and will continue to be through private placements of common stock, preferred stock and debt financing.

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

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

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

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

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

We believe that our cash, cash equivalents and marketable securities, which totaled $8.6 million as of March 31, 2009, along with the funds available through the Deerfield agreement, will be sufficient to meet our anticipated operating needs into the second half of 2009 based upon current operating and spending assumptions. However, we expect to incur substantial expenses as we . . .