10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2007

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from                      to                     .

Commission File Number:

000-31633

Kosan Biosciences Incorporated

(Exact name of registrant as specified in its charter)

Delaware	94-3217016
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3832 Bay Center Place, Hayward, California 94545

(address of principal executive offices)

(510) 732-8400

(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 registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (Check one):

Large accelerated filer  ¨                    Accelerated filer  x                     Non-accelerated filer  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.001 par value; 42,585,680 shares outstanding at October 31, 2007.

KOSAN BIOSCIENCES INCORPORATED

Form 10-Q

Quarter Ended September 30, 2007

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1:	Financial Statements:
	Condensed Balance Sheets as of September 30, 2007 (unaudited) and December 31, 2006	3
	Condensed Statements of Operations (unaudited) for the three and nine months ended September 30, 2007 and 2006	4
	Condensed Statements of Cash Flows (unaudited) for the nine months ended September 30, 2007 and 2006	5
	Notes to Condensed Financial Statements (unaudited)	6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4:	Controls and Procedures	23
PART II.	OTHER INFORMATION
Item 1A:	Risk Factors	24
Item 5:	Other Information	41
Item 6:	Exhibits	42
SIGNATURES		43

2

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

KOSAN BIOSCIENCES INCORPORATED

CONDENSED BALANCE SHEETS

(in thousands)

	September 30, 2007			December 31, 2006 (1)
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	35,248		$	35,655
Short-term investments		45,453			27,483
Accounts receivable		1,686			1,152
Prepaid and other current assets		963			907
Total current assets		83,350			65,197
Restricted cash		949			949
Property and equipment, net		4,556			4,801
Other assets		240			240
Total assets	$	89,095		$	71,187
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,617		$	1,323
Accrued liabilities		9,861			6,331
Current portion of deferred revenue		1,428			13,992
Current portion of equipment loans		932			1,289
Total current liabilities		13,838			22,935
Deferred revenue, less current portion		6,069			5,599
Equipment loans, less current portion		811			899
Stockholders’ equity:
Common stock		43			35
Additional paid-in capital		247,786			202,016
Accumulated other comprehensive income		31			9
Accumulated deficit		(179,483	)		(160,306	)
Total stockholders’ equity	$	68,377		$	41,754
Total liabilities and stockholders’ equity	$	89,095		$	71,187

(1) The balance sheet data at December 31, 2006 has been derived from the audited financial statements at that date.

See accompanying notes.

3

KOSAN BIOSCIENCES INCORPORATED

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenues:
Contract revenue	$	1,947		$	2,137		$	17,071		$	7,455
Grant revenue		—			32			—			341
Total revenues		1,947			2,169			17,071			7,796
Operating expenses:
Research and development (including charges for stock-based compensation of $364 and $340 in the three months ended September 30, 2007 and 2006, respectively, and $1,364 and $914 in the nine months ended September 30, 2007 and 2006, respectively)		12,299			8,712			33,381			28,362
General and administrative (including charges for stock-based compensation of $328 and $277 in the three months ended September 30, 2007 and 2006, respectively, and $1,179 and $676 in the nine months ended September 30, 2007 and 2006, respectively)		1,851			1,632			6,054			5,733
Total operating expenses		14,150			10,344			39,435			34,095
Loss from operations		(12,203	)		(8,175	)		(22,364	)		(26,299	)
Other income, net		1,070			635			3,187			1,389
Net loss	$	(11,133	)	$	(7,540	)	$	(19,177	)	$	(24,910	)
Basic and diluted net loss per common share	$	(0.26	)	$	(0.22	)	$	(0.46	)	$	(0.76	)
Shares used in computing basic and diluted net loss per common share		42,528			34,573			41,384			32,778

See accompanying notes.

4

KOSAN BIOSCIENCES INCORPORATED

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Nine Months Ended September 30,
	2007			2006
Operating activities
Net loss	$	(19,177	)	$	(24,910	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,695			1,761
Amortization of investment premiums and discounts		(512	)		(125	)
Stock-based compensation		2,544			1,590
Gain on sale of property and equipment		(27	)		—
Changes in assets and liabilities:
Accounts receivable		(534	)		1,535
Prepaid and other assets		(56	)		101
Accounts payable and accrued liabilities		3,824			(1,731	)
Deferred revenue		(12,094	)		(2,458	)
Net cash used in operating activities		(24,337	)		(24,237	)
Investing activities
Acquisition of property and equipment		(1,533	)		(265	)
Proceeds from sale of property and equipment		110			—
Purchase of investments		(59,371	)		(37,181	)
Proceeds from maturity of investments		41,935			37,350
Net cash used in investing activities		(18,859	)		(96	)
Financing activities
Proceeds from issuance of common stock		43,234			24,582
Proceeds from equipment loans		678			270
Principal payments under equipment loans		(1,123	)		(1,496	)
Net cash provided by financing activities		42,789			23,356
Net decrease in cash and cash equivalents		(407	)		(977	)
Cash and cash equivalents at beginning of period		35,655			18,750
Cash and cash equivalents at end of period	$	35,248		$	17,773

See accompanying notes.

5

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. Organization and Summary of Significant Accounting Policies

Overview

Kosan Biosciences Incorporated (the “Company” or “Kosan”) was incorporated under the laws of the State of California on January 6, 1995 and commenced operations in 1996. In July 2000, the Company was reincorporated under the laws of the State of Delaware. Kosan is a cancer therapeutics company focused on advancing two new classes of anticancer agents through clinical development: heat shock protein 90, or Hsp90, inhibitors and epothilones.

Hsp90 inhibitors have a novel mechanism of action targeting multiple pathways involved in cancer cell growth and survival. The Company’s proprietary formulations of tanespimycin (KOS-953) are in late stage clinical trials for multiple myeloma in combination with Velcade^® (bortezomib) as well as for HER2-positive metastatic breast cancer in combination with Herceptin^® (trastuzumab) and as monotherapy for melanoma. Kosan’s Tanespimycin in Myeloma Evaluation, or “TIME,” clinical program includes TIME-1, a Phase 3 pivotal study of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, which the Company expects to initiate in the fourth quarter of 2007 or early in the first quarter of 2008, and TIME-2, a Phase 2/3 study of tanespimycin in combination with Velcade in patients with relapsed-refractory multiple myeloma, which the Company initiated in the third quarter of 2007. The TIME program is utilizing the Company’s new, improved tanespimycin injectable suspension formulation, that replaced the prior Cremophor-based formulation. The Company anticipates presenting updated data with the injectable suspension formulation from the ongoing Phase 1b trial in multiple myeloma and from a Phase 2 trial of tanespimycin in combination with Herceptin in patients with HER2-positive metastatic breast cancer in December 2007. In addition, intravenous and oral formulations of a second-generation Hsp90 inhibitor, alvespimycin HCl (KOS-1022), are currently being evaluated in Phase 1 clinical trials.

Epothilones inhibit cell division with a mechanism of action similar to taxanes, one of the most successful classes of anti-tumor agents. Kosan is developing its epothilone, KOS-1584, in Phase 1 clinical trials and it has shown activity in patients with non-small cell lung, ovarian, breast, pancreatic, prostate and other cancers. Although the Company’s epothilone program is currently partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (collectively, “Roche”) through a global development and commercialization agreement, this agreement will terminate in late February 2008 following a termination notice received from Roche in October 2007. See Notes 2 and 7 for more information on the Company’s agreement with Roche.

Kosan also has a motilin receptor agonist program for the stimulation of gastrointestinal movement, or GI motility. In December 2006, the Company established a worldwide exclusive license agreement with Pfizer Inc. for its motilin agonist program, including KOS-2187 and related compounds. Pfizer is responsible for development, regulatory and commercial activities related to the motilin agonist program and has initiated Phase 1 clinical testing of KOS-2187 as a potential treatment of gastroesophageal reflux disease (“GERD”).

Kosan also has next-generation Hsp90 inhibitor, next-generation epothilone and nuclear export inhibitor programs for cancer that are undergoing preclinical evaluation. These programs are based on the use of Kosan’s technology to improve the structure of known polyketides and the efficiency of large-scale production. Kosan has funded its operations primarily through equity financing, contract payments under its collaboration agreements, equipment financing arrangements and government grants.

6

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Organization and Summary of Significant Accounting Policies (continued)

Basis of Presentation

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The information as of September 30, 2007, and for the three and nine months ended September 30, 2007 and 2006, reflects all adjustments (including normal recurring adjustments) that management of the Company believes are necessary for a fair presentation of the results for the periods presented. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying unaudited condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission on March 16, 2007.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the accompanying notes. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period they are determined. Actual results could differ from those estimates.

Cash Equivalents and Investments

The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. The Company limits its concentration of risk by diversifying its investments among a variety of issuers. All investment securities are classified as available-for-sale and are recorded at fair value based on quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss). Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Realized gains and losses and declines in the fair value that are deemed to be other-than-temporary are reflected in earnings. The cost of securities sold is based on the specific identification method.

The Company recognizes an impairment charge when the decline in the estimated fair value of a marketable security below the amortized cost is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration of time during which the fair value has been less than its amortized cost, any adverse changes in the investees’ financial condition and associated downgrades to credit ratings and the Company’s intent and ability to hold the marketable security for a period of time sufficient to allow for any anticipated recovery in market value. For the nine months ended September 30, 2007 and 2006, the Company did not recognize an impairment charge related to its investment securities.

7

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Organization and Summary of Significant Accounting Policies (continued)

Restricted Cash

The Company held a restricted investment consisting of a certificate of deposit of approximately $949,000 at September 30, 2007 and December 31, 2006. This investment is carried at fair value and is restricted as to withdrawal under a letter of credit agreement related to a facility lease.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.

Revenue Recognition

The Company generates revenue under collaborative agreements with pharmaceutical companies and, in prior years, under research grants from the National Institutes of Health. The arrangements may include up-front non-refundable fees, reimbursement for personnel and supply costs, milestone payments for the achievement of defined collaboration objectives and royalties on potential sales of commercialized products. The Company recognizes revenue under these arrangements when (i) persuasive evidence of an arrangement exists; (ii) delivery of the services, supplies or technology license has occurred; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured.

The Company recognizes license and other up-front fees pursuant to research and development collaboration agreements over the Company’s estimated period of continuing involvement with research and development of the respective agreement. These estimates are reviewed on a periodic basis and updated if the underlying assumptions are modified. Any changes in these estimates will result in either an acceleration or further deferral of the related revenue recognition. Payments related to substantive performance milestones that are at risk at the initiation of an agreement are recognized upon successful completion of a performance milestone event.

Contract revenues related to research and development efforts are recognized as revenue as the related services are performed or delivered in accordance with contract terms. Such payments generally are made based on the number of full-time equivalent researchers assigned to the project and the related research and development expenses incurred or as other deliverables under the contracts are fulfilled. Revenues related to government grants are recognized at the time a grant is awarded and as related research expenses are incurred. Any amounts received in advance of performance are recorded as deferred revenue until earned.

Research and Development

Research and development consists of costs incurred for Company-sponsored and collaborative research and development activities. These costs consist primarily of salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, licensing-related expenses, depreciation of facilities and equipment, lab consumables and services performed by clinical research organizations and research institutions, contract manufacturers and other outside service providers. Expenses related to clinical trials and drug manufacturing generally are accrued based on estimates of work performed or the level of patient enrollment and activities according to the planned

8

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Organization and Summary of Significant Accounting Policies (continued)

Research and Development (continued)

protocols or agreements. The Company monitors planned protocols, work performed, patient enrollment levels and related activities to the extent possible and adjusts estimates accordingly. Research and development expenses under government grant awards and collaborative agreements approximated the revenue recognized, excluding milestone and up-front fees received under such arrangements.

The Company’s research and development expenses do not reflect the costs incurred by Roche, the National Cancer Institute (the “NCI”) or Pfizer associated with the clinical trials conducted by such parties in connection with the Company’s epothilone, Hsp90 inhibitor and motilin receptor agonist programs, respectively.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) or “SFAS 123R”, “Share-Based Payment”, using the modified prospective transition method. SFAS 123R requires that the compensation cost relating to share-based payment transactions, including stock options and employee stock purchase plans, be recognized in the financial statements. Under this transition method, stock-based compensation expense is recognized for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock-Based Compensation”. Stock-based compensation expense for all stock-based compensation awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs net of an expected forfeiture rate on a graded-vesting basis over the requisite service period of the award, which is generally the option vesting term of one or four years. Prior to the adoption of SFAS 123R, the Company accounted for stock options granted to employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees” and related interpretations, and thus, recognized compensation expense for options granted with exercise prices less than the fair value of the Company’s common stock on the date of the grant. Other stock-based compensation expense for options granted to non-employees has been determined in accordance with SFAS 123 and Emerging Issues Task Force (“EITF”) 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” as the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The measurement of other stock-based compensation to non-employees is subject to periodic adjustment as the underlying awards vest. As such, changes to these measurements could be substantial should the Company experience significant changes in its stock price.

9

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

1. Organization and Summary of Significant Accounting Policies (continued)

Income Taxes

Effective January 1, 2007, the Company adopted FASB Interpretation No. (“FIN”) 48 “Accounting for Uncertainty in Income Taxes”. FIN 48 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also requires additional disclosure of the beginning and ending unrecognized tax benefits and details regarding the uncertainties that may cause the unrecognized benefits to increase or decrease within a twelve month period. The Company did not recognize any material adjustment in its liability for unrecognized income tax benefits upon the adoption of FIN 48, including any amounts for interest and penalties. The Company had approximately $5.3 million of unrecognized tax benefits related to research and development credits at the date of adoption. The Company recognizes interest and penalties related to income taxes in income tax expense. The Company is subject to income tax examinations for Federal and State income taxes from 2003 and 2002, respectively, forward. The Company does not anticipate that total unrecognized tax benefits will significantly change within the following twelve month period.

Net Loss per Share

Basic and diluted net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period. The Company has excluded all outstanding stock options and warrants from the calculation of diluted net loss per common share because all such securities are antidilutive for all applicable periods presented. Diluted net loss per share is not presented separately as the Company is in a net loss position and including potentially dilutive securities in the loss per share computation would be antidilutive.

Reclassifications

Certain reclassifications of prior years’ balances have been made to conform to the current year presentation. These reclassifications had no effect on prior years’ net loss or stockholders’ equity.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective beginning January 1, 2008. The Company is currently evaluating the impact of SFAS 157 on its financial statements.

In June 2007, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on EITF No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities.” Under EITF 07-3, nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred and capitalized. Such amounts should be expensed as the related goods are delivered or services are performed. If the Company’s expectations change such that it does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF 07-3 is effective for new contracts entered into beginning January 1, 2008. The Company is currently evaluating the impact of EITF 07-3 on its financial statements.

10

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

2. Research and Development Agreements

Roche

In September 2002, the Company entered into a research and development collaboration agreement (the “Roche Agreement”) with Roche. Under the terms of the Roche Agreement, Roche was granted worldwide exclusive rights to market and sell KOS-1584 and any other epothilones developed under the collaboration in the field of oncology, and the Company was granted the right to co-promote in the United States any epothilone products developed under the collaboration. The Roche Agreement provides, among other things, for the Company to receive payments for the reimbursement of agreed upon research and development expenditures. Effective July 1, 2004, the Company entered into an amendment to the Roche Agreement that provided for the reimbursement of costs that exceeded the previously stipulated amounts set forth in the Roche Agreement. In March 2006, the Company entered into a letter agreement with Roche, replacing a particular at-risk milestone payment obligation in the Roche Agreement with an obligation by Roche to pay the Company $2.0 million for certain patent expenses.

The Company recognized revenue related to the Roche Agreement of approximately $2.0 million and $2.1 million for the three months ended September 30, 2007 and 2006, respectively, and approximately $6.4 million and $7.5 million for the nine months ended September 30, 2007 and 2006, respectively. Such amounts, excluding the ratable portion of up-front fees and milestone payments, approximated research and development expenses incurred under the Roche Agreement. Included in contract revenues was approximately $0.4 million and $0.8 million for the three months ended September 30, 2007 and 2006, respectively, and $1.4 million and $2.5 million for the nine months ended September 30, 2007 and 2006, respectively, related to the ratable portion of the $25.0 million up-front fee that is being recognized over the estimated clinical development period for product candidates in clinical trials. In the first quarter of 2007, upon the decision to advance KOS-1584 into Phase 2 clinical trials, the Company determined that the estimated clinical development period extended from 2009 to 2012, resulting in a further deferral of the unrecognized portion of the up-front fee.

11

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

2. Research and Development Agreements (continued)

Pfizer

In December 2006, the Company entered into an exclusive license agreement (the “Pfizer Agreement”) with Pfizer Inc. under which the Company granted to Pfizer a worldwide exclusive license to its motilin agonist program. Under the terms of the Pfizer Agreement, Pfizer and the Company agreed to collaborate on filing of regulatory documents for the initiation of a Phase 1 clinical trial of the Company’s clinical candidate, KOS-2187. Pfizer is responsible for all development, regulatory and commercial activities related to the motilin agonist program. The Company received an up-front fee of $12.5 million in December 2006 and is eligible to receive milestone payments for the successful development and commercialization of licensed compounds, including milestone payments for achieving certain sales amounts, as well as royalties on worldwide sales. For the nine months ended September 30, 2007, the Company recognized revenue of approximately $10.7 million related to the up-front fee.

License Agreements

The Company has license agreements with several academic, government and medical institutions. Included in research and development expenses were fees incurred in connection with these agreements of approximately $202,000 and $78,000 for the nine months ended September 30, 2007 and 2006, respectively.

3. Comprehensive Income

For the three and nine months ended September 30, 2007 and 2006, comprehensive loss was as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net loss	$	(11,133	)	$	(7,540	)	$	(19,177	)	$	(24,910	)
Unrealized gain (loss) on available-for-sale securities		44			87			22			178
Comprehensive loss	$	(11,089	)	$	(7,453	)	$	(19,155	)	$	(24,732	)

4. Equipment Financing

The Company finances certain equipment and facility improvements under debt obligations with terms of 48 months. In April 2004, the Company entered into a $3.5 million equipment line of credit agreement, all of which had been fully utilized as of March 31, 2007. The interest rates of each of the loans are fixed at the time of the draw down, with the interest rates ranging from 6.86% to 9.09%. Obligations under the loans are secured by the assets financed under the loans.

12

KOSAN BIOSCIENCES INCORPORATED

NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)

(unaudited)

5. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	September 30, 2007		December 31, 2006
Research and development-related	$	7,216	$	3,538
Compensation-related		1,293		1,564
Professional services		711		486
Facilities-related		517		508
Other		124		235
	$	9,861	$	6,331

6. Facility Leases

On August 8, 2007, the Company exercised an option to renew the lease for one of its facilities in Hayward, California (the “Premises”) for an additional five years at fair market rents, extending the lease term from 2008 to 2013. The Company expects that the minimum monthly rental expense will be approximately $83,000 for the first year of the extension term and will increase to approximately $97,000 for the final year of the extension term. The Company expects to enter into a formal amendment to the lease with the lessor of the Premises with respect to the exercise of its option.

7. Stockholders’ Equity

In February 2007, the Company completed a registered direct public offering of 7,000,000 shares of common stock at a public offering price of $6.50 per share. The Company received approximately $42.3 million in net proceeds after placement agent fees and other offering costs.

8. Subsequent Event

In October 2007, the Company received notice from Roche that it is terminating the Roche Agreement in its entirety, which termination will be effective in late February 2008. Following the termination of the Roche Agreement, the rights licensed to Roche will revert to the Company, and in connection with the termination, Roche is required to provide the Company with certain license rights, data and other assistance related to the product candidates licensed to Roche under the Roche Agreement. Roche’s development funding commitments under the Roche Agreement will continue until the termination date, following which Roche will be obligated to reimburse the Company for certain costs of completing the KOS-1584 Phase 1 clinical trials. The Company expects that the receipt of the notice of termination of the Roche Agreement in October 2007 will result in the acceleration of the unrecognized portion of the $25.0 million up-front fee.

13

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

Forward-Looking Statements

The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements about:

• our strategy, including our plans with respect to presenting clinical data and initiating clinical trials;

• our research and development programs, including clinical testing;

• sufficiency of our cash resources;

• revenues from our current licensing arrangement with Pfizer;

• our research and development and other expenses; and

• our operations and legal risks.

In some cases, forward-looking statements can be identified by words such as “expect,” “anticipate,” “intend,” “believe,” “hope,” “assume,” “estimate,” “plan,” “will” and other similar words and expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Discussions containing these forward-looking statements may be found throughout this Form 10-Q, including the section entitled Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed below in Part II, Item 1A “Risk Factors” that could cause our actual results to differ materially from those in the forward-looking statements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document. The risks discussed below in Part II, Item 1A “Risk Factors” and elsewhere in this report should be considered in evaluating our prospects and future financial performance.

The name Kosan Biosciences Incorporated, our logo and all other Kosan names are our trademarks. All other trademarks or brand names appearing in this Quarterly Report are the property of their respective holders.

14

Overview

We are a cancer therapeutics company focused on advancing two new classes of anticancer agents through clinical development: heat shock protein 90, or Hsp90, inhibitors and epothilones. The following is the status of our product candidates.

Hsp90 Inhibitors

Tanespimycin

Our proprietary formulations of tanespimycin (KOS-953) are in late stage clinical trials for multiple myeloma in combination with Velcade^® (bortezomib), as well as for HER2-positive metastatic breast cancer in combination with Herceptin^® (trastuzumab) and as monotherapy for melanoma. Our Tanespimycin in Myeloma Evaluation, or “TIME,” clinical program includes TIME-1, a Phase 3 pivotal study of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, which we expect to initiate in the fourth quarter of 2007 or early in the first quarter of 2008, and TIME-2, a Phase 2/3 study of tanespimycin in combination with Velcade in patients with relapsed-refractory multiple myeloma, which we initiated in the third quarter of 2007. The TIME program is utilizing our new, improved tanespimycin injectable suspension formulation that replaced the prior Cremophor-based formulation. We anticipate presenting updated data with the injectable suspension formulation from our ongoing Phase 1b trial in multiple myeloma and from our Phase 2 trial of tanespimycin in combination with Herceptin in patients with HER2-positive metastatic breast cancer in December 2007. Lastly, our Phase 2 clinical trial of tanespimycin in metastatic melanoma is ongoing.

Alvespimycin

Intravenous and oral formulations of a second-generation Hsp90 inhibitor, alvespimycin HCl (KOS-1022), are currently being evaluated in Phase 1 clinical trials. In September 2007, at the ASCO Breast Cancer Symposium, we presented updated data from a Phase 1b clinical trial of intravenous alvespimycin in combination with Herceptin in patients with solid tumors, primarily HER2-positive metastatic breast cancer and ovarian cancer, demonstrating antitumor activity and manageable toxicity. This trial is ongoing and has also been expanded to include the addition of Taxol to the alvespimycin plus Herceptin regimen. We intend to initiate a Phase 2 clinical trial of alvespimycin as monotherapy in patients with HER2-positive metastatic breast cancer later in the fourth quarter of 2007. We anticipate initiating a later stage combination clinical trial in patients with HER2-positive metastatic breast cancer in 2008. Our oral Phase 1 trial is ongoing on two schedules, daily and every other day dosing and we plan to evaluate additional doses and schedules.

Epothilones

KOS-1584 is our epothilone anticancer clinical candidate that is being evaluated in dose-escalating Phase 1 clinical trials in patients with solid tumors. In October, at the 2007 AACR/NCI/EORTC meeting, we presented updated data from one of our KOS-1584 Phase 1 clinical trials, utilizing two different weekly dosing schedules, demonstrating antitumor activity and manageable toxicity in patients with solid tumors. A partial response was reported in a patient with refractory non-small cell lung cancer and clinical activity was observed in a variety of other cancers including breast, ovarian, prostate and pancreatic and other cancers. We expect to initiate our Phase 2 clinical program with KOS-1584 in early 2008.

Our epothilone program is currently partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (collectively “Roche”) through a global development and commercialization agreement. On October 25, 2007, we received notice from Roche that it is terminating the agreement in its entirety, which termination will be effective in late February 2008. Following the termination of the agreement, the rights licensed to Roche will revert to us, and in connection

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with the termination, Roche is required to provide us with certain license rights, data and other assistance related to the product candidates licensed to Roche under the agreement. Roche’s development funding commitments under the agreement will continue until the termination date in late February 2008, after which Roche will be obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials. We believe, based on our discussions with Roche, that the decision to terminate the agreement was driven by a re-prioritization within Roche’s research and development group rather than the value of our epothilone program.

Other Programs

We also have a motilin receptor agonist program for the stimulation of gastrointestinal movement, or GI motility. In December 2006, we established a worldwide exclusive license agreement with Pfizer for our motilin agonist program, including KOS-2187 and related compounds. Pfizer is responsible for all development, regulatory and commercial activities related to the motilin agonist program. Pfizer has initiated Phase 1 clinical testing of KOS-2187 as a potential treatment for gastroesophageal reflux disease (“GERD”).

We also have next-generation Hsp90 inhibitor, next-generation epothilone and nuclear export inhibitor programs for cancer that are undergoing preclinical evaluation. These programs are also based on the use of our technology to improve the structure of known polyketides and the efficiency of large-scale production.

We have incurred significant losses since our inception. As of September 30, 2007, our accumulated deficit was approximately $179.5 million. We expect to incur additional operating losses over the next several years as we continue to advance our product candidates into and through clinical trials.

We believe that our existing cash and investments, anticipated cash flow from our collaboration with Roche through the effective date of the termination of our agreement with Roche and Roche’s clinical trial cost reimbursement obligations to us following the termination of our agreement, will be sufficient to support our current operating plan into the first half of 2009. We have based this estimate on assumptions that may prove wrong, and we expect that additional financing will be required in order to fund our operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities as of the date of the financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates. The basis of our current estimates or assumptions has not significantly changed since we filed our Annual Report on Form 10-K for the year ended December 31, 2006 with the Securities and Exchange Commission on March 16, 2007, except as noted below.

Clinical Trial and Drug Manufacturing Accruals

Research and development expenditures are expensed as incurred. Our expenses related to clinical trials and drug manufacturing are based on estimates of the services received or efforts expended pursuant to contracts with multiple institutions, clinical research organizations, contract manufacturers and other service providers that conduct and manage clinical trial activities or drug manufacturing on our behalf. The

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financial terms of these agreements are established prior to the initiation of the related services, thus establishing the basis of our estimates. However, these terms may be subject to amendment due to changes in the scope and length of the related clinical trial or work performed. Expenses related to clinical trials and drug manufacturing generally are accrued based on estimates of work performed or the level of patient enrollment and activities according to the planned protocols or agreements. We monitor planned protocols, work performed, patient enrollment levels and related activities to the extent possible and adjust our estimates accordingly. All estimates may differ significantly from the actual amounts subsequently invoiced. No adjustments for material changes in estimates have been recognized in any period presented.

Income Taxes

Effective January 1, 2007, we adopted FASB Interpretation No. (“FIN”) 48 “Accounting for Uncertainty in Income Taxes”. FIN 48 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also requires additional disclosure of the beginning and ending unrecognized tax benefits and details regarding the uncertainties that may cause the unrecognized benefits to increase or decrease within a twelve month period. We did not recognize any material adjustment in our liability for unrecognized income tax benefits upon the adoption of FIN 48, including any amounts for interest and penalties. We had approximately $5.3 million of unrecognized tax benefits related to research and development credits at the date of adoption. We recognize interest and penalties related to income taxes in income tax expense. We are subject to income tax examinations for Federal and State income taxes from 2003 and 2002, respectively, forward. We do not anticipate that total unrecognized tax benefits will significantly change within the following twelve month period.

Results of Operations

Revenues

Revenues were approximately $1.9 million and $17.1 million for the three and nine months ended September 30, 2007, respectively, compared to approximately $2.2 million and $7.8 million for the same periods in 2006. Revenues in 2007 consisted primarily of contract revenues recognized under our agreements with Roche and Pfizer. Revenues in 2006 consisted primarily of contract revenue under our agreement with Roche.

	Three Months Ended September 30,						Nine Month Ended September 30,
(In thousands, except for percentages)	2007		2006		% Change		2007		2006		% Change
Contract revenue	$	1,947	$	2,137	-9	%	$	17,071	$	7,455	129	%
Grant revenue		—		32	-100	%		—		341	-100	%
Total revenues	$	1,947	$	2,169	-10	%	$	17,071	$	7,796	119	%

Total revenues decreased by approximately 10%, or $0.2 million, for the three months ended September 30, 2007 compared to the same period in 2006. The decrease for the three month period is due to lower contract revenue from Roche, primarily from the extension of the amortization of our up-front fee. Total revenues increased by approximately 119%, or $9.3 million, for the nine months ended September 30, 2007 compared to the same period last year. The increase for the nine month period was primarily due to

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amortization of the remaining $10.7 million up-front fee from Pfizer recognized in 2007, partially offset by lower contract revenue from Roche as previously discussed. As of March 31, 2007, we had fully amortized the Pfizer up-front fee and, as a result, we do not expect to recognize any further contract revenue related to the amortization of this fee. In February 2007, Roche and we jointly made a decision to advance KOS-1584 into later stage clinical trials. In the first quarter of 2007, we determined that the estimated clinical development period resulting from this decision would be extended from 2009 to 2012. We expect the termination of our agreement with Roche in late February 2008, however, will result in an acceleration of the unrecognized portion of the up-front fee. As discussed above, Roche’s development funding commitments under the agreement will continue until the termination date, after which Roche will be obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials. Accordingly, we expect that our contract revenues from Roche will significantly decrease in 2008 compared to 2007 as a result of the termination of our agreement with Roche.

Research and Development Expenses

Our research and development expenses were approximately $12.3 million and $33.4 million for the three and nine months ended September 30, 2007, respectively, compared to $8.7 million and $28.4 million for the same periods in 2006. Our research and development activities consisted primarily of salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, licensing-related expenses, depreciation of facilities and equipment, lab consumables and services performed by clinical research organizations and research institutions, contract manufacturers and other outside service providers. We group these activities into two major categories: “research and preclinical” and “clinical development.” We are unable to estimate the nature, timing or costs to complete our research and development projects, or when material net cash inflows to us could be expected to commence, if ever, due to the numerous risks and uncertainties associated with developing pharmaceutical products. These risks and uncertainties include those discussed under this report in Part II, Item 1A “Risk Factors.”

	Three Months Ended September 30,						Nine Months Ended September 30,						Inception - September 30, 2007
(In thousands, except for percentages)	2007		2006		% Change		2007		2006		% Change
Clinical development
Epothilones	$	2,168	$	1,503	44	%	$	6,268	$	5,840	7	%	$	63,436
Hsp90 inhibitors		7,244		4,720	53	%		18,190		12,462	46	%		49,944
Total clinical development		9,412		6,223	51	%		24,458		18,302	34	%		113,380
Research and preclinical (1)		2,887		2,489	16	%		8,923		10,060	-11	%		160,056
Total research and development	$	12,299	$	8,712	41	%	$	33,381	$	28,362	18	%	$	273,436

(1) “Research and preclinical” constitutes internal research and development costs for our early stage programs in the areas of cancer, gastrointestinal motility and technology development. Expenses for the three months ended September 30, 2007 and 2006 included allocated personnel-related expenses of approximately $1.1 million and $1.2 million, allocated facility-related expenses of approximately $0.8 million and $1.0 million and allocated lab consumables of approximately $0.1 million and $0.1 million, respectively. Expenses for the nine months ended September 30, 2007 and 2006 included allocated personnel-related expenses of approximately $3.6 million and $4.4 million, allocated facility-related expenses of approximately $2.4 million and $3.3 million and allocated lab consumables of approximately $0.4 million and $0.4 million, respectively. Expenses for the period from inception through September 30, 2007 included allocated personnel-related expenses of approximately $78.2 million, allocated facility-related expenses of approximately $39.7 million and allocated lab consumables of approximately $10.7 million.

The increase of 41%, or approximately $3.6 million, and 18%, or approximately $5.0 million, in research and development expenses for the three and nine months ended September 30, 2007 compared to the same periods in 2006 were the result of the following:

• approximately $3.2 million and $6.2 million in increased clinical costs for the three and nine months ended September 30, 2007, respectively, primarily due to the increased clinical costs in the Hsp90 inhibitor and epothilone programs, including costs associated with the initiation of the clinical trials in our TIME registration program in multiple myeloma in the third quarter of 2007 and KOS-1584 process development, which was funded by Roche;

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• approximately $0.4 million in increased preclinical and research costs for the three month period in 2007, primarily related to the development our next generation epothilone, KOS-1803; and

• approximately $1.1 million in decreased preclinical and research costs for the nine month period in 2007, primarily related to reorganization related expenses and a reduction in investment in certain early-stage research programs in 2006.

We expect to initiate TIME-1, a Phase 3 pivotal study of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, in the fourth quarter of 2007 or early in the first quarter of 2008 and a Phase 2 clinical trial of alvespimycin as monotherapy in patients with HER2-positive metastatic breast cancer later in the fourth quarter of 2007. We also expect to initiate our Phase 2 clinical program with KOS-1584 early in 2008. The preparation for, and initiation of, these clinical trials will result in an increase in our research and development expenses over the next several quarters, particularly following the termination of our agreement with Roche in late February 2008. After the termination of our agreement with Roche, Roche will only be obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials.

Pfizer is funding all of the current KOS-2187 clinical trial costs. The National Cancer Institute (“NCI”) is responsible for the remaining costs of ongoing clinical trials with tanespimycin and alvespimycin that they are conducting. In addition, we are sponsoring other clinical trials of tanespimycin and alvespimycin at our sole expense. Our research and development expenses do not reflect the costs incurred by Roche, the NCI or Pfizer associated with the clinical trials conducted by such parties in connection with our epothilone, Hsp90 inhibitor and motilin receptor agonist programs, respectively.

General and Administrative Expenses

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except for percentages)	2007		2006		% Change		2007		2006		% Change
General and administrative	$	1,851	$	1,632	13	%	$	6,054	$	5,733	6	%

Our general and administrative expenses were approximately $1.9 million and $6.1 million for the three and nine months ended September 30, 2007, respectively, compared to $1.6 million and $5.7 million for the same periods in 2006. For the three months ended September 30, 2007, general and administrative expenses increased by 13%, or approximately $0.2 million compared to the same period in 2006. For the nine months ended September 30, 2007, general and administrative expenses increased by 6%, or approximately $0.3 million, compared to the same period in 2006. The increase was primarily due to increased personnel costs to support our increasing development activities. We expect our general and administrative expenses to moderately increase in support of our research and development activities as we continue to advance our product candidates through clinical trials.

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Other Income, Net

	Three Months Ended September 30,								Nine Months Ended September 30,
(In thousands, except for percentages)	2007			2006			% Change		2007			2006			% Change
Interest income	$	1,104		$	706		56	%	$	3,342		$	1,850		81	%
Interest expense		(61	)		(71	)	-14	%		(182	)		(461	)	-61	%
Interest income, net		1,043			635		64	%		3,160			1,389		128	%
Gain from the sale of property and equipment		27			—		100	%		27			—		100	%
Other income, net	$	1,070		$	635		69	%	$	3,187		$	1,389		129	%

Interest income increased to approximately $1.1 million and $3.3 million for the three and nine months ended September 30, 2007, from approximately $0.7 million and $1.9 million for the same periods in 2006. The increase resulted from higher average investment balances in 2007 compared to 2006 and higher returns in the current interest rate environment.

Interest expense decreased to approximately $0.1 million and $0.2 million for the three and nine months ended September 30, 2007, from approximately $0.1 million and $0.5 million for the same periods in 2006. The decrease is primarily due to expiration of our Silicon Valley Bank line of credit facility in May 2006.

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Liquidity and Capital Resources

Since inception, we have financed our operations primarily through sales of our equity securities, contract payments received under our collaboration and license agreements and government grant awards, interest income and equipment financing arrangements. As of September 30, 2007, we had received approximately $221.4 million from the sales of equity securities, approximately $130.2 million from contract payments received under our collaboration and license agreements and government grant awards, approximately $21.7 million from interest income and approximately $14.9 million from equipment financing arrangements since inception. As of September 30, 2007, we had approximately $81.7 million in cash, cash equivalents, restricted cash and investments, compared to approximately $64.1 million as of December 31, 2006. Our funds are currently invested in government agency and corporate obligations.

Cash used in operating activities was approximately $24.3 million for the nine months ended September 30, 2007, compared to approximately $24.2 million for the same period last year. Our net loss of approximately $19.2 million for the nine months ended September 30, 2007 included non-cash revenue of approximately $12.1 million related to the amortization of our up-front payment received from Pfizer and Roche, and non-cash charges of approximately $3.7 million related to stock-based compensation, depreciation and amortization of investment premiums and discounts. Cash used in operating activities for the same period in 2006 was primarily used to fund the net loss of approximately $24.9 million, partially offset by non-cash charges of approximately $2.5 million related to the upfront payment received from Roche and $3.2 million related to stock-based compensation, depreciation and amortization of investment premiums and discounts.

Cash used in investing activities, excluding changes in our investments, was approximately $1.4 million for the nine months ended September 30, 2007, compared to approximately $0.3 million for the same period in 2006, due to higher capital spending for the nine months ended September 30, 2007 as compared to the same period in 2006.

Cash provided by financing activities was approximately $42.8 million for the nine months ended September 30, 2007, compared to approximately $23.4 million for the same period in 2006. Financing activities for the nine months ended September 30, 2007 included cash inflows of approximately $0.7 million of equipment debt financing and approximately $43.2 million in proceeds from the sale of our common stock related to our February 2007 registered direct public offering of 7,000,000 shares of common stock, stock option exercises and stock purchases made under our 2000 Employee Stock Purchase Plan, offset by cash outflows of approximately $1.1 million of scheduled payments on our debt arrangements. Financing activities for the nine months ended September 30, 2006 included cash inflows of approximately $0.3 million of equipment debt financing and approximately $24.6 million in proceeds from the sale of our common stock related to our April 2006 underwritten offering of 5,100,000 shares of common stock, stock option exercises and stock purchases made under our 2000 Employee Stock Purchase Plan, offset by approximately $1.5 million of scheduled payments on our debt arrangements.

We believe that our existing cash and investments, anticipated cash flow from our collaboration with Roche through the effective date of the termination of our agreement with Roche and Roche’s clinical trial cost reimbursement obligations to us following the termination of our agreement, will be sufficient to support our current operating plan into the first half of 2009. We have based this estimate on assumptions that may prove to be wrong. Our future capital uses and requirements depend on numerous forward-looking factors, including those set forth in Part II, Item 1A “Risk Factors.”

In addition, we review from time to time potential opportunities to expand our technologies or add to our portfolio of drug candidates. In the future, we may need further capital in order to acquire or invest in technologies, products or businesses.

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We expect that additional financing will be required to fund operations. We expect to finance future cash needs through the sale of equity securities, debt financings, additional collaboration or licensing arrangements or any combination of the foregoing or other arrangements. In August 2007, we filed a shelf registration statement on Form S-3 with the SEC pursuant to which we may offer and sell up to $75.0 million of our common stock and/or warrants to purchase our common stock, either individually or in units. Pursuant to two prior shelf registration statements we filed on Form S-3, we may offer and sell approximately $26.0 million of our common stock (including $24.5 million of warrants to purchase our common stock and/or units consisting of common stock and warrants to purchase common stock). In total, we may offer and sell up to $101.0 million of our equity securities under our three shelf registration statements, plus an additional approximately $20.2 million that we could sell under immediately effective related registration statements, assuming we continue to meet the SEC’s eligibility requirements for primary offerings on Form S-3.

We filed a resale registration statement covering the resale of 6,879,868 shares issuable pursuant to the committed equity financing facility (“CEFF”) with Kingsbridge and 285,000 shares underlying the warrant at an exercise price of $4.94 issued to Kingsbridge in connection with our CEFF. We have the availability to sell under the CEFF up to $47.0 million of common stock in the future, subject to certain conditions.

We have no current commitments to offer and sell any securities that may be offered or sold pursuant to the registration statements described above. Additional financing or collaboration and licensing arrangements may not be available when needed or, if available, may not be on terms favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all of our research or development programs, to lose rights under existing licenses or to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Insufficient funds may preclude us from meeting the conditions required for the extension of credit and may adversely affect our ability to operate as a going concern. If additional funds are obtained by issuing equity securities, substantial dilution to existing stockholders may result. In addition, see Part II, Item 1A “Risk Factors.”

Contractual Obligations

As of September 30, 2007, our obligations and commitments to make future payments under contracts such as debt and lease agreements were as follows:

	Payment Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
	(in thousands)
Equipment financing obligations	$	1,920	$	1,042	$	811	$	67	$	—
Operating leases		11,745		1,898		4,263		4,588		996
Total contractual obligations	$	13,665	$	2,940	$	5,074	$	4,655	$	996

As of September 30, 2007, we had exercised an option to renew the lease for one of our facilities in Hayward, California (the “Premises”) for an additional five years at fair market rents, extending the lease term from 2008 into 2013. We expect to enter into a formal amendment to the lease with the lessor of the Premises with respect to the exercise of our option to extend the term of the lease. The amounts set forth in the table above with respect to operating leases include what we currently expect will be the minimum lease payments during the renewal term of the lease.

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investments to fluctuate. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and investment-grade corporate obligations. Although changes in interest rates may affect the fair value of our portfolio and cause unrealized gains and losses, such gains and losses would not be realized unless the investments were sold prior to maturity. Through our money managers, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. If market interest rates were to increase by 100 basis points, or 1%, at September 30, 2007 rates, the fair value of our portfolio on that date would decline by approximately $0.2 million.

We did not hold any derivative instruments as of September 30, 2007, and we have never held such instruments in the past. In addition, we had outstanding debt, consisting of borrowings under equipment financings, of approximately $1.7 million as of September 30, 2007, with a range of annual interest rates from 6.86% to 9.09%.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of September 30, 2007, our chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective.

Changes in Internal Controls over Financial Reporting. There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. The Company’s management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls 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. 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 the Company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

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PART II. OTHER INFORMATION

Item 1A: Risk Factors

You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2007.

We have a history of net losses and may never become profitable.*

We commenced operations in 1996 and are still developing our product candidates. We have not commercialized any products, and we have incurred significant losses to date. We have a history of net losses and as of September 30, 2007 we had an accumulated deficit of approximately $179.5 million. To date, our revenues have been primarily from partnering arrangements and government grant awards. Our expenses have consisted principally of costs incurred in research and development and from general and administrative costs associated with our operations. We expect our expenses to increase and to continue to incur operating losses for at least the next several years as we continue our research and development efforts for our product candidates and research programs. The amount of time necessary to successfully commercialize any of our product candidates is long and uncertain, and successful commercialization may not occur at all. As a result, we may never become profitable.

We expect that additional financing will be required, and an inability to obtain the capital necessary to fund our operations on acceptable terms or at all would threaten the continued operation of our business.*

We expect that additional financing will be required to fund operations. We do not know whether additional financing will be available when needed, or that, if available, we will obtain financing on favorable terms. We have consumed substantial amounts of cash to date and expect to incur significant operating expenditures over the next several years as we continue to advance our product candidates into and through clinical trials. For example, after the termination of our collaborative research, development and commercialization agreement Roche in late February 2008, we will be required, absent any new partnering arrangements with third parties, to independently to fund any KOS-1584 or other epothilone development and clinical trial activities that we may undertake.

We may raise additional financing through public or private equity offerings, debt financings, collaboration or licensing arrangements, government grant awards or any combination of the foregoing or other arrangements. To the extent we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants and significant interest costs. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies, product candidates or marketing territories.

If we are unable to raise sufficient funds when needed, we may be required to delay, scale back or eliminate some or all of our research or development programs; lose rights under existing licenses; or relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. Insufficient funds may adversely affect our ability to operate as a going concern. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

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We believe that our existing cash and investments, anticipated cash flow from our collaboration with Roche through the effective date of the termination of our agreement with Roche and Roche’s clinical trial cost reimbursement obligations to us following the termination of our agreement, will be sufficient to support our current operating plan into the first half of 2009. We may choose to obtain additional financing from time to time. We have based this estimate on assumptions that may prove to be wrong. Our future capital uses and requirements depend on numerous forward-looking factors, including the following:

• our ability to establish any new partnering arrangements, our rights and obligations under any new partnering arrangements and our ability to generate revenues under any new partnering arrangements;

• the extent to which clinical and other development activities are funded or conducted by future partners, if any;

• our ability to sell shares of our common stock or other securities, including under our CEFF with Kingsbridge;

• the progress, success and costs of preclinical testing and clinical trials of our product candidates;

• any acceleration or expansion of our clinical development plans;

• our ability to maintain or extend our existing licensing arrangements with Pfizer;

• the progress, number and costs of our research programs;

• the costs and timing of obtaining, enforcing and defending patent and other intellectual property rights;

• any need to obtain licenses to additional patents or other intellectual property in order to use, import, manufacture, market or sell our product candidates;

• any need to expand our manufacturing capabilities; and

• expenses associated with any possible future litigation.

If we fail to enter into new partnering or licensing arrangements in the future, our business and operations would be negatively impacted.*

Our strategy depends upon the formation and sustainability of multiple partnering arrangements and license agreements with third parties, including with respect to our Hsp90 inhibitor and epothilone programs. We expect to rely on these arrangements for not only financial resources, but also for expertise that we expect to need in the future relating to clinical trials, manufacturing, sales and marketing, and for license and technology rights. Although we have in the past established partnering arrangements and various license agreements, we do not know if we will be able to establish additional arrangements on favorable terms, or whether any such partnering arrangements will ultimately be successful. For example, although we established a collaboration arrangement with Roche for our epothilone program, the collaboration will terminate in late February 2008 following a termination notice receive from Roche in October 2007. In addition, there have been, and may continue to be, a significant number of business combinations among pharmaceutical companies that have resulted, and may continue to result, in a reduced number of potential future partners, which may limit our ability to find partners who will work with us in developing and commercializing our product candidates. If we do not enter into new partnering arrangements, in particular, partnering arrangements for the further development of our Hsp90 inhibitor and epothilone programs, we will be required to undertake Hsp90 inhibitor and epothilone development and commercialization at our own expense which may limit the number of product candidates that we will be able to develop and commercialize, significantly increase our capital requirements and reduce the likelihood of successful product introduction. We may also be required to curtail, suspend, delay or terminate research and development programs, including planned clinical trials for our product candidates, and therefore our ability to generate revenues from our epothilone, Hsp90 inhibitor or other programs will be adversely affected. Our ability to start new research and development programs may also be materially harmed.

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If our current licensing arrangements or potential future partnering or licensing arrangements are unsuccessful or are terminated, or if conflicts develop with our current licensees or licensors, or our potential future partners, licensees or licensors, our research and development efforts could be delayed, curtailed or terminated, our revenues could significantly decrease and our operations may be adversely affected.*

We have a license agreement with Pfizer pursuant to which Pfizer is responsible for development, regulatory and commercial activities related to our motilin agonist program. We also have licenses to technology and compounds from several research groups, including Sloan-Kettering and the Oregon State University in the field of epothilones, the NCI in the field of geldanamycin analogs and Stanford University in the field of polyketide technology. These agreements permit our licensors to terminate the agreements under certain circumstances. Although our epothilone program is currently partnered with Roche, we received notice from Roche in October 2007 that it is terminating our collaborative research, development and commercialization agreement in its entirety, which termination will be effective in late February 2008. In addition, our collaboration agreements with the NCI with respect to the clinical development of tanespimycin and alvespimycin have expired, although we have entered into a data exchange agreement with the NCI regarding the clinical trials originally initiated under our collaboration agreements with the NCI. If we do not maintain, extend or replace our license agreement with Pfizer, we may be required to seek new partners or to undertake motilin agonist development and commercialization at our own expense, the research and development efforts for our motilin agonist program could be delayed, our revenues could significantly decrease and our operations would be adversely affected. Furthermore, if our in-license agreements are terminated, or disputes arise that we are not able to resolve in our favor concerning our rights to particular compounds or technologies, our research and development efforts could be delayed, curtailed or terminated, or we could lose our rights to use the licensed compounds or technologies.

We control neither the amount nor timing of resources that Pfizer devotes to our motilin agonist program, nor the scope, content and timing of the preclinical studies, clinical trials and other development efforts that Pfizer conducts or permits, including for KOS-2187. If we are successful in establishing new partnering arrangements with respect to our epothilone program, our Hsp90 inhibitor program or our other programs, we may not be able to control the amount nor timing of resources that potential future partners devote to our programs. As a result, we do not know if Pfizer or any potential future partners will dedicate sufficient resources, or if the development or commercialization efforts by Pfizer or any potential future partners will be successful. We also do not know if the development or commercialization efforts by Pfizer or any potential future partners will be the same as those we would choose to devote if we solely controlled the development and commercialization of our programs and product candidates. In addition, we do not know whether Pfizer or future partners, if any, might pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including our competitors, as a means for developing treatments for the diseases targeted by the partnering or licensing arrangements with us. In addition, business combinations or significant changes in a partner’s business strategy may adversely affect its willingness or ability to continue the partnering or licensing arrangement with us. If Pfizer or any potential future partners fail to conduct research, development or commercialization activities with respect to compounds or products for which they have rights from us successfully and in a timely manner, or if they or our licensors breach or terminate their agreements with us, the development or commercialization of the affected product candidates, technology or research program could be delayed or terminated. For example, if Pfizer does not successfully develop and commercialize a product from our motilin agonist program, we may not receive any future milestone payments and will not receive any royalties under our license agreement with Pfizer.

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Our committed equity financing facility with Kingsbridge may not be available to us if we elect to make a draw down, may require us to make additional “blackout” or other payments to Kingsbridge and may result in dilution to our stockholders.*

In July 2006, we entered into a CEFF with Kingsbridge. The CEFF entitles us to sell and obligates Kingsbridge to purchase, from time to time through September 25, 2009, shares of our common stock for cash consideration up to an aggregate of $47.0 million as of September 30, 2007, subject to certain conditions and restrictions. Kingsbridge will not be obligated to purchase shares under the CEFF unless certain conditions are met, which include a minimum price for our common stock; the accuracy of representations and warranties made to Kingsbridge; compliance with laws; and the effectiveness of a registration statement registering for resale the shares of common stock to be issued in connection with the CEFF. In addition, among other termination rights, Kingsbridge is permitted to terminate the CEFF by providing written notice to us within 10 trading days after it obtains actual knowledge that an event has occurred resulting in a material and adverse effect on our business, operations, properties or financial condition. If we are unable to access funds through the CEFF, or if Kingsbridge terminates the CEFF, we may be unable to access capital on favorable terms, or at all.

We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to suspend the use of the resale registration statement and prohibit Kingsbridge from selling shares under the resale registration statement for a certain period of time. If we deliver a blackout notice in certain circumstances, or if the resale registration statement is not effective in circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number of shares purchased by Kingsbridge in the most recent draw down and held by Kingsbridge immediately prior to the blackout period and the change in the market price of our common stock during the period in which the use of the registration statement is suspended. If the trading price of our common stock declines during a suspension of the resale registration statement, the blackout or other payment could be significant.

Should we sell shares to Kingsbridge under the CEFF, or issue shares in lieu of a blackout payment, it will have a dilutive effect on the holdings of our current stockholders and may result in downward pressure on the price of our common stock. If we draw down under the CEFF, we will issue shares to Kingsbridge at a discount of up to 10% from the volume weighted average price of our common stock. If we draw down amounts under the CEFF when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing and may further decrease our share price.

If we are unable to recruit and retain skilled employees and consultants, we may not be able to successfully operate our business.*

Retaining our current management and other employees and recruiting qualified personnel to perform future research, manufacturing, development and other work will be critical to our success. None of our employees has employment commitments for any fixed period of time and could leave our employment at will. Competition is intense among biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions for experienced scientists and other personnel, and we may not be able to retain or recruit sufficient skilled personnel on acceptable terms to allow us to develop our product candidates and research programs, which would likely have an adverse effect on our business.

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Our potential products are in development, and substantial additional effort and expense will be necessary for further development.

Our product candidates are in various stages of research and development. We may not be able to develop products that prove to be safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable costs or can be marketed successfully. All of the potential products that we are currently developing will require significant development and investment, including extensive clinical testing, before we can submit any application for regulatory approval. For example, we expect to incur significant expenses in connection with our TIME registration program for tanespimycin in combination with Velcade for multiple myeloma. These expenses will be even higher to the extent we are required to pay for patients’ medical or other expenses, including, for example, the cost of Velcade for these studies.

Our products must satisfy rigorous standards of safety and efficacy before they can be approved by the FDA and international regulatory authorities for commercial use. We will need to conduct significant additional research and clinical trials before we can determine if our products are sufficiently safe and effective to file with the FDA and other regulatory agencies for product approval. Clinical trials are expensive and time-consuming, and therefore, significant amounts of money will need to be spent testing our products.

In addition, significant time and investment will be required to try to develop manufacturing processes for our products so that they are economical to manufacture on a commercial scale and satisfactory to the FDA and other governmental authorities.

The progress and results of our preclinical and clinical testing are highly uncertain.*

We must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and efficacy of our products before they can be approved for commercial sale. As a result, commercialization of our product candidates depends upon successful completion of preclinical and clinical trials. Preclinical testing and clinical development are long, expensive and uncertain processes. It may take us a number of years to complete our testing, and failure can occur at any stage of testing. For example, in October 2005, we discontinued a Phase 2 clinical study of our first-generation epothilone, KOS-862, in hormone-refractory prostate cancer because the study did not meet the primary objective of tumor marker response in the first stage of a two stage clinical trial, and we previously discontinued clinical studies of KOS-862 in patients with non-small cell lung cancer and colorectal cancer. We could experience similar failures in other current or future clinical testing of our product candidates.

Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of trials do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industry, including Kosan, have suffered significant setbacks in advanced clinical trials, even after reporting promising results in earlier trials. Also, preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent further testing or regulatory approval.

We do not know whether clinical trials of our product candidates will begin on time or whether any of our clinical trials will be completed on schedule, or at all. In particular, the timing of the commencement of our Phase 2 clinical trial program with KOS-1584 remains uncertain as a result of our reevaluation of the clinical program in light of the pending termination of our collaboration with Roche. We may plan and initiate clinical trials before final data from earlier studies have been collected and analyzed because it takes a significant amount of time and effort to plan and initiate clinical trials and because of the length of time it takes to successfully develop a product candidate. Consequently, we may need to modify, suspend, cancel or terminate clinical trials based on results from earlier studies. We also do not know whether clinical trials will indicate that an earlier-stage compound or formulation will be more appropriate for clinical and

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commercial development than a compound or formulation that is at a later stage of clinical development, and therefore result in extended timelines as well as increased development costs. For example, Roche and we decided in February 2007 to cease development of KOS-862 in favor of further development of our second-generation epothilone product candidate, KOS-1584, and in May 2007, we decided to change the formulation for tanespimycin to our injectable suspension formulation, which delayed the commencement of clinical trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be suspended, terminated or repeated. Certain of the clinical trials of our product candidates are or may in the future be designed to include two stages, with the decision whether to proceed to the second stage dependent on results obtained in the first stage. Failure to achieve predetermined response rates as defined in the protocol may result in the decision not to proceed into the second stage of the trial.

We have multiple product candidates in human clinical trials for the treatment of cancer. Anticancer drugs frequently have a narrow therapeutic window between efficacy and toxicity. If unacceptable toxicity is observed in a clinical trial, the trial may be terminated at an early stage. We cannot predict whether any clinical trials of our product candidates will demonstrate toxicity issues or adverse events resulting in a significant patient withdrawal.

Completion of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. Our clinical trials may be suspended at any time if we, our collaborators, the FDA, or other regulatory authorities believe the patients participating in our studies are exposed to unacceptable health risks or that study protocols or patient informed consents should be amended to reflect additional health risks, additional testing procedures or other changes. For example, in September 2005, we temporarily suspended enrollment in our tanespimycin and alvespimycin clinical trials in connection with a request by the FDA to amend the protocols and patient informed consents for those trials. We provided amended protocols and informed consents for those clinical trials to the FDA in response to certain of its requested changes, and we resumed enrollment in the clinical trials. The FDA may require further changes to these protocols and informed consents, which may have a material adverse effect on the timing of, and our ability to conduct, the tanespimycin and alvespimycin clinical trials.

Our ability to commence or timely complete clinical trials may be adversely affected by many factors, including:

• ineffectiveness of the study compound, or perceptions by physicians that the compound is not effective for a particular indication;

• inability to manufacture sufficient quantities of compound for use in clinical trials;

• a failure to obtain approval from the FDA, other regulatory authorities or an investigational site’s institutional review board to conduct a clinical trial;

• inability to reach agreement with a sufficient number of investigational sites to conduct a study;

• inability to obtain product liability insurance, including clinical trial insurance, that meets the requirements of a location outside the U.S.;

• the number of patients required, slower than expected rate of patient recruitment or inability to recruit a sufficient number of patients;

• the occurrence of adverse medical events, including death, during a clinical trial, even if caused by the advanced status of patients’ disease or medical problems that are not related to our product candidates;

• inconclusive or negative results from a clinical trial;

• competing clinical trials in the same or similar indication;

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• third-party clinical investigators failing to perform our clinical trials on our anticipated schedule or consistent with a clinical trial protocol, and other third-party organizations not performing data collection and analysis in a timely or accurate manner; and

• a decision by the FDA or other regulatory authorities to require suspension or modification of a clinical trial.

Our product development costs will increase if we have delays in testing or approvals, if we need to perform more or larger clinical trials than planned or if our clinical trials include more expensive testing or other procedures than planned. If the delays are significant, our financial results and the commercial prospects for our products will be harmed, and our ability to become profitable will be adversely affected. If any clinical trials of our product candidates are not successful, our business, financial condition and results of operations will be harmed.

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

Our product candidates and the activities associated with their development, manufacture and commercialization are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States, and by comparable authorities in other countries. Our products may not be commercialized unless and until our partners or we obtain regulatory approval from the FDA or foreign governmental authorities to do so. The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon the type, complexity, novelty, safety and efficacy of the product candidates involved. We have not received regulatory approval to market any of our product candidates in any jurisdiction and, although our personnel have experience from working at other companies, we as a company have no experience in preparing and filing the applications necessary to gain regulatory approvals to commercialize our products. This lack of experience may impede our ability to obtain FDA or other foreign regulatory approvals to commercialize our products in a timely manner, if at all.

Changes in the regulatory approval policy during the development period, changes in or the enactment of additional regulations or statutes, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application for regulatory approval. For example, new federal legislation known as the FDA Amendments Act of 2007 was recently enacted. This legislation grants the FDA extensive new authority to impose post-approval clinical study and clinical trial requirements, require safety-related changes to product labeling, review advertising aimed at consumers, and require the adoption of risk management plans. Other proposals have been made to impose additional requirements on drug approvals, further expand post-approval requirements and restrict sales and promotional activities. The new legislation, and the additional proposals if enacted, may make it more difficult or burdensome for us to obtain approval of our product candidates, any approvals we receive may be more restrictive or be subject to onerous post-approval requirements, our or our current or potential future partners’ ability to commercialize approved products successfully may be hindered and our business may be harmed as a result. Furthermore, the approval procedure and the time required to obtain approval varies among countries and can involve additional testing beyond that required by the FDA. Approval by one regulatory authority does not ensure approval by regulatory authorities in other jurisdictions.

The FDA and other regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data is insufficient for approval and require additional preclinical, clinical or other studies or modifications to the manufacturing processes or facilities or quality control procedures for our product candidates. For example, we commenced a Phase 2/3 study of tanespimycin in combination with Velcade in patients with relapsed-refractory multiple myeloma in the third

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quarter of 2007, and we plan to commence a Phase 3 pivotal study of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma in the fourth quarter of 2007 or early in the first quarter of 2008. If the results are favorable, we believe these clinical trials will support the filing of a New Drug Application (“NDA”) with the FDA for the treatment of multiple myeloma. However, the FDA or other regulatory authorities may require additional data prior to accepting or approving an application for marketing approval for tanespimycin or other product candidates, which would result in delays in potential FDA or other regulatory authority approval and additional costs, either of which may be too significant to continue development of tanespimycin or other product candidates. This risk is further compounded by any changes during development of a product candidate, such as changes in manufacturing processes, formulations or dosing regimens.

Any clinical trial may fail to produce results satisfactory to the FDA or other regulatory authorities. For example, we currently conduct, and expect to conduct in the future, clinical trials for our product candidates in countries outside of the United States. The FDA or other regulatory authorities may reject data from clinical trials conducted in other countries if they are not conducted in accordance with applicable regulatory standards and procedures.

We do not know whether clinical trials for our product candidates will demonstrate safety and efficacy sufficient to obtain the requisite regulatory approvals or will result in marketable products. Our or our partners’ failure to adequately demonstrate the safety and efficacy of our products under development will prevent receipt of FDA and foreign approvals and, ultimately, commercialization of our products.

We rely on third parties to conduct, supervise or monitor our clinical trials, and those third parties may not perform satisfactorily.*

We do not have the ability to independently conduct clinical trials for our products, and we rely on third parties such as our partners, contract research organizations, laboratory testing companies, medical institutions and clinical investigators to conduct, supervise or monitor our clinical trials. We have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own.

We are supervising and monitoring on our own certain Phase 2 and Phase 2/3 clinical trials in our tanespimycin and alvespimycin development program. In 2007, we initiated a broad, multinational registrational program for the treatment of multiple myeloma. The tanespimycin in myeloma evaluation, or TIME program, includes a Phase 2/3 trial that we initiated in the third quarter of 2007 and a Phase 3 trial that we expect to initiate in the fourth quarter of 2007 or early in the first quarter of 2008. To date, we have not successfully conducted a clinical trial intended to form the basis of an NDA (or foreign equivalent thereto) filing. Additionally, the TIME program, and our planned Phase 2 trials with alvespimycin, are multinational trials. We have not conducted large clinical trials outside of North America. Consequently, we may not have the necessary capabilities to successfully execute and complete these planned clinical trials in a manner that supports approval of our clinical candidates for their target indications in a timely manner, or at all. Failure to commence or complete, or delays in our planned or current clinical trials, would prevent us from commercializing products, and thus seriously harm our business.

We also rely on Pfizer to conduct all clinical trials for our motilin agonist program, including KOS-2187. We may rely on future partners, if any, to conduct clinical trials for our product candidates. If any of these third parties do not successfully carry out their obligations or meet expected deadlines, clinical trials may be extended, delayed, suspended or terminated, data generated from clinical trials may not be acceptable to the FDA or other regulatory authorities and our product candidates may not receive regulatory approval or be successfully commercialized.

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We may not be able to obtain or maintain orphan drug exclusivity for our product candidates.

Some jurisdictions, including Europe and the United States, may designate drugs for relatively small patient populations as orphan drugs. The FDA and the European Medicines Agency have granted orphan drug status to tanespimycin for the treatment of multiple myeloma and chronic myelogenous leukemia. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process, but does make the product eligible for orphan drug exclusivity and, in the United States, specific tax credits. Generally, if a company receives the first marketing approval for a product with an orphan drug designation in the clinical indication for which it has such designation, the product is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same drug for the same indication may not be approved, except in limited circumstances, for a period of up to ten years in Europe (reviewable after six years), and for a period of seven years in the United States. This exclusivity, however, could block the approval of tanespimycin for the treatment of multiple myeloma or chronic myelogenous leukemia in the United States or Europe if a competitor obtains approval before us of a product containing tanespimycin for these specific indications. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to maintain it. For example, if a competitive product is shown to be clinically superior to our product, any orphan drug exclusivity we have obtained will not block the approval of such competitive product.

Even if any of our product candidates receives regulatory approval, we may still face significant development and regulatory difficulties.

Even if the FDA or other regulatory authorities approves a product candidate, the approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product, and may impose ongoing requirements for post-approval studies, including additional research and development and clinical trials. In addition, regulatory agencies subject a product, its manufacturer and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, our partners or us, including requiring withdrawal of the product from the market.

If our partners, any of our product candidates that become approved for marketing by a regulatory authority or we fail to comply with applicable regulatory requirements, a regulatory authority may take various actions, including:

• issuing warning letters;

• imposing civil or criminal penalties;

• suspending regulatory approval;

• refusing to approve pending applications or supplements to approved applications filed by us or our partners;

• imposing restrictions on operations, including costly new manufacturing requirements; or

• seizing or detaining products or requiring a product recall.

Any inability to protect our proprietary technologies could significantly harm our business and ability to successfully commercialize product candidates.

Our commercial success will depend in part on our ability to obtain patents and maintain adequate protection of other intellectual property for our technologies and product candidates in the United States and other countries and prevent others from infringing our proprietary rights. If we are unable to adequately

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protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have. Intellectual property laws vary from country to country, and the laws of a particular country may afford less intellectual property protection than another country.

Any patents that we or our partners own or license from third parties may not provide protection against competitors. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and products are covered by valid and enforceable patents or are effectively maintained as trade secrets. However, our patent positions, as well as the patent positions of biotechnology companies and other third parties, involve complex legal and factual questions, and, therefore, we cannot predict with certainty whether our patent applications will be allowed or any resulting patents will be valid and enforceable. Further, our patents or patent applications or those of our licensors could be placed into interference, and we may lose our rights in such patents or applications. Patents may be challenged, even by our partners, held unenforceable, invalidated or circumvented. Certain of our current exclusive license agreements restrict, and any future exclusive license agreements may restrict, our rights under patents and patent applications to certain fields of use, and therefore, we may not have the ability to prevent competitors from developing and commercializing our product candidates or technologies in fields of use not covered by our exclusive license agreements.

The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:

• we or our licensors were the first to make the inventions covered by each of our patents or pending patent applications;

• we or our licensors were the first to file patent applications for these inventions;

• others will not independently develop similar or alternative technologies or duplicate any of our technologies;

• any of our or our licensors’ or partners’ pending patent applications will result in issued patents;

• any of our or our licensors’ or partners’ patents will be valid or enforceable;

• any patents issued to us or our licensors or collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by third parties;

• we will develop additional proprietary technologies that are patentable; or

• the patents of others will not have an adverse effect on our business.

We apply for patents covering our technologies, product candidates, formulations and uses thereof, as we deem appropriate. However, we may fail to apply for patents on important technologies or products in a timely fashion or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. For example, tanespimycin, the active pharmaceutical ingredient in the most advanced product candidate in our Hsp90 inhibitor program, was originally disclosed in a now-expired third party patent. Consequently, others can develop products containing tanespimycin. We are aware of at least three other companies that have been developing product candidates containing or based on tanespimycin, and these companies have filed patent applications relating to their products in development. Other competitors may currently be developing, or may in the future develop, products containing or based on tanespimycin. In addition, we generally are unable to control the patent prosecution of technology that we license from others to the same degree as we would for our own technology. Further, some of our patents and patent applications for our motilide program have been assigned to Pfizer, and additional patents and patent applications may in the future be assigned to Pfizer or other current or future partners. We generally are unable to control the filing, prosecution and maintenance of patent rights that we assign to partners to the same degree as we would if we maintained ownership of them.

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In addition to patents, we rely on trade secrets and proprietary know-how. We have taken measures to protect our confidential information and trade secrets. However, these measures may not provide adequate protection. We seek to protect our confidential information and trade secrets by entering into confidentiality agreements with employees, collaborators, consultants and others. Nevertheless, parties may breach these agreements or competitors may otherwise obtain or independently develop our trade secrets.

Interference, opposition or similar proceedings relating to our patents and patent applications are costly, and an unfavorable outcome could prevent us from commercializing our product candidates.*

We are aware of a significant number of patents and patent applications relating to aspects of our technologies and compounds filed by, and issued to, other parties. Others have filed patent applications or have been granted patents claiming inventions also claimed or licensed by us, and we may have to participate in an interference or other proceeding before a patent agency or court to determine priority of invention or which party was first to invent and, thus, has the right to a patent for these inventions. We believe one or more interferences may be declared between patents and applications we own or have exclusively licensed and patents and applications owned by Abbott Laboratories or Biotica Technologies Ltd. relating to erythromycin polyketide synthase, or PKS, genes, methods for altering PKS genes, and erythromycin analogs. In April 2005, a hearing was held at the European Patent Office to address an opposition filed by Biotica to one of our exclusively licensed patents related to the recombinant production of polyketides. The European Patent Office maintained, or upheld, the patent, but with narrowing amendments. Both parties appealed this decision. In June 2007, the board of appeals of the European Patent Office held a hearing on the appeal and revoked the patent in its entirety. The revocation of this European patent is not expected to impact our freedom to operate.

We are the exclusive licensee to two patent rights claiming our epothilone clinical candidate KOS-1584. One is a granted patent and one is a patent application, owned by the Oregon State University and Sloan-Kettering, respectively. In June 2007, the US Patent and Trademark Office declared an interference between the patent and patent application. In October 2007, we entered into a settlement agreement with the Oregon State University and Sloan-Kettering setting forth the agreed upon procedure to conduct the interference. In addition, we entered into amendments to our agreements with the Oregon State University and Sloan-Kettering in connection with the settlement agreement. These amendments confirm, as well as make certain adjustments to, our financial obligations to each of the Oregon State University and Sloan-Kettering under our agreements with them, regardless of which party ultimately prevails in the interference.

A proceeding or a lawsuit involving an interference or opposition could result in substantial cost to us even if the outcome is favorable, and if the outcome is unfavorable, we could be required to license the other party’s rights, on terms that may be unfavorable to us, or cease using the technology. We could incur additional cost because we are licensed under both party’s patent rights. An interference or opposition may also result in loss of claims based on patentability grounds raised in the interference or opposition. Although patent and intellectual property disputes in the biotechnology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include ongoing royalties. Furthermore, we cannot be certain that a license would be available to us on satisfactory terms, if at all. Companies and others developing products that could compete with our product candidates, such as Novartis AG in the area of potential epothilone products, may be particularly unwilling to grant us a license at any price. If we are not able to obtain necessary licenses, we may not be able to manufacture or commercialize our product candidates, which would materially harm our business, financial condition and results of operations.

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Claims by third parties of intellectual property infringement would require us to spend time and money and could deprive us of valuable rights needed to develop or commercialize our products.

Our commercial success depends significantly on not infringing the patents and proprietary rights of other parties and not breaching any licenses that we have entered into with regard to our technologies and products. Other parties may currently or in the future possess intellectual property rights covering product candidates that we or our current or potential future partners are developing or desire to develop; methods of treatment or administration involving our product candidates; formulations of our product candidates; and genes, gene fragments, cell lines, compounds and other technologies we use or may wish to use. Any infringement of patent rights or violation of other proprietary rights may require us to obtain a license from another party, forego product development or commercialization or face lawsuits or other claims.

The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. We are aware of patents and published patent applications that, if valid, and if we are unsuccessful in circumventing or acquiring the rights to these patents, may block our ability to commercialize products based on the product candidates that we are developing or pursue our PKS gene manipulation and production technologies. We cannot be sure that other parties have not filed for or obtained relevant patents that could affect our ability to obtain patents or operate our business. Others, including our partners, may challenge our patent or other intellectual property rights or sue us for patent infringement, misappropriation of their intellectual property rights or breach of license agreements. We may be required to commence legal proceedings to resolve our patent or other intellectual property rights. An adverse determination in any litigation or administrative proceeding to which we may become a party could subject us to significant liabilities, result in our patents being deemed invalid, unenforceable or revoked, require us to license disputed rights from others or to cease using the disputed technology. In addition, our involvement in any of these proceedings may cause us to incur substantial costs and result in diversion of management and technical personnel.

Other parties may obtain patents in the future and claim that our products or the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any claims that the use of our technologies infringes any patents, defending ourselves against any claim that we are employing any proprietary technology without authorization or enforcing our patents against others. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief that could effectively block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to:

• pay substantial damages;

• stop producing certain products and using certain methods;

• develop non-infringing products and methods; and

• obtain one or more licenses from other parties.

We may not be able to obtain licenses from other parties at a reasonable cost, or at all. If we are not able to obtain necessary licenses at a reasonable cost or at all, we could encounter substantial delays in product introductions while we attempt to develop alternative methods and products, which we may not be able to accomplish. Litigation or the failure to obtain licenses could prevent us from manufacturing or commercializing products and could materially harm our business, financial condition and results of operation.

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Manufacturing difficulties could delay or preclude commercialization of our products and substantially increase our expenses.*

We currently use contract manufacturers to make tanespimycin and alvespimycin active pharmaceutical ingredients. We currently formulate the final drug product for tanespimycin injectable suspension formulation at our facilities and use a contract manufacturer to fill the final drug product vials. In the future, we expect to use a contract manufacturer to conduct the entire tanespimycin injectable suspension formulation and filling process. We currently use a contract manufacturer to formulate the final drug product for alvespimycin. We maintain a limited inventory of tanespimycin and alvespimycin drug product at our facilities in Hayward, California, and we also maintain a limited inventory at the facilities of an outside contractor. In our epothilone program, we rely on contract manufacturers for the active pharmaceutical ingredient for KOS-1584. Drug product for KOS-1584 is formulated by an outside contractor. We maintain limited inventories of formulated drug product for KOS-1584 at our facilities in Hayward, California and at the facilities of outside contractors. For all of our projects, drug product is distributed to clinical sites primarily through outside contractors.

If any of our or our contract manufacturers’ manufacturing or inventory facilities encounter delays, are destroyed or otherwise become unavailable to us, then the clinical development of our product candidates or submissions for their regulatory approval, and therefore commercialization, could be delayed or precluded. Adverse effects would be particularly acute if problems arise with our sole sourcing or inventory relationships. Alternative qualified production capacity may not be available on a timely basis or at all because manufacturing processes for our product candidates are complex and may be subject to a lengthy regulatory approval process.

A number of factors could cause prolonged interruptions in the manufacturing and supply of our product candidates, including:

• the failure of a supplier to provide raw materials or intermediates used for manufacture of our product candidates;

• equipment malfunctions or failures;

• the failure to manufacture in accordance with current good manufacturing practices, FDA or other regulatory requirements;

• the delay of product shipments due to U.S. custom regulations or third-party carriers used to transport our product candidates, and damage to our product candidates while they are in transit;

• changes in FDA or other regulatory authority requirements or standards that require modifications to the manufacturing processes or facilities used in the production of our product candidates;

• action by the FDA or other regulatory authorities to suspend production of one or more of our product candidates; or

• difficulties in scaling-up production of our product candidates for large clinical trials or commercial supply.

While our manufacturing personnel have extensive experience from working at other companies, we as a company have no experience manufacturing products for commercial sale. We may encounter difficulties in scaling-up our manufacturing processes and equipment. We may not be able to achieve such scale-up in a timely manner or at a commercially reasonable cost, if at all. In addition, our facilities in Hayward, California are located within the San Francisco Bay Area, an area where earthquakes periodically occur. They are also located in a designated flood zone. Our access to any raw materials, intermediates, active pharmaceutical ingredients or formulated drug product for our product candidates sourced or inventoried through our facilities in Hayward, California may be subject to interruption, damage or loss in the event of an earthquake or flood.

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As discussed above, we rely upon outside contractors to manufacture and supply to us raw materials, intermediates, active pharmaceutical ingredients and formulated drug product for our product candidates. Our dependence upon others for the manufacture of our product candidates and their components may adversely affect our ability to continue clinical development of our product candidates in a timely manner and may adversely affect any future profit margins and our ability to commercialize any products that we may develop on a timely and competitive basis. Dependence on contract manufacturers involves a number of additional risks, many of which are outside of our control, including:

• failure of a contract manufacturer to manufacture products to our specifications or to deliver products in the quantities, timeframe or manner that we require;

• a decision by the FDA or other regulatory authorities not to approve our use of a particular contract manufacturer to supply our products;

• intellectual property rights to any improvements in a manufacturing process or new manufacturing processes being owned by or shared with a contract manufacturer;

• termination of an agreement with a contract manufacturer or increased prices charged by a contract manufacturer; or

• a contract manufacturer declaring bankruptcy or otherwise going out of business.

Any of these factors could cause us to delay or suspend clinical trials, regulatory submissions or commercialization of our products and could result in significantly increased costs.

In addition, our future contract manufacturers may not be in the United States, and we currently utilize contract manufacturers located outside the United States. Consequently, we may face additional manufacturing difficulties due to a number of potential factors, including importation and customs issues, political uncertainties and a potentially limited ability to enforce our contractual rights against parties not located within the United States.

We face intense competition from pharmaceutical companies, biotechnology companies and academic groups.*

We face, and will continue to face, intense competition from organizations such as biotechnology and pharmaceutical companies, as well as academic and research institutions and government agencies, that are pursuing competing technologies and products. These organizations may develop or currently possess technologies or products that are superior alternatives to ours. For example, companies with competing Hsp90 inhibitors include Biogen Idec Inc., which has initiated Phase 1 clinical trials in solid tumors with its intravenous formulation of tanespimycin and its oral synthetic Hsp90 inhibitor and has announced that it expects to initiate Phase 2 clinical trials in 2007; Infinity Pharmaceuticals, which, in collaboration with MedImmune, Inc. (recently acquired by AstraZeneca), has initiated a Phase 1/2 clinical trial of its intravenous Hsp90 inhibitor in non-small cell lung cancer and a Phase 1 clinical trial in gastrointestinal stromal tumors and has announced its plans to initiate clinical trials with its oral formulation in the second half of 2007; Abraxis BioScience, Inc., which has announced its plans to file an IND in the second half of 2007 for its albumin-bound nanoparticle formulation of tanespimycin; Vernalis plc, which has announced that it has selected an intravenous and an oral Hsp90 inhibitor preclinical development candidate in collaboration with Novartis AG and which has initiated a Phase 1/2 trial of an Hsp90 inhibitor; Serenex, Inc., which has initiated a Phase 1 clinical trial with its oral Hsp90 inhibitor; and Synta Pharmaceuticals Corp., which announced plans to file an IND for its Hsp90 inhibitor in 2007, as well as other companies reported to be pursuing Hsp90 inhibitors. Competing epothilones in clinical development include those being developed by Novartis AG, which is reported to be in Phase 3 clinical trials; and Schering AG, which is reported to be in Phase 2 clinical trials. Gastrointestinal motility competitors include Chugai Pharmaceuticals, whose motilide agonist is reported to be in Phase 2 clinical trials. In addition, IXEMPRA(TM) (ixabepilone), an epothilone developed by Bristol-Myers Squibb Company, was approved by the FDA in October 2007 for use in breast cancer. Thus, it is possible that, even if we are successful in developing any of our product candidates, one or more compounds of our competitors will be approved and marketed before our own. This could place our partners and us at a significant disadvantage and could prevent us from realizing significant commercial benefit from such compounds. Further, our competitors in the polyketide gene-engineering field may be more effective at implementing their technologies to develop commercial products or may hold or develop patents or other proprietary rights that may prevent us from practicing our technologies and pursuing our programs.

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We also face and will continue to face intense competition from other companies for partnering arrangements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions and for licenses to additional technologies. These competitors, either alone or with their collaborative partners, may succeed in developing technologies or products that are superior to ours.

Any products that we develop through our technologies will compete in multiple, highly competitive markets. Development of pharmaceutical products requires significant investment and resources. Many of the organizations competing with us in the markets for such products have greater capital resources, research and development and marketing staffs, facilities and capabilities, and greater experience in discovery and developing drugs, obtaining regulatory approvals and product manufacturing and marketing. Accordingly, our competitors may succeed in more rapidly developing and marketing technologies and products that are more effective than our technologies and products or that would render our products or technologies obsolete or noncompetitive.

We believe that our ability to successfully compete will depend on, among other things:

• our ability to develop novel product candidates with attractive pharmaceutical properties and to secure and protect intellectual property rights based on our innovations;

• the efficacy and safety of our product candidates;

• the speed at which we and our partners develop our product candidates;

• our and our partners’ ability to design and successfully execute appropriate clinical trials;

• our and our partners’ ability to obtain regulatory approvals to market our product candidates and the timing and scope of any regulatory approvals;

• our and our partners’ ability to manufacture commercial quantities and sell any product candidates that are approved for marketing;

• acceptance of future products by physicians and other healthcare providers; and

• the development of effective pricing and reimbursement strategies.

If we face product liability claims, these claims will divert our management’s time and we will incur litigation costs, and if we are held liable, our business, financial condition and results of operation may be materially harmed.

We face an inherent business risk of liability claims in the event that the use of our potential products in clinical trials or otherwise, or any other products manufactured in our facility, results in personal injury or death. Even though we have obtained product liability insurance, it may not be sufficient to cover claims that may be made against us. Product liability insurance is expensive, difficult to obtain and may not be available on acceptable terms, if at all. Any claims against us, regardless of their merit, could materially and adversely affect our business, financial condition and results of operation, because litigation related to these claims would strain our financial resources in addition to consuming the time and attention of our management. If we are sued for any injuries caused by our products or products manufactured at our facility, our liability could exceed our total assets.

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We use hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including hazardous chemicals and radioactive and biological materials. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. Our operations also produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling, shipment and disposal of these materials. We could be subject to civil damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, we could be sued for injury or contamination that results from our use or the use by third parties or our partners of these materials, and our liability may exceed our insurance coverage and total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or commercialization efforts. In the event we do not comply with any of these laws or regulations, we may incur significant fines, our governmental licenses or permits may be revoked or we may face additional penalties, any of which could harm our business.

We have a stockholders rights plan and anti-takeover provisions in our corporate charter documents that may result in outcomes with which you do not agree.

Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the rights, preferences, privileges and restrictions of those shares without further vote or action by our stockholders. The rights of the holders of any preferred stock that may be issued in the future may adversely affect the rights of the holders of common stock. The issuance of preferred stock could make it more difficult for third parties to acquire a majority of our outstanding voting stock.

Our certificate of incorporation provides for staggered terms for the members of the board of directors and prevents our stockholders from acting by written consent. These provisions and other provisions of our bylaws and of Delaware law applicable to us could delay or make more difficult a merger, tender offer or proxy contest involving us. This could reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without these provisions. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. This is because our board of directors is responsible for appointing the members of our management team.

We have adopted a rights agreement under which all stockholders have the right to purchase shares of a new series of preferred stock at an exercise price of $70.00 per one one-hundredth of a share (subject to adjustment), if a person acquires more than 20% of our common stock. The rights plan could make it more difficult for a person to acquire a majority of our outstanding voting stock. The rights plan could also reduce the price that investors might be willing to pay for shares of our common stock and result in the market price being lower than it would be without the rights plan. In addition, the existence of the rights plan itself may deter a potential acquirer from acquiring us. As a result, either by operation of the rights plan or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.

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Our stock price has been, and may continue to be, extremely volatile.*

The trading price of our common stock has been, and is likely to continue to be, highly volatile. During the period from October 1, 2006 through September 30, 2007, our common stock traded between $3.70 and $7.35 on the Nasdaq Global Market. The trading price of our common stock could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

• delay or failure in initiating, conducting, completing or analyzing clinical trials or unsatisfactory design of or data from these trials by our collaborators or us;

• announcements of data from clinical trials, new partnering arrangements or other developments that do not meet the expectations of analysts, investors or other third parties;

• developments in clinical trials for potentially competitive product candidates;

• changes in the United States or foreign health care systems or regulations;

• regulatory approvals for competitive product candidates or delays or failures by our partners or us in obtaining regulatory approvals for our product candidates;

• new products or services introduced or announced by us or our competitors;

• announcements of technological developments in research by us or our competitors;

• published reports by securities analysts;

• announcements of expirations, terminations or amendments of collaborations, licenses or government research grants, or announcements that we have entered into new collaboration, licensing or similar arrangements;

• departures of key personnel;

• developments or disputes as to patent or other proprietary rights;

• litigation or an unfavorable outcome in litigation;

• sales of our common stock;

• announcements of, and actual or anticipated fluctuations in, our financial results; and

• economic and other external factors, disasters or crises.

In addition, the stock market in general, and the Nasdaq Global Market and the market for biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. If this type of litigation were instituted against us, we would be faced with substantial costs and management’s attention and resources would be diverted, which could in turn seriously harm our business, financial condition and results of operations.

We expect that our quarterly and annual results of operations will fluctuate, and this fluctuation could cause our stock price to decline, creating investor losses.*

Our quarterly and annual operating results have fluctuated in the past and are likely to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors that could cause our operating results to fluctuate include:

• expiration or termination of current or potential future partnering or licensing arrangements, which may not be renewed or replaced;

• the success rate of our, Pfizer’s or potential future partners’ efforts leading to milestone payments and royalties under our licensing arrangements with Pfizer or any future collaboration or license agreements that we may establish;

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• the progress of our product candidates in clinical trials, and therefore, the timing of expenses for those clinical trials;

• the timing and willingness of partners to develop and commercialize our products;

• general and industry specific economic conditions, which may affect our partners’ research and development expenditures; and

• costs and expenses related to any litigation or administrative proceedings in which we may be involved.

If our revenues decline or do not grow due to expiration, termination or amendment of current or future collaboration agreements or licenses, failure to obtain new contracts or other factors, we may not be able to reduce our operating expenses correspondingly. In addition, we expect operating expenses to continue to increase, particularly following the termination of our collaboration arrangement with Roche. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter or year-to-year comparisons of our operating results are not a good indication of our future performance. Our operating results in some quarters or years may not meet the expectations of stock market analysts and investors. In that case, our stock price may decline.

If we are unable to favorably assess the effectiveness of internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, our stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, on an annual basis, our management is required to report on, and our independent auditors to attest to, the effectiveness of our internal controls over financial reporting. The rules governing the standards that must be met for management to make its annual assessment are complex and require significant documentation and testing. While our internal controls over financial reporting were deemed effective by both our management and our independent auditors as of December 31, 2006, there may be changes in our systems, processes or operations that will affect the effectiveness of internal controls in the future. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our future assessments of internal controls may continue to result in increased expenses and the devotion of significant management resources. If we cannot favorably assess the effectiveness of our internal controls over financial reporting in the future, or if our independent auditors are unable to provide an unqualified attestation report on our internal controls over financial reporting, investor confidence and our stock price could be adversely affected.

Item 5: Other Information

On August 8, 2007, we exercised our option to extend, for a term of five years, the term of that certain lease agreement, dated December 1, 1997 (the “Lease”), with Northern California Industrial Portfolio, Inc. (“Landlord”) for the lease of premises containing approximately 69,512 square feet of office space located at 3825 Bay Center Place, Hayward, California. The five-year extension term will expire on February 28, 2013, with an option to extend for an additional five year term. We expect that our minimum monthly rental expense will be $82,511 for the first year of the extension term and will increase to $96,524 for the final year of the extension term. We expect to enter into a formal amendment with Landlord with respect to the exercise of our option to extend the term of the Lease. Under the terms of the Lease, we are also responsible for our proportionate share of certain operating expenses, including taxes, insurance, common area management and management fees. In the event of a default of certain of our obligations under the Lease, the Landlord would have right to terminate the Lease. The foregoing is only a brief description of the material terms of the Lease, does not purport to be a complete statement of the rights and obligations of the parties under the Lease, and is qualified in its entirety by reference to the Lease that was filed as Exhibit 10.42 to our quarterly report on Form 10-Q for the quarterly period ended June 30, 2002.

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Item 6: Exhibits

Exhibit No.
3.1	Amended and Restated Certificate of Incorporation. (1)
3.2	Amended and Restated Bylaws of Registrant. (2)
4.1	Form of Specimen Common Stock Certificate. (3)
4.2	Third Amended and Restated Registration Rights Agreement, dated March 30, 2000, between Registrant and certain stockholders. (3)
4.3	Registrant’s Certificate of Designation of Series A Junior Preferred Stock. (4)
4.4	Warrant for the purchase of shares of common stock, dated July 19, 2006, issued by the Registrant to Kingsbridge Capital Limited. (5)
4.5	Registration Rights Agreement, dated July 19, 2006, by and between the Registrant and Kingsbridge Capital Limited. (5)
10.39	Consulting Agreement, dated August 24, 2007, by and between the Registrant and Margaret A. Horn.
10.40†	Amendment to the Research and License Agreement, dated October 2, 2007, by and between the Registrant and the Sloan-Kettering Institute for Cancer Research.
10.41†	Exclusive License Agreement, dated April 4, 2005, by and between the Registrant and the State of Oregon, acting by and through the State Board of Higher Education on Behalf of Oregon State University.
10.42†	Amendment No. One to the Exclusive License Agreement, dated October 2, 2007, by and between the Registrant and the State of Oregon, acting by and through the State Board of Higher Education on behalf of Oregon State University.
31.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a)
31.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a)
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer of Kosan Biosciences Incorporated, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code (18 U.S.C. 1350). (7)

(1) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2001.

(2) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2003.

(3) Incorporated herein by reference to an exhibit of our Registration Statement on Form S-1, Registration No. 333-33732.

(4) Incorporated by reference to an exhibit of our current report on Form 8-K filed on October 15, 2001.

(5) Incorporated by reference to an exhibit of our current report on Form 8-K filed on July 25, 2006.

(6) This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Kosan Biosciences Incorporated under the Securities Act or the Exchange Act (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

† Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

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SIGNATURES

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

	Kosan Biosciences Incorporated
November 9, 2007	By:	/s/ Robert G. Johnson, Jr.
		Robert G. Johnson, Jr., M.D., Ph.D. President and Chief Executive Officer and Duly Authorized Officer
November 9, 2007	By:	/s/ Gary S. Titus
		Gary S. Titus Senior Vice President and Chief Financial Officer and Duly Authorized Officer

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EXHIBIT INDEX

Exhibit No.
3.1	Amended and Restated Certificate of Incorporation. (1)
3.2	Amended and Restated Bylaws of Registrant. (2)
4.1	Form of Specimen Common Stock Certificate. (3)
4.2	Third Amended and Restated Registration Rights Agreement, dated March 30, 2000, between Registrant and certain stockholders. (3)
4.3	Registrant’s Certificate of Designation of Series A Junior Preferred Stock. (4)
4.4	Warrant for the purchase of shares of common stock, dated July 19, 2006, issued by the Registrant to Kingsbridge Capital Limited. (5)
4.5	Registration Rights Agreement, dated July 19, 2006, by and between the Registrant and Kingsbridge Capital Limited. (5)
10.39	Consulting Agreement, dated August 24, 2007, by and between the Registrant and Margaret A. Horn.
10.40†	Amendment to the Research and License Agreement, dated October 2, 2007, by and between the Registrant and the Sloan-Kettering Institute for Cancer Research.
10.41†	Exclusive License Agreement, dated April 4, 2005, by and between the Registrant and the State of Oregon, acting by and through the State Board of Higher Education on Behalf of Oregon State University.
10.42†	Amendment No. One to the Exclusive License Agreement, dated October 2, 2007, by and between the Registrant and the State of Oregon, acting by and through the State Board of Higher Education on behalf of Oregon State University.
31.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a)
31.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a)
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer of Kosan Biosciences Incorporated, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United Stated Code (18 U.S.C. 1350). (6)

(1) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2001.

(2) Incorporated herein by reference to an exhibit of our Quarterly Report on Form 10-Q for the period ended June 30, 2003.

(3) Incorporated herein by reference to an exhibit of our Registration Statement on Form S-1, Registration No. 333-33732.

(4) Incorporated by reference to an exhibit of our current report on Form 8-K filed on October 15, 2001.

(5) Incorporated by reference to an exhibit of our current report on Form 8-K filed on July 25, 2006.

(6) This certification “accompanies” the Quarterly Report on Form 10-Q to which it relates, pursuant to Section 906 of the Sarbanes Oxley Act of 2002, and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Kosan Biosciences Incorporated under the Securities Act or the Exchange Act (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

† Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

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EX-10.39

Exhibit 10.39

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT (the “Agreement”) is made and entered into by and between KOSAN BIOSCIENCES INCORPORATED, a Delaware corporation having an address at 3832 Bay Center Place, Hayward, CA 94545 (the “Company”), and MARGARET A. HORN, an individual, having an address at _________________, (“Consultant”), effective as set forth in Section 8.3 herein.

RECITALS

WHEREAS, Consultant previously served as the Company’s Senior Vice President, Legal and Corporate Development and General Counsel and has resigned her employment effective August 24, 2007;

WHEREAS, given her prior service to the Company, Consultant has skills and knowledge in the Company’s field of endeavor and thus is well suited to advise the Company; and

WHEREAS, the Company desires that Consultant advise and consult with the Company in Consultant’s area of expertise and on the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the mutual obligations specified in this Agreement, the parties agree to the following:

1. CONSULTING SERVICES. Consultant shall provide consulting services to the Company, the specific nature and amount of which shall be as described generally in Exhibit A and in accordance with the Company’s more specific instructions. Exhibit A lists Consultant’s main contact person for the Services, and this person will be the primary source of Company’s more specific instructions regarding the Services. The Company may change Consultant’s main contact upon written notice. Consultant will perform the Services in strict accordance with Exhibit A and the Company’s other directions, using Consultant’s highest degree of professional skill and expertise.

Consultant shall render the Services at such times and in such quantities as are set forth in Exhibit A. Consultant shall perform the Services at the Company’s principal place of business, another Company location, or at other places set forth in Exhibit A.

2. COMPENSATION. Company shall compensate Consultant in accordance with Exhibit A for Services actually provided by Consultant in accordance with this Agreement.

3. AMENDMENTS TO EXHIBIT A. Exhibit A sets forth the specifics of the Services, the location of the Services and compensation for the Services as of the Effective Date. Exhibit A may only be amended by a writing signed by an authorized representative of each party (in the case of the Company, a person having a seniority level of Senior Vice President or higher).

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4. INDEPENDENT CONTRACTOR STATUS. It is understood and agreed that Consultant is an independent contractor, is not an agent or employee of the Company, and is not authorized to act on behalf of the Company. Consultant agrees not to hold Consultant out as, or give any person any reason to believe that Consultant is an employee, agent, joint venturer or partner of the Company. Consultant will not be eligible for any employee benefits, nor will the Company make deductions from any amounts payable to Consultant for taxes or insurance (except to the extent the Company is required by law to do so). All payroll and employment taxes, insurance, and benefits shall be the sole responsibility of Consultant. Consultant retains the right to provide services for others during the term of this Agreement and is not required to devote Consultant’s services exclusively for the Company, provided that, during the term of this Agreement, Consultant may not provide services (as a consultant, employee, or in any other status) to a competing entity of the Company, or engage in activities that compete with the Company or that otherwise conflict with his duties to the Company hereunder.

5. NO SOLICITATION. During the term of this Agreement and for one (1) year after its termination, Consultant will not personally or through others recruit, solicit or induce, or attempt to recruit, solicit or induce, any employee or independent contractor of the Company to terminate his or her employment or contractor relationship, as applicable, with the Company.

6. CONFIDENTIAL INFORMATION.

6.1 Company Information. During the term of this Agreement and in the course of Consultant’s performance hereunder, Consultant may receive or otherwise be exposed to confidential or proprietary information relating to the Company’s technology know-how, data, inventions, developments, plans, business practices or strategies. Such confidential or proprietary information of the Company (collectively referred to as “Information”) may include but not be limited to: (i) confidential or proprietary information supplied to Consultant with the legend “Confidential” or equivalent; (ii) the Company’s marketing and customer support strategies, financial information (including sales, costs, profits and pricing methods), internal organization, employee information, and customer lists; (iii) the Company’s technology, including, but not limited to, discoveries, inventions, research and development efforts, data, software, trade secrets, processes, samples, media and/or cell lines (and procedures and formulations for producing any such samples, media and/or cell lines), vectors, viruses, assays, plasmids, formulas, methods, product and know-how and show-how; (iv) all derivatives, improvements, additions, modifications, and enhancements to any of the above, including any such information or material created or developed by Consultant under this Agreement; or (v) information of third parties as to which the Company has an obligation of confidentiality. Consultant agrees that any Information provided to Consultant prior to the Effective Date shall be considered “Information” and protected hereunder.

Consultant acknowledges the confidential and secret character of the Information and agrees that the Information (with the exception of information in category (v)) is the sole, exclusive and extremely valuable property of the Company. Accordingly, Consultant shall not reproduce any of the Information without the applicable prior written consent of the Company, use the Information except in the performance of this Agreement, nor disclose all or any part of the Information in any form to any third party, either during or after the term of this Agreement. Upon termination of this Agreement for any reason, including expiration of term, Consultant agrees to cease using and to return to the Company all whole and partial copies of the Information.

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Consultant shall not remove from the premises of Company or otherwise transfer to any third party any materials to which Company provides Consultant access, unless Consultant has express advance written consent from Company.

6.2 Other Employer Information. Consultant agrees that Consultant will not, during Consultant’s engagement with the Company, improperly use or disclose any proprietary information or trade secrets of Consultant’s former or concurrent employers or companies with which Consultant has or has had a consulting or other relationship, if any, and that Consultant will not bring onto the premises of the Company any unpublished documents or any property belonging to Consultant’s former or concurrent employers or companies unless consented to in writing by said employers or companies.

6.3 Third Party Information. Consultant recognizes that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and, in some cases, to use it only for certain limited purposes. Consultant agrees that Consultant owes the Company and such third parties, both during the term of Consultant’s engagement and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except in a manner that is consistent with the Company’s agreement with the third party) or use it for the benefit of anyone other than the Company or such third party (consistent with the Company’s agreement with the third party).

7. INVENTIONS.

7.1 Disclosure of Inventions. Consultant shall promptly and fully disclose to the Company any and all ideas, improvements, inventions, know-how, techniques and works of authorship learned, conceived or developed by Consultant pursuant to Consultant’s performance of the Services for the Company or pursuant to any services provided to the Company prior to the Effective Date (together with all intellectual property rights therein (including without limitation patent applications and patents), the “Consulting Inventions”). Consultant shall keep and maintain adequate and current records (in the form of notes, sketches, drawings or in any other form that may be required by the Company) of all work performed relating to the Services, including all proprietary information developed relating thereto. Such records shall be available to and remain the sole property of the Company at all times.

7.2 Inventions Assigned to the Company. Consultant agrees that any and all Consulting Inventions shall be the sole and exclusive property of the Company. Accordingly, Consultant hereby assigns to the Company all Consultant’s right, title and interest in and to the Consulting Inventions, and agrees to execute and deliver all documents and take all reasonable, lawful actions to assist the Company to evidence or record such assignment or perfect or enforce the Consulting Inventions. Further, if Company is unable, after making reasonable inquiry, to obtain Consultant’s signature on any such documents, Consultant hereby appoints Company as Consultant’s attorney-in-fact to execute and deliver such documents.

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7.3 Proprietary Information and Inventions of Concurrent Employers. The Company acknowledges that Consultant may be concurrently employed by others during the course of this Agreement. The Company shall have no rights to the proprietary information or inventions developed by Consultant during the course of his employment with such concurrent employers.

8. RELEASE OF CLAIMS. In exchange for the compensation and benefits to be provided to Consultant by the Company pursuant to this Agreement (including the continued vesting of Consultant’s Stock Options as set forth in Exhibit A), Consultant hereby provides the following Release:

8.1 General Release. Consultant hereby generally and completely releases the Company and its directors, officers, employees, shareholders, partners, agents, attorneys, predecessors, successors, parent and subsidiary entities, insurers, affiliates, and assigns (collectively, the “Released Parties”) from any and all claims, liabilities and obligations, both known and unknown, arising out of or in any way related to events, acts, conduct, or omissions occurring at any time prior to or on the date that Consultant signs this Agreement (collectively, the “Released Claims”). The Released Claims include, but are not limited to: (1) all claims arising out of or in any way related to Consultant’s employment with the Company or the termination of that employment; (2) all claims related to Consultant’s compensation or benefits, including salary, bonuses, relocation benefits, housing assistance, commissions, vacation pay, expense reimbursements, severance pay, fringe benefits, stock, stock options, or any other ownership or equity interests; (3) all claims for breach of contract, wrongful termination, and breach of the implied covenant of good faith and fair dealing; (4) all tort claims, including claims for fraud, defamation, emotional distress, and discharge in violation of public policy; and (5) all federal, state, and local statutory claims, including claims for discrimination, harassment, retaliation, attorneys’ fees, or other claims arising under the federal Civil Rights Act of 1964 (as amended), the federal Americans with Disabilities Act of 1990, the federal Age Discrimination in Employment Act (as amended) (“ADEA”), the federal Family and Medical Leave Act, the California Labor Code (as amended), the California Family Rights Act, and the California Fair Employment and Housing Act (as amended).

8.2 Excluded Claims. Notwithstanding the foregoing, the following are not included in the Released Claims (the “Excluded Claims”): (i) any rights or claims for indemnification Consultant may have pursuant to any written indemnification agreement to which she is a party, the charter, bylaws, or operating agreements of any of the Released Parties, or under applicable law; or (ii) any rights which are not waivable as a matter of law. In addition, Consultant understands that nothing in this Release prevents her from filing, cooperating with, or participating in any proceeding before the Equal Employment Opportunity Commission, the Department of Labor, or the California Department of Fair Employment and Housing, except that Consultant acknowledges and agrees that she shall not recover any monetary benefits in connection with any such claim, charge or proceeding with regard to any claim released herein. Consultant hereby represents and warrants that, other than the Excluded Claims, she is not aware of any claims she has or might have against any of the Released Parties that are not included in the Released Claims.

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8.3 ADEA Waiver. Consultant acknowledges that she is knowingly and voluntarily waiving and releasing any rights she may have under the ADEA, and that the consideration given for the waiver and release in the preceding paragraphs is in addition to anything of value to which she is already entitled. Consultant further acknowledges that she has been advised by this writing that: (1) her waiver and release do not apply to any rights or claims that may arise after the date she signs this Agreement; (2) she should consult with an attorney prior to signing this Agreement (although she may choose voluntarily not to do so); (3) she has twenty-one (21) days to consider this release (although she may choose voluntarily to sign this Agreement earlier); (4) she has seven (7) days following the date she signs this Agreement to revoke this ADEA waiver by providing written notice of revocation to the Company’s Chief Executive Officer; and (5) this Agreement will not be effective until the date upon which the revocation period has expired, which will be the eighth calendar day after the date she signs it provided that she does not revoke the ADEA Waiver contained in this Section 8.3 (the “Effective Date”).

8.4 Section 1542 Waiver. CONSULTANT UNDERSTANDS THAT THIS RELEASE AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. Consultant acknowledges that she has read and understands Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” Consultant hereby expressly waives and relinquishes all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction with respect to her release of claims herein, including but not limited to my release of unknown and unsuspected claims.

8.5 Representations. Consultant hereby represents and warrants that: (1) she has been paid all compensation owed and for all hours worked; (2) she has not earned and is not owed any bonus or incentive compensation; (3) she is not owed any relocation benefits; (4) she has received all the leave and leave benefits and protections for which she is eligible, pursuant to the Family and Medical Leave Act, the California Family Rights Act, or otherwise; and (5) she has not suffered any on-the-job injury for which she has not already filed a workers’ compensation claim.

8.6 Covenants. Consultant further agrees: (1) not to disparage any of the Released Parties in any manner likely to be harmful to its or their business, business reputations, or personal reputations (although she may respond accurately and fully to any question, inquiry or request for information as required by legal process); (2) not to voluntarily (except in response to legal compulsion) assist any third party in bringing or pursuing any proposed or pending litigation, arbitration, administrative claim or other formal proceeding against any of the Released Parties; and (3) to reasonably cooperate with the Company by voluntarily (without legal compulsion) providing accurate and complete information, in connection with either or both parties’ actual or contemplated defense, prosecution, or investigation of any claims or demands by or against third parties, or other matters, arising from events, acts, or failures to act that occurred during the period of Consultant’s employment.

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9. TERMINATION. Either party may terminate this Agreement at any time by giving the other party thirty (30) days written notice. Either party may terminate this Agreement upon written notice in the case of material breach of the terms of this Agreement by the other party, if such breach remains uncured thirty (30) days after written notice of such breach is sent by the terminating party. In the event of any termination, Consultant shall cease work immediately, unless otherwise advised by the Company, shall return to the Company all Information, Consulting Inventions, and other materials belonging to the Company, and shall notify the Company of costs incurred up to the termination date. Sections 5, 6, 7, 8, 10, 11 and 12 of this Agreement shall survive any termination of this Agreement. In the event that the Agreement is not terminated earlier as provided herein, it shall expire by its terms, and terminate, on January 3, 2008 unless the parties agree in writing to extend the term of the Agreement.

10. COMPLIANCE WITH APPLICABLE LAWS. Consultant warrants that all material supplied and work performed under this Agreement complies with or will comply with all applicable United States and foreign laws and regulations.

11. Assignment; Benefit. This Agreement is for the personal services of Consultant and may not be assigned by Consultant. Consultant may not delegate any of Consultant’s duties under this Agreement nor shall it be assignable by Consultant by operation of law, without the prior written consent of the Company. This Agreement may be assigned at any time by the Company in its discretion, provided that Consultant would not be required to perform personal services for any entity other than an entity (a) affiliated with the Company or (b) that has merged with or acquired all or substantially all of the Company’s assets to which the Services relate. The parties’ rights and obligations under this Agreement will bind and inure to the benefit of their respective successors, heirs, executors, and administrators and permitted assigns.

12. LEGAL AND EQUITABLE REMEDIES. Consultant hereby acknowledges and agrees that if Consultant breaches this Agreement, including, without limitation, by the actual or threatened disclosure of Information or Consulting Inventions without the prior express written consent of the Company, the Company will suffer an irreparable injury, such that no remedy at law will afford it adequate protection against, or appropriate compensation for, such injury. Accordingly, Consultant hereby agrees that the Company shall be entitled to specific performance of Consultant’s obligations under this Agreement, as well as such further relief as may be granted by a court of competent jurisdiction.

13. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and construed according to the laws of California, without giving effect to its conflict of laws rules. If any provision of this Agreement is found by a court of competent jurisdiction to be unenforceable, that provision shall be severed and the remainder of this Agreement shall continue in full force and effect. Any disputes arising under this Agreement shall be resolved by trial to a judge as the finder of fact seated in a court of competent subject matter jurisdiction in San Mateo or San Francisco counties, California. Each party hereby consents to, and waives any defenses that party may have to or conflicting with, the personal jurisdiction and venue of all such courts or relating to trial to a judge (including without limitation the defense of forum non conveniens).

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14. COMPLETE UNDERSTANDING; MODIFICATION. This Agreement constitutes the final, exclusive and complete understanding and agreement of the Company and Consultant with respect to the subject matter hereof. There are no other understandings, agreements, representations or warranties between the parties with respect to that subject matter other than those set forth in this Agreement. Any waiver, modification or amendment of any provision of this Agreement shall be effective only if in writing and signed by a Company officer.

15. NOTICES. Any notices required or permitted hereunder shall be given to the appropriate party at the address specified below or at such other address as the party shall specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or sent by certified or registered mail, three days after the date of mailing. Either party may update its notice address by written notice to the other party.

If to the Company:	If to the Consultant:
Kosan Biosciences Incorporated 3832 Bay Center Place Hayward, CA 94545 Attention: Chief Executive Officer	Margaret A. Horn [Address]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first set forth above.

KOSAN BIOSCIENCES INCORPORATED	MARGARET A. HORN
/s/ Robert G. Johnson, Jr.	/s/ Margaret A. Horn
PRINTED NAME: Robert G. Johnson, Jr.	PRINT NAME: Margaret A. Horn
TITLE: President & CEO	SOCIAL SECURITY NUMBER:____________________

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EXHIBIT A

WORK PLAN; COMPENSATION

Work Plan:

Consultant will provide general consulting services as requested from time to time. Consultant’s primary contact at the Company shall be Robert G. Johnson, M.D., Ph.D., President and Chief Executive Officer.

Term of Service:

Until January 3, 2008, unless earlier terminated in accordance with this Agreement, or extended by mutual written agreement of Consultant and an officer of the Company.

Compensation:

Consultant shall be paid $250 per hour actually spent performing the Services (excluding de minimis Services), not to exceed ten (10) hours per month without the Company’s prior written approval. Payments will be processed within thirty (30) days after receipt by Company of Consultant’s itemized invoice therefor (which invoice shall contain a written description of the day(s) that Consultant provided services, the amount of time, and a description of the provided services with respect to all time invoiced).

Stock Option Awards:

Consultant and the Company agree to the following regarding the stock option grants (the “Options”) provided to Consultant in connection with Consultant’s former employment with the Company:

To the maximum extent consistent with the Company’s 2006 Equity Incentive Plan (the “2006 Plan”) and Consultant’s option agreement(s) under the 2006 Plan, Consultant’s service to the Company under the Consulting Agreement shall constitute “Continuous Service” (as defined in the 2006 Plan) and vesting of the Options under the 2006 Plan will continue so long as there is no termination or interruption of Consultant’s Continuous Service. Once a termination or interruption of Consultant’s Continuous Service occurs (which will be no later than the termination of the Consulting Agreement), then Consultant will be entitled to exercise any vested shares subject to the Options under the 2006 Plan within ninety (90) days thereafter (but in no event later than the expiration of the term of such Option as set forth in the option agreement(s)) pursuant to the terms and conditions of the 2006 Plan and Consultant’s option agreement(s).

To the maximum extent consistent with the Company’s 1996 Stock Option Plan (the “1996 Plan”) and Consultant’s option agreement(s) under the 1996 Plan, Consultant’s service to the Company under the Consulting Agreement shall result in Consultant being a “Service Provider” (as defined in the 1996 Plan) and vesting of the Options under the 1996 Plan will continue so long as there is no termination or interruption of Consultant’s status as a Service Provider. Once a termination or interruption of Consultant’s status as a Service Provider occurs (which will be

no later than the termination of the Consulting Agreement), then Consultant will be entitled to exercise any vested shares subject to the Options under the 1996 Plan within such period of time as is specified in the Consultant’s option agreement(s) under the 1996 Plan (but in no event later than the expiration of the term of such Option as set forth in the option agreement(s)) pursuant to the terms and conditions of the 2006 Plan and Consultant’s option agreement(s). In the absence of a specified time in the option agreement(s), any Options under the 1996 Plan shall remain exercisable for three (3) months following the termination or interruption of Consultant’s status as a Service Provider.

EX-10.40

EXHIBIT 10.40

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

AMENDMENT TO RESEARCH

AND LICENSE AGREEMENT

This Amendment (“Amendment”) to the Research and License Agreement (“Agreement”) dated August 25, 2000, as amended by the Consent and Amendment dated September 16, 2002, is entered into this 2^nd day of October, 2007 by and between Kosan Biosciences Inc., having an address at 3832 Bay Center Place, Hayward, California 94545 (“Licensee”) and the Sloan-Kettering Institute for Cancer Research, having a place of business at 1275 York Avenue, New York, New York 10021 (“SKI”).

RECITALS

WHEREAS, SKI owns U.S. Application Serial No. 10/435,408 (“‘408 application”) that is exclusively licensed to Licensee in accordance with this Agreement;

WHEREAS, the ‘408 application is involved in Interference 105,557 declared by the United States Patent and Trademark Office on June 29, 2007;

WHEREAS, also involved in the interference is U.S. Patent No. 7,145,018 (“‘018 patent”) owned by the State of Oregon (“University”) that is exclusively licensed to Licensee under the terms of the Exclusive License Agreement dated April 4, 2005 and related amendment;

WHEREAS, Licensee, SKI and University on October 2, 2007 entered into a Settlement Agreement setting forth the agreed upon plan to conduct, and resolve all issues in, Interference No. 105,557 and;

WHEREAS, in furtherance of the resolution of Interference No. 105,557, Licensee and SKI wish to make certain amendments to the Agreement.

NOW THEREFORE, Licensee and SKI agree as follows:

1. Article 1 is hereby amended by the addition of the following new definitions:

1.45 “OSU AGREEMENT” shall mean that certain Exclusive License Agreement between LICENSEE and the State of Oregon dated April 4, 2005.

1.46 “OSU PATENT RIGHTS” shall mean any claim of any issued patents licensed to LICENSEE by the State of Oregon under the OSU AGREEMENT that have any composition of matter, method of use or administration or formulation claims covering LICENSEE’s trans-9,10-dehydroepothilone D compound designated KOS-1584 (or R1645), unless such claim has lapsed, expired, been canceled, been abandoned or been held invalid by a court or other appropriate body of competent jurisdiction in a decision that is unappealable or unappealed within the time allowed for appeal or been admitted to be invalid or unforceable through reissue or disclaimer or otherwise.

2. Article 6 is hereby amended by the addition of new Section 6.5 as follows:

6.5 LICENSEE hereby agrees to reimburse SKI for its actual out-of pocket expenses incurred after [ * ] for conducting Interference No. 105,557 up to a total of [ * ]. Within sixty

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(60) days after receipt by LICENSEE of an invoice detailing such expenses, LICENSEE shall pay to SKI or its designee all amounts directly related to Interference No. 105,557 up to [ * ]. Notwithstanding anything to the contrary herein, if any SKI PATENT RIGHTS become involved in any interference proceeding or priority contest with any patent application or patent directed to epothilones, their use or manufacture, that is controlled by the State of Oregon, whether such proceeding is before the United States Patent and Trademark Office or any U.S. federal court, SKI shall be responsible for its own costs and LICENSEE shall have no obligation whatsoever to pay for such proceeding or reimburse SKI.

3. Article 7 is hereby amended by the addition of new Section 7.1.7 as follows.

7.1.7 Notwithstanding anything to contrary under Sections 7.1.1, 7.1.2 and 7.1.3 above, if there is no [ * ] in [ * ] within SKI PATENT RIGHTS covering LICENSEE’S compound designated KOS-1584 or products containing such compound requiring payment of a royalty to SKI, but products containing KOS-1584, the use of such product, or the method of manufacture of such product is covered by at least one [ * ] of a [ * ] patent within OSU PATENT RIGHTS, LICENSEE agrees to pay SKI the applicable royalty on NET SALES of such products in accordance with Section 7.1.1, 7.1.2 or 7.1.3, as the case my be. Royalties payable under this Section 7.1.7 shall be due to SKI from the period beginning with the first commercial sale of LICENSEE’S KOS-1584 products.

4. Article 7 is hereby amended by the addition of new Section 7.14 as follows:

Notwithstanding anything to contrary under Sections 7.1.1, 7.1.2 and 7.1.3 above no monies payable to SKI under this AGREEMENT shall be subject to an offset, reduction or deduction on account of royalties paid by LICENSEE or SUBLICENSEE to the State of Oregon on NET SALES of KOS-1584.

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

5. Except as specifically amended herein, the terms of the Agreement shall remain in full force and effect. The Agreement (including the exhibits and schedules thereto) and this Amendment and the Settlement Agreement constitute the entire agreement between SKI and Licensee with respect to the subject matter within and therein and supersede all revisions, agreements and understandings between the parties whether written or oral. If there is a conflict between the terms of the Agreement and this Amendment, the terms of the Amendment shall govern.

IN WITNESS WHEREOF, Licensee and SKI by their duly authorized officers have amended this Amendment to the Agreement as of the date of the first written above.

SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH		KOSAN BIOSCIENCES INC.
By:	/s/ G. J. Bernhardt	By:	/s/ Robert G. Johnson Jr.
	(Signature)		(Signature)
Name:	Gustave J. Bernhardt	Name:	Robert G. Johnson, Jr.
	(Please Print)		(Please Print)
Title:	Director, Research Resources Management	Title:	President & CEO
Date:	10/2/07	Date:	2 October 2007

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[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EX-10.41

EXHIBIT 10.41

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

EXCLUSIVE LICENSE AGREEMENT

This “Agreement”, effective on the date of last signature (“Effective Date”), is between Kosan Biosciences Incorporated, having a principal place of business at 3832 Bay Center Place, Hayward, California 94545, hereafter referred to as “Company”, and the State of Oregon, acting by and through the State Board of Higher Education on Behalf of Oregon State University, an institution of higher education in the State of Oregon, located at Corvallis, Oregon, hereafter referred to as “University”.

WITNESSETH:

WHEREAS, University is the owner by assignment from Drs. James D. White and Rich G. Carter and Kurt F. Sundermann (collectively, the “Inventors”) of their entire right, title and interest in the invention entitled “Method for Synthesizing Epothilones and Epothilone Analogs” which is the subject of United States Patent Application Serial Number 10/352,340 filed January 27, 2003 (the “‘340 Application”) and certain other United States and foreign patent applications that have been or may be filed comprising Oregon State University Docket Number 99-01, hereafter referred to as the “Invention”, and

WHEREAS, University is committed to a policy that ideas and creative works produced at University should be used for the greatest possible public benefit; and

WHEREAS, University accordingly believes that every reasonable incentive should be provided for the prompt introduction of such ideas into public use, all in a manner consistent with public interest; and

WHEREAS, Company is desirous of obtaining a license to practice the above-identified Invention, and to manufacture, use and sell in the commercial marketplace the products made in accordance therewith; and

WHEREAS, University is desirous of granting such license to Company in accordance with the terms of this Agreement; and

WHEREAS, since this Invention was made with U. S. Government support under research grant number GM 50574 awarded by the National Institutes of Health, the U.S. Government has certain rights in this Invention.

NOW, THEREFORE, in consideration of the foregoing premises, the parties agree as follows:

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Article I

Definitions

A. “Affiliate” shall mean any entity that is in control of Company, is controlled by Company, or is under common control with Company. For purposes of this definition, “control” shall mean direct or indirect ownership or control of fifty percent (50%) or more of the equity or voting interests of the controlled entity or such lesser maximum percentage permitted in those jurisdictions where majority ownership by foreign entities is prohibited.

B. “Adjusted Gross Sales” shall mean the amount of gross sales of all Licensed Products invoiced by Roche or Roche Affiliates to third parties less deductions of returns (including allowances actually given for spoiled, damaged, out-dated, rejected, or returned Licensed Product previously sold; Licensed Product withdrawals and Licensed Product recalls) or return reserves , rebates (price reductions, rebates to social and welfare systems, chargebacks or chargeback reserves, government-mandated rebates and similar types of rebates, for example, P.P.R.S., and Medicaid), volume (quantity) discounts, and taxes (value added or sales taxes, government-mandated exceptional taxes and other taxes directly linked to the gross sales amount), to the extent included in the amounts invoiced, provided that no income taxes shall be deducted from gross sales of Licensed Product to calculate Adjusted Gross Sales. The computation of Adjusted Gross Sales shall not include amounts received by Roche or Roche Affiliates for the sale of Licensed Product to Roche or Roche Affiliates. If Roche or any Roche Affiliates receives consideration other than cash for sales of Licensed Products to third parties, the fair market value of such consideration shall be included in Adjusted Gross Sales as computed on a product-by-product basis. Quarterly, actual returns and actual chargebacks will be reconciled against the return reserves and chargeback reserves, respectively, and Adjusted Gross Sales will be credited or debited accordingly.

C. “Confidential Information” shall mean information that (i) is marked or identified, orally or in writing, as confidential or proprietary information of the disclosing party prior to, upon or promptly after receipt by the receiving party; or (ii) the receiving party should recognize from the circumstances surrounding the disclosure to be confidential.

D. “Field of Use” shall mean all fields of use.

E. “IND” shall mean Investigational New Drug Application filed with the United States Food and Drug Administration.

F. “Know-How” shall mean unpatented discoveries, inventions, and improvements, proprietary information, trade secrets, drawings, plans, designs, or specifications provided by University pertaining to Licensed Products.

G. “Licensed Processes” shall mean the processes claimed in or covered by a Valid Claim in the Patent Rights.

H. “Licensed Products” shall mean products claimed in or whose manufacture, use or sale is covered by a Valid Claim in the Patent Rights or products made by means of Licensed Processes. For purposes of payment of Milestone Payments under Article VI of this Agreement, two or more products will be considered the same Licensed Product if each contains or consists of the same active pharmaceutical ingredient (including different salts, crystalline forms, solvates, and hydrates thereof), even if such products have different formulations or are used for different indications.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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I. “NDA” shall mean a New Drug Application filed with the United States Food and Drug Administration.

J. “Net Sales” shall mean the amount billed or invoiced on sales of Licensed Products by Company or its sublicensees of Patent Rights or distributors, less

1) Customary trade, quantity or cash discounts and commissions actually allowed and taken;

2) Amounts repaid or credited by reason of rejection, return or retroactive price reductions;

3) To the extent included in the amount stated on purchase orders, invoices or other documents of sales, taxes levied on and/or other governmental charges made as to production, sale, transportation, delivery or use, and paid by or on behalf of Company;

4) To the extent included in the amount stated on purchase orders, invoices or other documents of sales, freight, insurance and other transportation charges; and

5) any such billed or invoiced amounts not collected by Company, its sublicensees or distributors, which deduction may be taken in the calendar quarter in which such sales are no longer recorded as a receivable, all in accordance with United States GAAP.

Notwithstanding the foregoing, with respect to sales of Licensed Product by Roche or Roche Affiliates, “Net Sales” shall mean the amount of Adjusted Gross Sales less a lump sum deduction of [ * ] of Adjusted Gross Sales, such deduction being taken in lieu of those sales-related deductions which are not specifically provided for in the definition of Adjusted Gross Sales (e.g., outward freights, postage charges, transportation insurance, packaging materials for dispatch of goods, custom duties, bad debts, discounts granted later than at the time of invoicing, cash discounts and other direct sales expenses).

Net Sales shall be determined based on the first sale of Products to an independent, unrelated third party that is not an Affiliate, sublicensee of Patent Rights or distributor.

K. “Patent Rights” shall mean the U.S. Patent Application Serial Number 10/352,340 filed January 27, 2003, and any other U.S. application owned by OSU that has Valid Claims covering the manufacture, use, or sale of [ * ], all divisions, continuations and continuations-in-part thereof and foreign patent applications corresponding to these applications, all U.S. and foreign patents issuing from such applications, divisions, continuations and continuations-in-part, and any reissues, reexaminations and extensions of all such patents.

L. “Phase I Clinical Trial” shall mean the first phase of human clinical trials of a Licensed Product to gain evidence of the safety and tolerability of such Licensed Product and information regarding pharmacokinetics and potentially pharmacological activity for such Licensed Product, which human clinical trials are completed prior to the initiation of Phase II Clinical Trials, as described in 21 C.F.R. §312.21(a), as may be amended.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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M. “Phase II Clinical Trial” shall mean, with respect to the United States, the second phase of human clinical trials of a Licensed Product to gain evidence of the efficacy in one or more indications and expanded evidence of the safety of such Licensed Product, as well as an indication of the dosage regimen required, as described in 21 C.F.R. §312.21(b), as may be amended.

N. “Phase III Clinical Trial” shall mean, with respect to the United States, the third phase of human clinical trials of a Licensed Product which are large-scale trials to gain evidence of efficacy and safety in a number of human subjects sufficient to support registration for such Licensed Product with the United States Food and Drug Administration, as described in 21 C.F.R. §312.21(c), as may be amended.

O. “Roche” shall mean, collectively, Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd.

P. “Roche Affiliate” shall mean any corporation or non-corporate business entity which controls, is controlled by, or is under common control with Roche. A corporation or non-corporate business entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls at least fifty percent (50%) of the voting stock of the other corporation (other than Genentech, Inc.) or such lesser maximum percentage permitted in those jurisdictions where majority ownership by foreign entities is prohibited, or (a) in the absence of the ownership of at least fifty percent (50%) of the voting stock of a corporation, or (b) in the case of a non-corporate business entity, if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the corporation or non-corporate business entity, as applicable, whether through the ownership of control of voting securities, by contract or otherwise.

Q. “Roche Agreement” shall mean that certain Collaborative Research, Development and Commercialization Agreement between the Company and Roche dated September 19, 2002, as amended.

R. “[ * ] Species Claim” means a claim in a patent or patent application that specifically identifies [ * ] by name or by reference to a specific structural formula. The term does not include claims that generically encompass [ * ] but do not specifically identify [ * ] by name or by reference to a specific structural formula.

S. “Valid Claim” shall mean a claim of an issued patent within the Patent Rights that has not lapsed, expired, been canceled, or become abandoned, and has not been held invalid by a court or other appropriate body of competent jurisdiction, unappealable or unappealed within the time allowed for appeal and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise. The term “Valid Claim” shall also include the [ * ] Species Claim in a pending patent application within the Patent Rights. For the purposes of this Agreement, the genus claims of the ‘340 application and any patent issuing therefrom are Valid Claims covering [ * ] regardless of (a) the cancellation of [ * ] from the ‘340 application; (b) whether [ * ] is prosecuted to allowance in a continuation application; or (c) any subsequent interpretation of the scope of such genus claims by any body of competent jurisdiction.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Article II

Grant

A. Subject to the terms and conditions of this Agreement, University hereby grants to Company a worldwide, exclusive license under the Patent Rights to make and have made, to use and have used, and to offer to sell, sell or import, and have offered to sell, sold or imported, the Licensed Products in the Field of Use, and to practice and have practiced the Licensed Processes and Know-How.

University also hereby grants to Company the right to enter into sublicensing agreements under the Patent Rights. Company agrees that any sublicenses granted other than to Roche pursuant to the Roche Agreement shall provide that the obligations imposed on Company under Article II, Article III, Article VIII, Article X, Section XII.J, Sections XIII.A, B and E, Article XIV, Article XV and Section XVII.F and G shall apply to the sublicensee as if it were a party to this Agreement. Company agrees to incorporate, either directly or by reference, provisions substantively similar to those listed above into all sublicense agreements entered into after the Effective Date. All sublicenses granted by Company other than to Roche pursuant to the Roche Agreement shall provide for termination of the sublicense upon termination of this Agreement, subject to the terms of Section XII.J below. Company agrees to forward to University a copy of each sublicense agreement Company enters into within thirty (30) days of its execution, except that financial terms of such sublicense agreement may be redacted. To the extent permitted by the Oregon Public Records law, University will maintain each sublicense agreement in confidence.

B. Notwithstanding anything to the contrary in this Article II, Company acknowledges and agrees that, because the Invention was made in the performance of work funded by the U.S. Government, Company’s license and Company’s rights under this Agreement are subject to rights accorded to the U.S. Government and to any requirements regarding the location of manufacture of Licensed Products provided under applicable federal statutes and regulations, including 35 USC §§202-206, and 37 CFR Part 401 (a copy of which regulation is attached hereto as Appendix A and by this reference incorporated herein). University has elected to retain title to the Invention pursuant to 35 USC §202.

C. Company, its distributors, Affiliates and sublicensees, and not University, shall have the obligation to ensure that any Licensed Products it makes, uses or sells are not defective and that any Licensed Product satisfies all applicable federal, state and local statutes, and rules and regulations. Company will comply, and will use commercially reasonable efforts to ensure that its distributors, Affiliates and sublicensees will comply, with all such applicable federal, state and local statutes, rules and regulations in the performance of Company’s obligations under this Agreement.

D. The University retains for itself and for other universities within the State of Oregon University System an irrevocable, nonexclusive and nontransferable and nonsublicensable right to practice for its own educational and non-commercial research purposes (not in humans) the Patent Rights, Know How and Licensed Processes. University reserves the right to supply the Patent Rights, Know How and Licensed Processes to academic research scientists of University and of other universities within the State of Oregon University System, with such supply subject to limitation of use by such scientists for internal non-commercial research purposes (not in humans) and prohibitions on further distribution.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Article III

Diligence

A. Company shall use reasonable efforts, consistent with sound and reasonable business practices and judgment, to effect commercialization of Licensed Products as soon as practicable and to maximize commercial sales. “Reasonable efforts” under this clause shall be deemed to have been satisfied if the goals and requirements set forth in Appendix B are met. To the extent permitted by the Oregon Public Records Laws, the development and commercialization goals attached as Appendix B, and any amendments thereto, shall constitute Confidential Information of Company.

Article IV

License Fee

A. Company shall pay University a nonrefundable license fee in the sum of [ * ] payable upon execution of this Agreement.

Article V

Royalties; Minimum Annual Payment

A. In addition to license fees payable under Article IV, Company agrees to pay University a royalty of [ * ] of Net Sales of Licensed Products sold in countries where there is a Valid Claim by Company, its distributors, Affiliates, and its sublicensees of Licensed Patents.

B. In the event that the aggregate payments under Articles IV, V and VI for any calendar year during the term of this Agreement are less than [ * ], University shall have the right to terminate this license upon written notice to Company in the event that Company does not pay to University the difference between [ * ] and the aggregate amounts paid under Articles IV, V and VI for such calendar year within thirty (30) days after written notice of non-payment sent by University to Company.

C. Licensed Products shall be deemed to have been sold when invoiced, or if not invoiced, then when delivered, shipped or paid for, whichever occurs first. Royalty payments shall be due to University when Licensed Products are sold and shall be payable pursuant to the terms of Section VII.C.

D. In the event Company or one or more of its Affiliates or sublicensees of Patent Rights is required to make payments to a third party for any patent or other intellectual property rights or technology to make, have made, use, offer for sale, sell, distribute, have distributed or import

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Licensed Products or to practice or have practiced Licensed Processes, then the royalties otherwise payable under this Article V shall be reduced by one-half of the amounts paid to such third party; provided, however, that in no event shall the royalty due University in any year fall below [ * ] of Net Sales of Licensed Products for such year. Company will provide University with written proof of payments to any third party that results in reduced royalties to University.

Article VI

Milestones

A. As further consideration for the licenses rights granted to Company under Article II, Company shall make the following initiation milestone payments (“Milestone Payments”) to University in the below specified amounts, for each Licensed Product to be paid at the commencement of each phase, with payments due (30) calendar days after achieving such milestone. A milestone does not apply if achieved prior to the Effective Date of this Agreement.

1. [ * ] [ * ]

2. [ * ] [ * ]

3. [ * ] [ * ]

4. [ * ] [ * ]

5. [ * ] [ * ]

6. [ * ] [ * ]

Article VII

Reports and Accounting

A. Company shall provide written annual reports within [ * ] days after the end of each calendar year beginning with the calendar year ending December 31, 2005, which shall include, but not be limited to: reports of progress on research and development, regulatory approvals, manufacturing, sublicensing, marketing, and sales during the prior year.

B. Company shall provide written quarterly royalty reports within [ * ] days after each calendar quarter, which shall include the number and aggregate amount of sales for each country in which sales occurred during the preceding three (3) months, except that with respect to sales of Licensed Product by Roche or Roche Affiliates, in lieu of the foregoing requirement, Company shall be required to send University the applicable portions of the royalty report provided by Roche pursuant to the Roche Agreement within ten (10) days after Company’s receipt thereof. Quarterly sales shall also be aggregated by selling entity (i.e., Company, Affiliates, and sublicensees). Company’s quarterly royalty report shall also include its marketing plans for the coming quarter. If progress differs from that anticipated in the plan provided under Appendix B, Company shall explain the reasons for the difference and provide a modified plan for University’s review. Company shall also provide any reasonable additional data University reasonably requires to evaluate Company’s performance.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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C. In order to minimize Company time spent on royalty reports, a brief one-page royalty report form is provided in Appendix C that will satisfy the University’s reporting requirements. With each royalty report, Company shall pay the amount of royalty due. Such report shall be certified as correct by an officer of Company and shall include the aggregate deductions from royalties as specified herein. If no royalties are due to University for any reporting period, the written report shall so state. With respect to sales of Licensed Product by Roche or Roche Affiliates, Company shall, to the extent applicable to University or this Agreement, provide University with a copy of the royalty report provided to Company by Roche.

D. Any payments to University shall be made payable to Oregon State University and be tendered to the Director of Technology Transfer, Oregon State University for distribution in keeping with State Board of Higher Education policies.

E. All payments due hereunder shall be payable in United States dollars. Conversion of foreign currency to US dollars shall be made at the conversion rate existing in the United States (as reported in the New York Times or, if not in the New York Times, then in the Wall Street Journal) on the last working day of each royalty period, except that with respect to sales of Licensed Product by Roche or Roche Affiliates, conversion of foreign currency to US dollars shall be made using the Roche central Swiss Francs Sales Statistics for the countries concerned. The amount of such sales by Roche or Roche Affiliates in currencies other than US dollars may be (i) first calculated in Swiss Francs and (ii) then converted into US dollars using the year-to-date average rate of exchange for such currencies as retrieved from Reuters’ system for the applicable period, in accordance with Roche’s then-current standard practices for its financial reporting purposes. All payments shall be without deduction of exchange, collection or other charges associated with currency conversion.

F. Late payments shall be subject to an interest charge of [ * ] per month, or the maximum rate allowed by law, whichever is less, payable from the date the royalty or other payment is due.

Article VIII

Record Keeping

Company shall keep, and shall require its distributors, Affiliates and sublicensees to keep accurate and correct records of Licensed Products made, used or sold under this Agreement, appropriate to determine the amount of royalties due hereunder to University. Such records shall be retained for at least [ * ] years following a given reporting period. They shall be available during normal business hours for inspection no more than once in any calendar year at the expense of University by University’s Internal Audit Department, or by a Certified Public Accountant selected by University and approved by Company for the sole purpose of verifying reports and payments hereunder. Such accountant shall not disclose to University any information other than information indicating the accuracy of reports and payments made under this Agreement. Notwithstanding the foregoing provisions in this Article VIII, University shall not have the right to inspect the records of Roche or Roche Affiliates, but shall have the right to require Company to exercise its rights under the Roche Agreement to (a) engage Roche’s independent certified accountants to perform, on behalf of Kosan, an audit in accordance with international accounting

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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standards of Roche’s books and records and (b) engage Company’s independent public accountant or audit specialty firm to interview knowledgeable employees of Roche and to examine and copy pertinent books and records, and report to University the results of any such audits to the extent applicable to University. In the event that any inspection under this Article VIII shows an under reporting and under payment by Company to University in excess of [ * ] for any [ * ] period, then Company shall pay the cost of such examination as well as any additional sum that would have been payable to University had the Company reported correctly, plus interest from the date such payments were due at the rate set forth in Section VII.F or, in the case of an under reporting and under payment with respect to sales by Roche and Roche Affiliates, interest from the date such payments were due at the LIBOR rate.

Article IX

Domestic and Foreign Patent Filing and Maintenance

A. Upon execution of this Agreement, Company shall reimburse University for all out-of-pocket expenses University has previously incurred for the preparation, filing, prosecution and maintenance of Patent Rights, which expenses are [ * ] as of the billing period through [ * ]. Subject to Section IX.C, Company shall reimburse University for all such future expenses University incurs after the billing period through [ * ] within thirty (30) days of Company’s receipt of University’s invoices for such future expenses. University shall take responsibility for the preparation, filing, prosecution and maintenance of any and all patent applications and patents included in Patent Rights, provided, however, that University shall first consult with Company as to the preparation, filing, prosecution and maintenance of such patent applications and patents and shall furnish to Company copies of documents relevant to any such preparation, filing, prosecution or maintenance. In the event that University elects not to file, prosecute or maintain any patent applications or patents within Patent Rights, Company shall have the right to do so at its own expense, and University shall cooperate with Company and execute any documents reasonably required by Company in order to perform such activities.

B. University and Company shall cooperate fully in the preparation, filing, prosecution and maintenance of Patent Rights and of all patents and patent applications licensed to Company hereunder, executing all papers and instruments or requiring members of University to execute such papers and instruments so as to enable University to apply for, to prosecute and to maintain patent applications and patents in University’s name in any country. Each party shall provide to the other prompt notice as to all matters which come to its attention and which may affect the preparation, filing, prosecution or maintenance of any such patent applications or patents.

C. Subject to the provisions of Section IX.E, if Company elects to no longer pay the patent expenses of a patent application or patent included within Patent Rights in a particular country, Company shall notify University not less than [ * ] days prior to the effective date of Company’s election, and shall thereby surrender its rights under such patent or patent application in such country, and Company’s rights, privileges and licenses with respect solely to the country for which Company has not or will not pay patent expenses under this Agreement shall terminate on the effective date of the notice. University acknowledges that Company’s election to no longer pay patent expenses pursuant to this Section IX.C shall not be a breach of this Agreement.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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D. University agrees to cancel [ * ] from the ‘340 Application and immediately file a continuation application which includes [ * ]. The parties shall collaborate in order to draft an Information Disclosure Statement for submission by University to the United States Patent and Trademark Office in connection with the continuation application, subject to Company’s review and approval, which shall not be unreasonably withheld. Company acknowledges that University cannot compel a submission by a third party.

E. If Company, Roche, any Roche Affiliate or any licensor of Company as of the Effective Date with respect to [ * ] is awarded a United States patent having [ * ] Species Claim(s), and Company notifies University in writing that Company desires University to cancel its [ * ] Species Claim(s), then University may elect not to cancel such claims and continue to prosecute, seek or maintain such claims, but at its own expense. In such event, notwithstanding Section IX.C, Company’s license rights and obligations with respect to such claims (other than the obligation to pay University’s expenses in prosecuting, seeking or maintaining such claims) shall remain in effect, as well as Company’s rights under Sections IX.A and IX.B with respect to the preparation, filing, prosecution and maintenance of such claims.

In the event an interference or other proceeding involving a determination of priority of invention is declared between a University application or patent and another application or patent having [ * ] Species Claim(s), then University shall be obligated to use best efforts to settle such interference with such other party as promptly as possible. Any such settlement shall not be entered into without the written permission of Company. Company shall be responsible for all of University’s costs attendant to any interference proceeding, except that if Company notifies University in writing that Company is not interested in having the interference proceedings continued, University may elect to continue with such proceeding, but at its own expense. In such event, notwithstanding Section IX.C, Company’s license rights and obligations (other than the obligation to pay University’s expenses in continuing such proceeding) shall remain in effect.

Article X

Infringement

A. Company and University agree to notify each other promptly of each infringement or possible infringement of the licensed Patent Rights or subsequently issued patent of which either party becomes aware. With respect to such Patent Rights or subsequently issued patent under which Company is exclusively licensed pursuant to this Agreement, Company or its sublicensee shall have the right to prosecute in its own name and at its own expense, any infringement of such Patent Rights or subsequently issued patent. Before Company or its sublicensee commences an action with respect to any such infringement, Company shall contact University to obtain University’s view concerning any potential effects such an action may bring and shall report such views to the appropriate sublicensees. University shall have a continuing right, but not an obligation, to intervene in any suit for patent infringement involving the Patent Rights. Neither Company nor its sublicensee shall take any action to compel University to initiate a suit or to join any suit for patent infringement except if part of an action alleging breach of University’s obligation contained in the

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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following sentence. Company or its sublicensee may request that University join in such suit if necessary to avoid dismissal of the suit, and University shall join in such suit if necessary to avoid dismissal.

Neither Company (nor its sublicensee) nor any attorney engaged by Company (or its sublicensee) shall prosecute the infringement in the name of the University, the State of Oregon, or any agency of the State of Oregon, nor purport to act as legal representative of the University, the State of Oregon or any of its agencies, without the prior written consent of the Oregon Attorney General, which shall not be unreasonably withheld . The University may, at its election, assume its own defense and settlement in the event the University determines that Company or its sublicensee is prohibited from representing the University or is not adequately protecting its interests.

B. If Company or its sublicensee elects to commence an action as described above and University is a legal party to such action, University shall have the right to assign to Company all of University’s rights, title and interest in licensed Patent Rights (subject to all University’s obligations to the government and others having rights in such licensed Patent Rights). In that event, such assignment shall be irrevocable and such action by Company on that patent shall thereafter be brought or continued in the name of Company. Notwithstanding any such assignment to Company by University, University shall cooperate fully with Company in connection with any such action. Regardless of any licensed Patent Rights assigned to Company by this clause, Company shall be required to continue to meet its obligations to University under this Agreement as if licensed Patent Rights were still licensed in the name of University.

C. If Company or its sublicensee elects to commence an action described above and University is a legal party to such action, University may, but shall not be obligated to, join the action as a co-plaintiff. Upon so doing, University shall jointly control the action with Company or its sublicensee.

D. Company shall reimburse University for any legal expenses and costs, including attorney fees (“litigation costs”), it reasonably incurs as part of an action brought by Company or its sublicensee, irrespective of whether University shall become a party to such action. Company shall reimburse University for litigation costs within thirty (30) days of receipt of University’s invoices.

E. If Company or its sublicensee elects to commence an action as described above, Company may offset up to [ * ] of the litigation costs of such action against up to [ * ] of each payment of royalty fees described in Sections V.A due to University. In the event that such[ * ] of such litigation costs exceed the amount of royalties withheld by Company for any calendar year, Company may, to that extent, reduce the royalties due to University from Company in succeeding calendar years, but never by more than [ * ] of the royalty due in any one calendar year.

F. No settlement, consent judgment or voluntary final disposition of the suit, which imposes any obligations or restrictions on University or grants any rights to the Patent Rights may be entered into without the consent of University, which consent shall not be unreasonably withheld.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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G. Recoveries or reimbursements from such action shall first be applied to reimburse Company and University for their respective litigation costs. For purposes of this Section X.G, Company’s litigation costs shall consist of litigation costs incurred by Company, plus litigation costs incurred by University and reimbursed by Company pursuant to Section X.D, less the amount of litigation costs recovered by Company by withholding royalties pursuant to Section X.E. For purposes of this Section X.G, University’s litigation costs shall consist of any litigation costs incurred by University but not reimbursed by Company pursuant to Section X.D. To the extent recoveries or reimbursements from such action are less than the parties’ aggregate litigation costs, such recoveries and reimbursements shall be apportioned pro rata based on the percentage that each party’s litigation costs bear to the total litigation costs of both parties, and then to reimburse University for royalties withheld pursuant to Section X.E. Any remaining recoveries or reimbursements shall be shared [ * ] to Company and [ * ] to University.

H. In the event that Company and its sublicensee, if any, elect not to exercise their right to prosecute an infringement of licensed Patent Rights pursuant to the above clauses, University may do so at its own expense, controlling such action and retaining all recoveries therefrom.

I. If a declaratory judgment action alleging invalidity of any licensed Patent Rights shall be brought against Company or University, then University, at its sole option, shall have the right to intervene and take over the sole defense of the action at its own expense but shall not settle or otherwise consent to a judgment without the written consent of the Company, which shall not be unreasonably withheld.

Article XI

Confidential Information

A. The receiving party shall hold the Confidential Information of the disclosing party in confidence and will use such Confidential Information only for the purposes of fulfilling its obligations under this Agreement. Without limiting the foregoing, the University agrees not to disclose any Confidential Information of Company, or anyone claiming through Company. Nothing in this Agreement will be interpreted to confer upon the receiving party any implied or express license to use the Confidential Information of the disclosing party for any purpose other than as expressly provided elsewhere in this Agreement. The receiving party shall not use the Confidential Information of the disclosing party for any purpose other than as expressly provided elsewhere in this Agreement, and will not disclose, provide, disseminate or otherwise make available any Confidential Information of the disclosing party or any part thereof in any form whatsoever to any third party, except as provided in Section B below.

B. The obligations in Section XI.A above shall not apply to the extent any (i) information that is now or later becomes publicly available through no fault of the receiving party; (ii) information that is obtained by the receiving party from a third party (other than in connection with this Agreement) without any obligation of secrecy or confidentiality; (iii) information that is independently developed by the receiving party (e.g., without reference to any Confidential

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Information); (iv) disclosure required by applicable law, provided that the receiving party shall use reasonable efforts to give advance notice to and cooperate with the disclosing party in connection with any such disclosure; (v) disclosure by the Company required by underwriters, bankers, investors or other entities prior to providing the Company with debt or equity financing, provided that such disclosures are made under confidential terms or are made under a public offering; (vi) disclosure by Company for purposes of regulatory compliance, regulatory filings or correspondence with regulatory authorities related to the Licensed Product; and (vii) disclosure with the written consent of the disclosing party.

C. The receiving party acknowledges that the covenants contained in Section XI.A are reasonable and necessary to protect the legitimate interests of the disclosing party, and that the disclosing party would not have entered into this Agreement in the absence of such covenants, that any breach or threatened breach of such covenants will result in irreparable injury to the disclosing party and that the remedy at law for such breach or threatened breach would be inadequate. Accordingly, the receiving party agrees that the disclosing party shall, in addition to any other rights or remedies which it may have, be entitled to seek such injunctive relief without the posting of any bond or security as may be available from any court of competent jurisdiction to restrain the receiving party from any breach or threatened breach of such covenants.

D. Notwithstanding the above Sections XI.A through XI.C, Company hereby acknowledges that any disclosures Company makes to University under this Agreement are subject to the Oregon Public Records Laws, including but not limited to ORS 192.410-192.505, and the provisions for the Custody and Maintenance of Public Records, ORS 192.005-192.170. University’s obligation to disclose documents or any portion of a document submitted by Company to University may depend upon official or judicial determinations made pursuant to the Oregon Public Records Law. If University receives from a third party any request under the Oregon Public Records Law, the University shall promptly notify Company within a reasonable period of time of the request. If any requests for disclosure of such information are made to University, disclosure shall only be made consistent with and to the extent allowable under law. Neither the State of Oregon nor any of its agencies are or shall be obligated to assist in Company’s defense; provided, however, that Company hereby asserts that any Confidential Information of Company under this Agreement or concerning Licensed Products, including without limitation the financial terms in this Agreement, represents trade secrets of Company, as defined in ORS 192.501(2) or 646.461(4), or is otherwise exempt from disclosure under the Oregon Public Records Law. Company reserves the right to assert at the time that a public records request is received by University that other terms of this Agreement constitute Confidential Information and therefore represent trade secrets of Company, as defined in ORS 192.501(2) or 646.461(4), or is otherwise exempt from disclosure under the Oregon Public Records Law. Company further agrees that any disclosure made by University pursuant to an order issued pursuant to the Oregon Public Records Law by the Oregon Department of Justice shall not be a breach of this Agreement.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Article XII

Term and Termination

A. The term of this Agreement shall begin on the Effective Date and shall continue for a period of [ * ] years, or the life of the last to issue patent in licensed Patent Rights, whichever period is greater.

B. In the event an order for relief is entered against Company under the Federal Bankruptcy Code, or an order appointing a receiver for substantially all of Company’s assets is entered by a court of competent jurisdiction, or Company makes an assignment for the benefit of creditors, or a levy of execution is made upon substantially all of the assets of Company and such levy is not quashed or dismissed within thirty (30) days, this Agreement and the rights, privileges and licenses granted hereunder shall automatically terminate effective the date of such order or assignment or in the case of such levy, the expiration of such thirty (30) day period, provided, however, that such termination shall not impair or prejudice any other right or remedy that University might have under this Agreement.

C. Upon any material breach or default of this Agreement by Company, University shall have the right to terminate this Agreement and the rights, privileges and licenses granted hereunder by ninety (90) days’ notice to Company. Such termination shall become effective unless Company shall have cured any such breach or default prior to the expiration of the ninety (90) day notice period.

D. Company shall have the right to terminate this Agreement at any time on sixty (60) days’ notice to University and upon payment of all amounts due and payable to University through that date.

E. If at any time prior to the first commercial sale of Licensed Product under this Agreement Company shall cease to pursue commercial development of Licensed Product as contemplated in Article III herein, Company shall be obligated to so notify University and this Agreement shall automatically terminate without obligation on the part of University to refund any of the fees which may have been paid by Company prior to such termination.

F. If Company and its distributors, Affiliates and sublicensees fail to sell or otherwise dispose of for value Licensed Products during any consecutive [ * ] month period, beginning with the [ * ] year following the year in which the first commercial sale of a Licensed Product occurs, University shall have the right to terminate this Agreement by giving Company written notice of termination to take effect thirty (30) days after the notification is given pursuant to the notice provisions in Article XVI. University may exercise its termination rights under this section for failure by Company and its distributors, Affiliates and sublicensees to sell for value Licensed Products notwithstanding payment by Company of minimum royalties due under Section V.C above.

G. Within [ * ] after termination of this Agreement under this Article XII other than expiration under Section XII.A, but subject to the provisions of Section XII.H, Company shall certify to University in writing that Licensed Products in its possession for sale in a country where there is a Valid Claim in an issued patent with respect to such Licensed Products have been destroyed.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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H Termination of this Agreement for any reason shall not be construed to release either party from any obligation that matured prior to the effective date of such termination. Company and any sublicensee thereof may, however, after the effective date of such termination, have [ * ] to sell all Licensed Products completed and in inventory or representing work-in-process.

I. Within thirty (30) days of the termination of this Agreement other than expiration under Section XII.A, Company shall duly account to University for the sale of Licensed Products and inventory in the Company’s possession for sale in a country where there is a Valid Claim in an issued patent with respect to such Licensed Products as of the date of termination.

J. Upon termination of this Agreement for any reason, any sublicensee of the Patent Rights not then in default under its agreement with Company shall be deemed to have a license from University on the same terms set forth in this Agreement.

K. The parties have agreed that University will cancel its [ * ] Species Claim from the ‘340 Application, which was allowed by the United States Patent and Trademark Office pursuant to the Notice of Allowance dated [ * ], and to re-present it for examination in a continuation application. The parties agree that University’s rights to receive royalty and milestone payments under this Agreement should not be prejudiced by such cancellation and the outcome of the prosecution of the continuation application. Accordingly, in the event of termination of this Agreement by Company prior to expiration pursuant to Section XII.D, Company’s royalty and milestone payment obligations under Articles V and VI with respect to [ * ] shall survive until the [ * ] of the [ * ] in the [ * ].

Article XIII

Indemnification, Insurance, Warranties and Exclusion of Warranties

A. Company shall, at all times during the term of this Agreement, indemnify, defend (with counsel approved by the Oregon Attorney General, which approval shall not be unreasonably withheld) and hold University, its members, agents, officers, employees and affiliates harmless against all liability, damage (including damage to property or injury or death to persons), loss or expenses (including reasonable attorney fees and expenses of litigation) arising out of any third party claims, suits, actions or judgments based on any legal theory of product liability (including, but not limited to, tort, warranty or strict liability theories) relating to or arising from the use by Company or its distributors, Affiliates and sublicensees of the Patent Rights, or resulting from the development, marketing, sale, use or distribution of Licensed Products or Licensed Processes by Company or its distributors, Affiliates and sublicensees, or arising from any obligations of Company hereunder, except for any claims or expenses arising out of the negligence or willful actions of University or its members, agents officers, or employees.

B. Company shall maintain in effect comprehensive general liability insurance in the combined amount of [ * ] per occurrence for bodily injury and property damages, including reasonable

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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attorney fees, arising out of any alleged defects in Licensed Product and Licensed Processes or in the use thereof. Notice shall be given to University at least thirty (30) days prior to cancellation or material change in the form of such policy(ies). Any sublicense granted by Company pursuant to this Agreement shall provide insurance as provided in this Article XIII. Company shall maintain comprehensive general liability insurance coverage for a minimum period of [ * ] beyond the last date a Licensed Product is sold or distributed by Company or by any distributor, Affiliate or sublicensee of Company.

C. The University represents and warrants to Company that: (a) this Agreement, when executed and delivered by the University, will be the legal, valid and binding obligation of the University, enforceable against the University in accordance with its terms; (b) other than the Federal Government interest, the University is the owner of all right, title and interest in and to the Invention and the Patent Rights, and has not granted rights in or to the Invention or the Patent Rights to any person other than Company; (c) as of the Effective Date of this Agreement, the University has not received any notice that the Invention infringes the proprietary rights of any third party; (d) to University’s knowledge and belief, the research which led to the filing of the Patent Rights was conducted solely by employees of the University acting within the scope of their employment; (e) to University’s knowledge and belief, the inventions claimed in the Patent Rights have not been publicly used, offered for sale, or disclosed in a printed publication by employees of the University prior to the filing of the U.S. provisional application for the Patent Rights.

D. Company represents and warrants to the University as follows:

(a) Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to execute, deliver and perform this Agreement;

(b) this Agreement, when executed and delivered by Company, will be the legal, valid and binding obligation of Company, enforceable against Company in accordance with its terms; and

(c) the execution, delivery and performance of this Agreement by Company does not conflict with, or constitute a breach or default under, (i) the charter documents of Company, (ii) any law, order, judgment or governmental rule or regulation applicable to Company, or (iii) any provision of any agreement, contract, commitment or instrument to which Company is a party; and the execution, delivery and performance of this Agreement by Company does not require the consent, approval or authorization of, or notice, declaration, filing or registration with, any governmental or regulatory authority.

E. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, UNIVERSITY MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH REGARD TO ANY LICENSED PATENT RIGHTS, LICENSED PRODUCTS OR LICENSED PROCESSES HEREUNDER OR ANY PARTS THEREOF. UNIVERSITY DOES NOT WARRANT THE VALIDITY OF THE LICENSED PATENT RIGHTS, AND MAKES NO REPRESENTATIONS WITH REGARD TO THE SCOPE OF THE PATENT RIGHTS OR THAT THE PATENT RIGHTS MAY BE USED

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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WITHOUT INFRINGING OTHER PATENTS OR INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. IN NO EVENT SHALL UNIVERSITY OR ITS OFFICERS, MEMBERS, AGENTS OR EMPLOYEES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS, REGARDLESS OF WHETHER UNIVERSITY SHALL BE ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT KNOW OF THE POSSIBILITY. UNIVERSITY EXPLICITLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY AND OF FITNESS FOR A PARTICULAR PURPOSE OF THE PATENT RIGHTS, LICENSED PRODUCTS, OR LICENSED PROCESSES CONTEMPLATED BY THIS AGREEMENT.

F. EXCEPT FOR COMPANY’S INDEMNIFICATION OBLIGATIONS UNDER SECTION XIII.A., IN NO EVENT SHALL EITHER PARTY OR ITS DIRECTORS, OFFICERS, MEMBERS, AGENTS OR EMPLOYEES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS (OTHER THAN PAYMENTS DUE TO UNIVERSITY UNDER ARTICLES IV, V AND VI), RESULTING FROM THE BREACH OF SUCH PARTY’S OBLIGATIONS UNDER THIS AGREEMENT, REGARDLESS OF WHETHER SUCH PARTY IS ADVISED, SHALL HAVE OTHER REASON TO KNOW, OR IN FACT KNOWS OF THE POSSIBILITY.

Article XIV

University’s Name

Company agrees not to use the name of University or any of its employees, in any advertisement or sales promotion relating to any Licensed Product or Licensed Processes without prior written approval by University.

Article XV

Transfer of Rights and Obligations

A. This Agreement shall not be assignable by either party hereto without the prior written consent of the other party, except to the successor or assignee of all or substantially all of the assignor’s business to which this Agreement relates. When duly assigned in accordance therewith, this Agreement shall be binding on and inure to the benefit of the assignee.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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Article XVI

Notices

A. All notices, demands, payments, reports or other writings provided for in this Agreement shall be deemed to have been fully given, made or sent when made in writing and delivered by hand or deposited in the U.S. mail, first class, postage paid, or nationally recognized overnight courier and addressed as follows (unless another address has been provided by the party affected):

To University:
	Director of Technology Transfer
	Research Office
	312 Kerr Administration Building
	Oregon State University
	Corvallis, Oregon 97331-2140
	Telephone:        503-737-0674
	Facsimile:         503-737-3093
With a copy to:
	Director of Legal Services
	Oregon University System
	Susan Campbell Hall
	Eugene, Oregon 97403
To Company:	Kosan Biosciences Incorporated
	3832 Bay Center Place
	Hayward, California 94545
	Attention: General Counsel
	Telephone: 510-732-8400
	Facsimile: [ * ]

Article XVII

Miscellaneous Provisions

A. This Agreement shall be construed in accordance with the laws of the State of Oregon. Any action brought hereunder shall be brought and conducted solely and exclusively within the United States District Court for the District of Oregon.

B. In the event that any provision hereof is found to be invalid or unenforceable pursuant to a final judgment or decree, the remainder of this Agreement shall remain valid and enforceable according to its terms.

C. Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship between the parties hereto. Except as specified herein, neither party shall have the right, power or implied authority to create any obligation or duty, express or implied, on behalf of the other party hereto.

D. This Agreement represents the entire agreement between the parties as to the matters set forth and integrates all prior discussions or understandings between them. This Agreement may only be modified or amended in writing by a document signed by an authorized representative of University and Company.

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E. The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of the Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party.

F. Company agrees to mark the Licensed Products or their packaging sold in the United States with all applicable U.S. patent numbers of patents in the Patent Rights or indicate “Patent Pending” status, if applicable. All Licensed Products manufactured in, shipped to or sold in other countries shall be marked in such a manner as to preserve University’s patent rights in such countries, if any.

G. Company agrees to comply with all applicable laws and regulations. In particular, it is understood and acknowledged that the transfer of certain commodities and technical data is subject to United States laws and regulations controlling the export of such commodities and technical data, including the Export Administration Act of 1979, and the Arms Export Control Act, and all Export Administration Regulations of the United States Department of Commerce. These laws and regulations among other things, prohibit or require a license for the export of certain types of technical data to certain specified countries. Company hereby agrees and gives written assurance that it will comply with all United States laws and regulations controlling the export of commodities and technical data and that it will defend and hold University harmless in the event of any legal action of any nature occasioned by any such violation by Company or its distributors, Affiliates or sublicensees.

H. Article VIII, Article XI, Sections XII.G through K, Article XIII, Article XIV, this Section XVII.H and Section XVII.I shall survive expiration or termination of this Agreement.

I. The parties recognize that disputes as to certain matters regarding this Agreement may from time to time arise between the parties. The parties shall seek to amicably resolve disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To reach amicable resolution, the parties agree to refer such disputes to the senior management of the Company and the head of technology transfer at the University for them to seek joint resolution for at least [ * ] days before resorting to litigation.

J. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same instrument.

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IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the Effective Date.

STATE OF OREGON, Acting by and through the STATE BOARD OF HIGHER EDUCATION on behalf of OREGON STATE UNIVERSITY		KOSAN BIOSCIENCES INCORPORATED
		/s/ Daniel V. Santi	4/1/05
			Date
/s/ Benjamin E. Rawlins	4 Apr. 2005	Daniel V. Santi, M.D., Ph.D.
Benjamin E. Rawlins	Date	Print name
General Counsel
		Chairman and CEO
		Title
/s/ John M. Cassady	4/1/05
John M. Cassady	Date
Vice President for Research
APPROVED AS TO LEGAL SUFFICIENCY BY
THE OREGON DEPARTMENT OF JUSTICE
/s/ Keith N. Jones	4-1-2005
Keith N. Jones	Date
Assistant Attorney General

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APPENDIX A

CERTAIN U.S. REGULATIONS

{Code of Federal Regulations}

{Title 34, Volume 1}

{Revised as of July 1, 2001}

From the U.S. Government Printing Office via GPO Access

{CITE: 37CFR401.1}

{Page 605-606}

TITLE 37—PATENTS, TRADEMARKS, AND COPYRIGHTS

CHAPTER IV—ASSISTANT SECRETARY FOR TECHNOLOGY POLICY, DEPARTMENT OF COMMERCE

PART 401—RIGHTS TO INVENTIONS MADE BY NONPROFIT ORGANIZATIONS AND SMALL BUSINESS FIRMS UNDER GOVERNMENT GRANTS, CONTRACTS, AND COOPERATIVE AGREEMENTS

Sec. 401.1 Scope.

(a) Traditionally there have been no conditions imposed by the government on research performers while using private facilities, which would preclude them from accepting research funding from other sources to expand, to aid in completing or to conduct separate investigations closely related to research activities sponsored by the government. Notwithstanding the right of research organizations to accept supplemental funding from other sources for the purpose of expediting or more comprehensively accomplishing the research objectives of the government sponsored project, it is clear that the ownership provisions of these regulations would remain applicable in any invention “conceived or first actually reduced to practice in performance” of the project. Separate accounting for the two funds used to support the project in this case is not a determining factor.

(1) To the extent that a non-government sponsor established a project which, although closely related, falls outside the planned and committed activities of a government-funded project and does not diminish or distract from the performance of such activities, inventions made in performance of the non-government sponsored project would not be subject to the conditions of these regulations. An example of such related but separate projects would be a government-sponsored project having research objectives to expand scientific understanding in a field and a closely related industry sponsored project having as its objectives the application of such new knowledge to develop usable new technology. The time relationship in conducting the two projects and the use of new fundamental knowledge from one in the performance of the other are not important determinants since most inventions rest on a knowledge base built up by numerous independent research efforts extending over many years. Should such an invention be claimed by the performing organization to be the product of non-government sponsored research and be challenged by the sponsoring agency as being reportable to the government as a “subject invention”, the challenge is appealable as described in Sec. 401.11(d).

(2) An invention which is made outside of the research activities of a government-funded project is not viewed as a “subject invention” since it cannot be shown to have been “conceived or first actually reduced to practice” in performance of the project. An obvious example of this is a situation where an instrument purchased with government funds is later used, without interference with or cost to the government-funded project, in making an invention all expenses of which involve only non-government funds.

(b) This part implements 35 U.S.C. 202 through 204 and is applicable to all Federal agencies. It applies to all funding agreements with small business firms and nonprofit organizations executed after the effective date of this part, except for a funding agreement made primarily for educational purposes. Certain sections also provide guidance for the administration of funding agreements, which predate the effective date of this part. In accordance with 35 U.S.C. 212, no scholarship, fellowship, training grant, or other funding agreement made by a Federal agency primarily to an awardee for educational purposes will contain any provision giving the Federal agency any rights to inventions made by the awardee.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(c) The march-in and appeals procedures in Sec. 401.6 and Sec. 401.11 shall apply to any march-in or appeal proceeding under a funding agreement subject to Chapter 18 of Title 35, U.S.C., initiated after the effective date of this part even if the funding agreement was executed prior to that date.

(d) At the request of the contractor, a funding agreement for the operation of a government-owned facility which is in effect on the effective date of this part shall be promptly amended to include the provisions required by Secs. 401.3(a) unless the agency determines that one of the exceptions at 35 U.S.C. 202(a)(i) through (iv) Sec. 401.3(a)(8) through (iv) of this part) is applicable and will be applied. If the exception at Sec. 401.3(a)(iv) is determined to be applicable, the funding agreement will be promptly amended to include the provisions required by Sec. 401.3(c).

(e) This regulation supersedes OMB Circular A-124 and shall take precedence over any regulations dealing with ownership of inventions made by small businesses and nonprofit organizations, which are inconsistent with it. This regulation will be followed by all agencies pending amendment of agency regulations to conform to this part and amended Chapter 18 of Title 35. Only deviations requested by a contractor and not inconsistent with Chapter 18 of Title 35, United States Code may be made without approval of the Secretary. Modifications or tailoring of clauses as authorized by Sec. 401.5 or Sec. 401.3, when alternative provisions are used under Sec. 401.3(a) (1) through (4), are not considered deviations requiring the Secretary’s approval. Three copies of proposed and final agency regulations supplementing this part shall be submitted to the Secretary at the office set out in Sec. 401.16 for approval for consistency with this part before they are submitted to the Office of Management and Budget (OMB) for review under Executive Order 12291 or, if no submission is required to be made to OMB, before their submission to the Federal Register for publication.

(f) In the event an agency has outstanding prime funding agreements that do not contain patent flow-down provisions consistent with this part or earlier Office of Federal Procurement Policy regulations (OMB Circular A-124 or OMB Bulletin 81-22), the agency shall take appropriate action to ensure that small business firms or nonprofit organizations that are subcontractors under any such agreements and that received their subcontracts after July 1, 1981, receive rights in their subject inventions that are consistent with Chapter 18 and this part.

(g) This part is not intended to apply to arrangements under which nonprofit organizations, small business firms, or others are allowed to use government-owned research facilities and normal technical assistance provided to users of those facilities, whether on a reimbursable or nonreimbursable basis. This part is also not intended to apply to arrangements under which sponsors reimburse the government or facility contractor for the contractor employee’s time in performing work for the sponsor. Such arrangements are not considered “funding agreements” as defined at 35 U.S.C. 201(b) and Sec. 401.2(a) of this part.

Sec. 401.2 Definitions.

As used in this part—

(a) The term funding agreement means any contract, grant, or cooperative agreement entered into between any Federal agency, other than the Tennessee Valley Authority, and any contractor for the performance of experimental, developmental, or research work funded in whole or in part by the Federal government. This term also includes any assignment, substitution of parties, or subcontract of any type entered into for the performance of experimental, developmental, or research work under a funding agreement as defined in the first sentence of this paragraph.

(b) The term contractor means any person, small business firm or nonprofit organization, which is a party to a funding agreement.

(c) The term invention means any invention or discovery, which is or may be patentable or otherwise protectable under Title 35 of the United States Code, or any novel variety of plant which is or may be protectable under the Plant Variety Protection Act (7 U.S.C. 2321 et seq.).

(d) The term subject invention means any invention of a contractor conceived or first actually reduced to practice in the performance of work under a funding agreement; provided that in the case of a variety of plant, the date of determination (as defined in section 41(d) of the Plant Variety Protection Act, 7 U.S.C. 2401(d)) must also occur during the period of contract performance.

(e) The term practical application means to manufacture in the case of a composition of product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are, to the extent permitted by law or government regulations, available to the public on reasonable terms.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(f) The term made when used in relation to any invention means the conception or first actual reduction to practice of such invention.

(g) The term small business firm means a small business concern as defined at section 2 of Pub. L. 85-536 (15 U.S.C. 632) and implementing regulations of the Administrator of the Small Business Administration. For the purpose of this part, the size standards for small business concerns involved in government procurement and subcontracting at 13 CFR 121.5 will be used.

(h) The term nonprofit organization means universities and other institutions of higher education or an organization of the type described in section 501(c)(3) of the Internal Revenue Code of 1954 (26 U.S.C. 501(c) and exempt from taxation under section 501(a) of the Internal Revenue Code (26 U.S.C. 501(a)) or any nonprofit scientific or educational organization qualified under a state nonprofit organization statute.

(i) The term Chapter 18 means Chapter 18 of Title 35 of the United States Code.

(j) The term Secretary means the Assistant Secretary of Commerce for Technology Policy.

(k) The term electronically filed means any submission of information transmitted by an electronic or optical-electronic system.

(l) The term electronic or optical-electronic system means a software-based system approved by the agency for the transmission of information.

(m) The term patent application or “application for patent” includes a provisional or nonprovisional U.S. national application for patent as defined in 37 CFR 1.9 (a)(2) and (a)(3), respectively, or an application for patent in a foreign country or in an international patent office.

(n) The term initial patent application means a nonprovisional U.S. national application for patent as defined in 37 CFR 1.9(a)(3).

{52 FR 8554, Mar. 18, 1987, as amended at 60 FR 41812, Aug. 14, 1995}

Sec. 401.3 Use of the standard clauses at Sec. 401.14.

(a) Each funding agreement awarded to a small business firm or nonprofit organization (except those subject to 35 U.S.C. 212) shall contain the clause found in Sec. 401.14(a) with such modifications and tailoring as authorized or required elsewhere in this part. However, a funding agreement may contain alternative provisions—

(1) When the contractor is not located in the United States or does not have a place of business located in the United States or is subject to the control of a foreign government; or

(2) In exceptional circumstances when it is determined by the agency that restriction or elimination of the right to retain title to any subject invention will better promote the policy and objectives of Chapter 18 of Title 35 of the United States Code; or

(3) When it is determined by a government authority, which is authorized by statute or executive order to conduct foreign intelligence or counterintelligence activities that the restriction or elimination of the right to retain title to any subject invention is necessary to protect the security to such activities; or

(4) When the funding agreement includes the operation of the government-owned, contractor-operated facility of the Department of Energy primarily dedicated to that Department’s naval nuclear propulsion or weapons related programs and all funding agreement limitations under this subparagraph on the contractor’s right to elect title to a subject invention are limited to inventions occurring under the above two programs.

(b) When an agency exercises the exceptions at Sec. 401.3(a)(2) or (3), it shall use the standard clause at Sec. 401.14(a) with only such modifications as are necessary to address the exceptional circumstances or concerns which led to the use of the exception. For example, if the justification relates to a particular field of use or market, the clause might be modified along lines similar to those described in Sec. 401.14(b). In any event, the clause should provide the contractor with an opportunity to receive greater rights in accordance with the procedures at Sec. 401.15. When an agency justifies and exercises the exception at Sec. 401.3(a)(2) and uses an alternative provision in the funding agreement on the basis of national security, the provision shall provide the contractor with the right to elect ownership to any invention made under such funding agreement as provided by the Standard Patent Rights Clause found at Sec. 401.14(a) if the invention is not classified by the agency within six months of the date it is reported to the agency, or within the same time period the Department of Energy does not, as authorized by regulation, law or Executive order or implementing regulations thereto, prohibit unauthorized dissemination of the invention. Contracts in support of DOE’s naval nuclear propulsion program are exempted from this paragraph.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(c) When the Department of Energy exercises the exception at Sec. 401.3(a)(4), it shall use the clause prescribed at Sec. 401.14(b) or substitute thereto with such modification and tailoring as authorized or required elsewhere in this part.

(d) When a funding agreement involves a series of separate task orders, an agency may apply the exceptions at Sec. 401.3(a)(2) or (3) to individual task orders, and it may structure the contract so that modified patent rights provisions will apply to the task order even though the clauses at either Sec. 401.14(a) or (b) are applicable to the remainder of the work. Agencies are authorized to negotiate such modified provisions with respect to task orders added to a funding agreement after its initial award.

(e) Before utilizing any of the exceptions in Sec. 401.3(a) of this section, the agency shall prepare a written determination, including a statement of facts supporting the determination, that the conditions identified in the exception exist. A separate statement of facts shall be prepared for each exceptional circumstances determination, except that in appropriate cases a single determination may apply to both a funding agreement and any subcontracts issued under it or to any funding agreement to which such an exception is applicable. In cases when Sec. 401.3(a)(2) is used, the determination shall also include an analysis justifying the determination. This analysis should address with specificity how the alternate provisions will better achieve the objectives set forth in 35 U.S.C. 200. A copy of each determination, statement of facts, and, if applicable, analysis shall be promptly provided to the contractor or prospective contractor along with a notification to the contractor or prospective contractor of its rights to appeal the determination of the exception under 35. S.C.202 (b)(4) and Sec. 401.4 of this part.

(f) Except for determinations under Sec. 401.3(a)(3), the agency shall also provide copies of each determination, statement of fact, and analysis to the Secretary. These shall be sent within 30 days after the award of the funding agreement to which they pertain. Copies shall also be sent to the Chief Counsel for advocacy of the Small Business Administration if the funding agreement is with a small business firm.

If the Secretary of Commerce believes that any individual determination or pattern of determinations is contrary to the policies and objectives of this chapter or otherwise not in conformance with this chapter, the Secretary shall so advise the head of the agency concerned and the Administrator of the Office of Federal Procurement Policy and recommend corrective actions.

(g) To assist the Comptroller General of the United States to accomplish his or her responsibilities under 35 U.S.C. 202, each Federal agency that enters into any funding agreements with nonprofit organizations or small business firms shall accumulate and, at the request of the Comptroller General, provide the Comptroller General or his or her duly authorized representative the total number of prime agreements entered into with small business firms or nonprofit organizations that contain the patent rights clause in this part or under OMB Circular A-124 for each fiscal year beginning with October 1, 1982.

(h) To qualify for the standard clause, a prospective contractor may be required by an agency to certify that it is either a small business firm or a nonprofit organization. If the agency has reason to question the status of the prospective contractor as a small business firm, it may file a protest in accordance with 13 CFR 121.9. If it questions nonprofit status, it may require the prospective contractor to furnish evidence to establish its status as a nonprofit organization.

Sec. 401.4 Contractor appeals of exceptions.

(a) In accordance with 35 U.S.C. 202(b)(4) a contractor has the right to an administrative review of a determination to use one of the exceptions at Sec. 401.3(a) (1) through (4) if the contractor believes that a determination is either contrary to the policies and objectives of this chapter or constitutes an abuse of discretion by the agency. Paragraph (b) of this section specifies the procedures to be followed by contractors and agencies in such cases. The assertion of such a claim by the contractor shall not be used as a basis for withholding or delaying the award of a funding agreement or for suspending performance under an award. Pending final resolution of the claim the contract may be issued with the patent rights provision proposed by the agency; however, should the final decision be in favor of the contractor, the funding agreement will be amended accordingly and the amendment made retroactive to the effective date of the funding agreement.

(b)(1) A contractor may appeal a determination by providing written notice to the agency within 30 working days from the time it receives a copy of the agency’s determination, or within such longer time as an agency may specify in its regulations. The contractor’s notice should specifically identify the basis for the appeal.

(2) The appeal shall be decided by the head of the agency or by his/her designee who is at a level above the person who made the determination. If the notice raises a genuine dispute over the material facts, the head of the agency or the designee shall undertake, or refer the matter for, fact-finding.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(3) Fact-finding shall be conducted in accordance with procedures established by the agency. Such procedures shall be as informal as practicable and be consistent with principles of fundamental fairness. The procedures should afford the contractor the opportunity to appear with counsel, submit documentary evidence, present witnesses and confront such persons as the agency may rely upon. A transcribed record shall be made and shall be available at cost to the contractor upon request. The requirement for a transcribed record may be waived by mutual agreement of the contractor and the agency.

(4) The official conducting the fact-finding shall prepare or adopt written findings of fact and transmit them to the head of the agency or designee promptly after the conclusion of the fact-finding proceeding along with a recommended decision. A copy of the findings of fact and recommended decision shall be sent to the contractor by registered or certified mail.

(5) Fact-finding should be completed within 45 working days from the date the agency receives the contractor’s written notice.

(6) When fact-finding has been conducted, the head of the agency or designee shall base his or her decision on the facts found, together with any argument submitted by the contractor, agency officials or any other information in the administrative record. In cases referred for fact-finding, the agency head or the designee may reject only those facts that have been found to be clearly erroneous, but must explicitly state the rejection and indicate the basis for the contrary finding. The agency head or the designee may hear oral arguments after fact-finding provided that the contractor or contractor’s attorney or representative is present and given an opportunity to make arguments and rebuttal. The decision of the agency head or the designee shall be in writing and, if it is unfavorable to the contractor shall include an explanation of the basis of the decision. The decision of the agency or designee shall be made within 30 working days after fact-finding or, if there was no fact-finding, within 45 working days from the date the agency received the contractor’s written notice. A contractor adversely affected by a determination under this section may, at any time within sixty days after the determination is issued, file a petition in the United States Claims Court, which shall have jurisdiction to determine the appeal on the record and to affirm, reverse, remand, or modify as appropriate, the determination of the Federal agency.

Sec. 401.5 Modification and tailoring of clauses.

(a) Agencies should complete the blank in paragraph (g)(2) of the clauses at Sec. 401.14 in accordance with their own or applicable government-wide regulations such as the Federal Acquisition Regulation. In grants and cooperative agreements (and in contracts, if not inconsistent with the Federal Acquisition Regulation) agencies wishing to apply the same clause to all subcontractors as is applied to the contractor may delete paragraph (g)(2) of the clause and delete the words “to be performed by a small business firm or domestic nonprofit organization” from paragraph (g)(1). Also, if the funding agreement is a grant or cooperative agreement, paragraph (g)(3) may be deleted. When either paragraph (g)(2) or paragraphs (g) (2) and (3) are deleted, the remaining paragraph or paragraphs should be renumbered appropriately.

(b) Agencies should complete paragraph (l), “Communications”, at the end of the clauses at Sec. 401.14 by designating a central point of contact for communications on matters relating to the clause. Additional instructions on communications may also be included in paragraph (l).

(c) Agencies may replace the italicized words and phrases in the clauses at Sec. 401.14 with those appropriate to the particular funding agreement. For example, “contracts” could be replaced by “grant,” “contractor” by “grantee,” and “contracting officer” by “grants officer.” Depending on its use, “Federal agency” can be replaced either by the identification of the agency or by the specification of the particular office or official within the agency.

(d) When the agency head or duly authorized designee determines at the time of contracting with a small business firm or nonprofit organization that it would be in the national interest to acquire the right to sublicense foreign governments or international organizations pursuant to any existing treaty or international agreement, a sentence may be added at the end of paragraph (b) of the clause at Sec. 401.14 as follows:

This license will include the right of the government to sublicense foreign governments, their nationals, and international organizations, pursuant to the following treaties or international agreements:

The blank above should be completed with the names of applicable existing treaties or international agreements, agreements of cooperation, memoranda of understanding, or similar arrangements, including military agreements

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relating to weapons development and production. The above language is not intended to apply to treaties or other agreements that are in effect on the date of the award but which are not listed. Alternatively, agencies may use substantially similar language relating the government’s rights to specific treaties or other agreements identified elsewhere in the funding agreement. The language may also be modified to make clear that the rights granted to the foreign government, and its nationals or an international organization may be for additional rights beyond a license or sublicense if so required by the applicable treaty or international agreement. For example, in some exclusive licenses or even the assignment of title in the foreign country involved might be required. Agencies may also modify the language above to provide for the direct licensing by the contractor of the foreign government or international organization.

(e) If the funding agreement involves performance over an extended period of time, such as the typical funding agreement for the operation of a government-owned facility, the following language may also be added:

The agency reserves the right to unilaterally amend this funding agreement to identify specific treaties or international agreements entered into or to be entered into by the government after the effective date of this funding agreement and effectuate those license or other rights which are necessary for the government to meet its obligations to foreign governments, their nationals and international organizations under such treaties or international agreements with respect to subject inventions made after the date of the amendment.

(f) Agencies may add additional subparagraphs to paragraph (f) of the clauses at Sec. 401.14 to require the contractor to do one or more of the following:

(1) Provide a report prior to the close-out of a funding agreement listing all subject inventions or stating that there were none.

(2) Provide, upon request, the filing date, patent application number and title; a copy of the patent application; and patent number and issue date for any subject invention in any country in which the contractor has applied for a patent.

(3) Provide periodic (but no more frequently than annual) listings of all subject inventions which were disclosed to the agency during the period covered by the report.

(g) If the contract is with a nonprofit organization and is for the operation of a government-owned, contractor-operated facility, the following will be substituted for paragraph (k)(3) of the clause at Sec. 401.14(a):

(3) After payment of patenting costs, licensing costs, payments to inventors, and other expenses incidental to the administration of subject inventions, the balance of any royalties or income earned and retained by the contractor during any fiscal year on subject inventions under this or any successor contract containing the same requirement, up to any amount equal to five percent of the budget of the facility for that fiscal year, shall be used by the contractor for scientific research, development, and education consistent with the research and development mission and objectives of the facility, including activities that increase the licensing potential of other inventions of the facility. If the balance exceeds five percent, 75 percent of the excess above five percent shall be paid by the contractor to the Treasury of the United States and the remaining 25 percent shall be used by the contractor only for the same purposes as described above. To the extent it provides the most effective technology transfer, the licensing of subject inventions shall be administered by contractor employees on location at the facility.

(h) If the contract is for the operation of a government-owned facility, agencies may add the following at the end of paragraph (f) of the clause at Sec. 401.14(a):

(5) The contractor shall establish and maintain active and effective procedures to ensure that subject inventions are promptly identified and timely disclosed and shall submit a description of the procedures to the contracting officer so that the contracting officer may evaluate and determine their effectiveness.

{52 FR 8554, Mar. 18, 1987, as amended at 60 FR 41812, Aug. 14, 1995}

Sec. 401.6 Exercise of march-in rights.

(a) The following procedures shall govern the exercise of the march-in rights of the agencies set forth in 35 U.S.C. 203 and paragraph (j) of the clause at Sec. 401.14.

(b) Whenever an agency receives information that it believes might warrant the exercise of march-in rights, before initiating any march-in proceeding, it shall notify the contractor in writing of the information and request informal written or oral comments from the contractor as well as information relevant to the matter. In the absence of any

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comments from the contractor within 30 days, the agency may, at its discretion, proceed with the procedures below. If a comment is received within 30 days, or later if the agency has not initiated the procedures below, then the agency shall, within 60 days after it receives the comment, either initiate the procedures below or notify the contractor, in writing, that it will not pursue march-in rights on the basis of the available information.

(c) A march-in proceeding shall be initiated by the issuance of a written notice by the agency to the contractor and its assignee or exclusive licensee, as applicable and if known to the agency, stating that the agency is considering the exercise of march-in rights. The notice shall state the reasons for the proposed march-in in terms sufficient to put the contractor on notice of the facts upon which the action would be based and shall specify the field or fields of use in which the agency is considering requiring licensing. The notice shall advise the contractor (assignee or exclusive licensee) of its rights, as set forth in this section and in any supplemental agency regulations. The determination to exercise march-in rights shall be made by the head of the agency or his or her designee.

(d) Within 30 days after the receipt of the written notice of march-in, the contractor (assignee or exclusive licensee) may submit in person, in writing, or through a representative, information or argument in opposition to the proposed march-in, including any additional specific information which raises a genuine dispute over the material facts upon which the march-in is based. If the information presented raises a genuine dispute over the material facts, the head of the agency or designee shall undertake or refer the matter to another official for fact-finding.

(e) Fact-finding shall be conducted in accordance with the procedures established by the agency. Such procedures shall be as informal as practicable and be consistent with principles of fundamental fairness. The procedures should afford the contractor the opportunity to appear with counsel, submit documentary evidence, present witnesses and confront such persons as the agency may present. A transcribed record shall be made and shall be available at cost to the contractor upon request. The requirement for a transcribed record may be waived by mutual agreement of the contractor and the agency. Any portion of the march-in proceeding, including a fact-finding hearing that involves testimony or evidence relating to the utilization or efforts at obtaining utilization that are being made by the contractor, its assignee, or licensees shall be closed to the public, including potential licensees. In accordance with 35 U.S.C. 202(c)(5), agencies shall not disclose any such information obtained during a march-in proceeding to persons outside the government except when such release is authorized by the contractor (assignee or licensee).

(f) The official conducting the fact-finding shall prepare or adopt written findings of fact and transmit them to the head of the agency or designee promptly after the conclusion of the fact-finding proceeding along with a recommended determination. A copy of the findings of fact shall be sent to the contractor (assignee or exclusive licensee) by registered or certified mail. The contractor (assignee or exclusive licensee) and agency representatives will be given 30 days to submit written arguments to the head of the agency or designee; and, upon request by the contractor oral arguments will be held before the agency head or designee that will make the final determination.

(g) In cases in which fact-finding has been conducted, the head of the agency or designee shall base his or her determination on the facts found, together with any other information and written or oral arguments submitted by the contractor (assignee or exclusive licensee) and agency representatives, and any other information in the administrative record. The consistency of the exercise of march-in rights with the policy and objectives of 35 U.S.C. 200 shall also be considered. In cases referred for fact-finding, the head of the agency or designee may reject only those facts that have been found to be clearly erroneous, but must explicitly state the rejection and indicate the basis for the contrary finding. Written notice of the determination whether march-in rights will be exercised shall be made by the head of the agency or designee and sent to the contractor (assignee of exclusive licensee) by certified or registered mail within 90 days after the completion of fact-finding or 90 days after oral arguments, whichever is later, or the proceedings will be deemed to have been terminated and thereafter no march-in based on the facts and reasons upon which the proceeding was initiated may be exercised.

(h) An agency may, at any time, terminate a march-in proceeding if it is satisfied that it does not wish to exercise march-in rights.

(i) The procedures of this part shall also apply to the exercise of march-in rights against inventors receiving title to subject inventions under 35 U.S.C. 202(d) and, for that purpose, the term “contractor” as used in this section shall be deemed to include the inventor.

(j) An agency determination unfavorable to the contractor (assignee or exclusive licensee) shall be held in abeyance pending the exhaustion of appeals or petitions filed under 35 U.S.C. 203(2).

(k) For purposes of this section the term exclusive licensee includes a partially exclusive licensee.

(l) Agencies are authorized to issue supplemental procedures not inconsistent with this part for the conduct of march-in proceedings.

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Sec. 401.7 Small business preference.

(a) Paragraph (k)(4) of the clauses at Sec. 401.14 Implements the small business preference requirement of 35 U.S.C. 202(c)(7)(D). Contractors are expected to use efforts that are reasonable under the circumstances to attract small business licensees. They are also expected to give small business firms that meet the standard outlined in the clause a preference over other applicants for licenses. What constitutes reasonable efforts to attract small business licensees will vary with the circumstances and the nature, duration, and expense of efforts needed to bring the invention to the market. Paragraph (k)(4) is not intended, for example, to prevent nonprofit organizations from providing larger firms with a right of first refusal or other options in inventions that relate to research being supported under long-term or other arrangements with larger companies. Under such circumstances it would not be reasonable to seek and to give a preference to small business licensees.

(b) Small business firms that believe a nonprofit organization is not meeting its obligations under the clause may report their concerns to the Secretary. To the extent deemed appropriate, the Secretary will undertake informal investigation of the concern, and, if appropriate, enter into discussions or negotiations with the nonprofit organization to the end of improving its efforts in meeting its obligations under the clause. However, in no event will the Secretary intervene in ongoing negotiations or contractor decisions concerning the licensing of a specific subject invention. All the above investigations, discussions, and negotiations of the Secretary will be in coordination with other interested agencies, including the Small Business Administration; and in the case of a contract for the operation of a government-owned, contractor operated research or production facility, the Secretary will coordinate with the agency responsible for the facility prior to any discussions or negotiations with the contractor.

Sec. 401.8 Reporting on utilization of subject inventions.

(a) Paragraph (h) of the clauses at Sec. 401.14 and its counterpart in the clause at Attachment A to OMB Circular A-124 provides that agencies have the right to receive periodic reports from the contractor on utilization of inventions. Agencies exercising this right should accept such information to the extent feasible, in the format that the contractor normally prepares for is own internal purposes. The prescription of forms should be avoided. However, any forms or standard questionnaires that are adopted by an agency for this purpose must comply with the requirements of the Paperwork Reduction Act. Copies shall be sent to the Secretary.

(b) In accordance with 35 U.S.C. 202(c)(5) and the terms of the clauses at Sec. 401.14 agencies shall not disclose such information to persons outside the government. Contractors will continue to provide confidential markings to help prevent inadvertent release outside the agency.

Sec. 401.9 Retention of rights by contractor employee inventor.

Agencies which allow an employee/inventor of the contractor to retain rights to a subject invention made under a funding agreement with a small business firm or nonprofit organization contractor, as authorized by 35 U.S.C. 202(d), will impose upon the inventor at least those conditions that would apply to a small business firm contractor under paragraphs (d)(1) and (3); (f)(4); (h); (i); and (j) of the clause at Sec. 401.14(a).

Sec. 401.10 Government assignment to contractor of rights in invention of government employee.

In any case when a Federal employee is a co-inventor of any invention made under a funding agreement with a small business firm or nonprofit organization and the Federal agency employing such co-inventor transfers or reassigns the right it has acquired in the subject invention from its employee to the contractor as authorized by 35 U.S.C. 202(e), the assignment will be made subject to the same conditions as apply to the contractor under the patent rights clause of its funding agreement. Agencies may add additional conditions as long as they are consistent with 35 U.S.C. 201-206.

Sec. 401.11 Appeals.

(a) As used in this section, the term standard clause means the clause at Sec. 401.14 of this part and the clauses previously prescribed by either OMB Circular A-124 or OMB Bulletin 81-22.

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(b) The agency official initially authorized to take any of the following actions shall provide the contractor with a written statement of the basis for his or her action at the time the action is taken, including any relevant facts that were relied upon in taking the action.

(1) A refusal to grant an extension under paragraph (c)(4) of the standard clauses.

(2) A request for a conveyance of title under paragraph (d) of the standard clauses.

(3) A refusal to grant a waiver under paragraph (i) of the standard clauses.

(4) A refusal to approve an assignment under paragraph (k)(1) of the standard clauses.

(5) A refusal to grant an extension of the exclusive license period under paragraph (k)(2) of the clauses prescribed by either OMB Circular A-124 or OMB Bulletin 81-22.

(c) Each agency shall establish and publish procedures under which any of the agency actions listed in paragraph (b) of this section may be appealed to the head of the agency or designee. Review at this level shall consider both the factual and legal basis for the actions and its consistency with the policy and objectives of 35 U.S.C. 200-206.

(d) Appeals procedures established under paragraph (c) of this section shall include administrative due process procedures and standards for fact-finding at least comparable to those set forth in Sec. 401.6 (e) through (g) whenever there is a dispute as to the factual basis for an agency request for a conveyance of title under paragraph (d) of the standard clause, including any dispute as to whether or not an invention is a subject invention.

(e) To the extent that any of the actions described in paragraph (b) of this section are subject to appeal under the Contract Dispute Act, the procedures under the Act will satisfy the requirements of paragraphs (c) and (d) of this section.

Sec. 401.12 Licensing of background patent rights to third parties.

(a) A funding agreement with a small business firm or a domestic nonprofit organization will not contain a provision allowing a Federal agency to require the licensing to third parties of inventions owned by the contractor that are not subject inventions unless such provision has been approved by the agency head and a written justification has been signed by the agency head. Any such provision will clearly state whether the licensing may be required in connection with the practice of a subject invention, a specifically identified work object, or both. The agency head may not delegate the authority to approve such provisions or to sign the justification required for such provisions.

(b) A Federal agency will not require the licensing of third parties under any such provision unless the agency head determines that the use of the invention by others is necessary for the practice of a subject invention or for the use of a work object of the funding agreement and that such action is necessary to achieve practical application of the subject invention or work object. Any such determination will be on the record after an opportunity for an agency hearing. The contractor shall be given prompt notification of the determination by certified or registered mail. Any action commenced for judicial review of such determination shall be brought within sixty days after notification of such determination.

Sec. 401.13 Administration of patent rights clauses.

(a) In the event a subject invention is made under funding agreements of more than one agency, at the request of the contractor or on their own initiative the agencies shall designate one agency as responsible for administration of the rights of the government in the invention.

(b) Agencies shall promptly grant, unless there is a significant reason not to, a request by a nonprofit organization under paragraph (k)(2) of the clauses prescribed by either OMB Circular A-124 or OMB Bulletin 81-22 inasmuch as 35 U.S.C. 202(c)(7) has since been amended to eliminate the limitation on the duration of exclusive licenses. Similarly, unless there is a significant reason not to, agencies shall promptly approve an assignment by a nonprofit organization to an organization which has as one of its primary functions the management of inventions when a request for approval has been necessitated under paragraph (k)(1) of the clauses prescribed by either OMB Circular A-124 or OMB Bulletin 81-22 because the patent management organization is engaged in or holds a substantial interest in other organizations engaged in the manufacture or sale of products or the use of processes that might utilize the invention or be in competition with embodiments of the invention. As amended, 35 U.S.C. 202(c)(7) no longer contains this limitation. The policy of this subsection should also be followed in connection with similar approvals that may be required under Institutional Patent Agreements, other patent rights clauses, or waivers that predate Chapter 18 of Title 35, United States Code.

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(c) The President’s Patent Policy Memorandum of February 18, 1983, states that agencies should protect the confidentiality of invention disclosure, patent applications, and utilization reports required in performance or in consequence of awards to the extent permitted by 35 U.S.C. 205 or other applicable laws. The following requirements should be followed for funding agreements covered by and predating this part 401.

(1) To the extent authorized by 35 U.S.C. 205, agencies shall not disclose to third parties pursuant to requests under the Freedom of Information Act (FOIA) any information disclosing a subject invention for a reasonable time in order for a patent application to be filed. With respect to subject inventions of contractors that are small business firms or nonprofit organizations, a reasonable time shall be the time during which an initial patent application may be filed under paragraph (c) of the standard clause found at Sec. 401.14(a) or such other clause may be used in the funding agreement. However, an agency may disclose such subject inventions under the FOIA, at its discretion, after a contractor has elected not to retain title or after the time in which the contractor is required to make an election if the contractor has not made an election within that time. Similarly, an agency may honor a FOIA request at its discretion if it finds that the same information has previously been published by the inventor, contractor, or otherwise. If the agency plans to file itself when the contractor has not elected title, it may, of course, continue to avail itself of the authority of 35 U.S.C. 205.

(2) In accordance with 35 U.S.C. 205, agencies shall not disclose or release for a period of 18 months from the filing date of the patent application to third parties pursuant to requests under the Freedom of Information Act, or otherwise, copies of any document which the agency obtained under this clause which is part of an application for patent with the U.S. Patent and Trademark Office or any foreign patent office filed by the contractor (or its assignees, licensees, or employees) on a subject invention to which the contractor has elected to retain title. This prohibition does not extend to disclosure to other government agencies or contractors of government agencies under an obligation to maintain such information in confidence.

(3) A number of agencies have policies to encourage public dissemination of the results of work supported by the agency through publication in government or other publications of technical reports of contractors or others. In recognition of the fact that such publication, if it included descriptions of a subject invention could create bars to obtaining patent protection, it is the policy of the executive branch that agencies will not include in such publication programs copies of disclosures of inventions submitted by small business firms or nonprofit organizations, pursuant to paragraph (c) of the standard clause found at Sec. 401.14(a), except that under the same circumstances under which agencies are authorized to release such information pursuant to FOIA requests under paragraph (c)(1) of this section, agencies may publish such disclosures.

(4) Nothing in this paragraph is intended to preclude agencies from including in the publication activities described in the first sentence of paragraph (c)(3), the publication of materials describing a subject invention to the extent such materials were provided as part of a technical report or other submission of the contractor which were submitted independently of the requirements of the patent rights provisions of the contract. However, if a small business firm or nonprofit organization notifies the agency that a particular report or other submission contains a disclosure of a subject invention to which it has elected title or may elect title, the agency shall use reasonable efforts to restrict its publication of the material for six months from date of its receipt of the report or submission or, if earlier, until the contractor has filed an initial patent application. Agencies, of course, retain the discretion to delay publication for additional periods of time.

(5) Nothing in this paragraph is intended to limit the authority of agencies provided in 35 U.S.C. 205 in circumstances not specifically described in this paragraph.

{52 FR 8554, Mar. 18, 1987, as amended at 60 FR 41812, Aug. 14, 1995}

Sec. 401.14 Standard patent rights clauses.

(a) The following is the standard patent rights clause to be used as specified in Sec. 401.3(a).

Patent Rights (Small Business Firms and Nonprofit Organizations)

(a) Definitions

(1) Invention means any invention or discovery which is or may be patentable or otherwise protectable under Title 35 of the United States Code, or any novel variety of plant which is or may be protected under the Plant Variety Protection Act (7 U.S.C. 2321 et seq.).

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(2) Subject invention means any invention of the contractor conceived or first actually reduced to practice in the performance of work under this contract, provided that in the case of a variety of plant, the date of determination (as defined in section 41(d) of the Plant Variety Protection Act, 7 U.S.C. 2401(d)) must also occur during the period of contract performance.

(3) Practical Application means to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are, to the extent permitted by law or government regulations, available to the public on reasonable terms.

(4) Made when used in relation to any invention means the conception or first actual reduction to practice of such invention.

(5) Small Business Firm means a small business concern as defined at section 2 of Pub. L. 85-536 (15 U.S.C. 632) and implementing regulations of the Administrator of the Small Business Administration. For the purpose of this clause, the size standards for small business concerns involved in government procurement and subcontracting at 13 CFR 121.3-8 and 13 CFR 121.3-12, respectively, will be used.

(6) Nonprofit Organization means a university or other institution of higher education or an organization of the type described in section 501(c)(3) of the Internal Revenue Code of 1954 (26 U.S.C. 501(c) and exempt from taxation under section 501(a) of the Internal Revenue Code (25 U.S.C. 501(a)) or any nonprofit scientific or educational organization qualified under a state nonprofit organization statute.

(b) Allocation of Principal Rights

The Contractor may retain the entire right, title, and interest throughout the world to each subject invention subject to the provisions of this clause and 35 U.S.C. 203. With respect to any subject invention in which the Contractor retains title, the Federal government shall have a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States the subject invention throughout the world.

(c) Invention Disclosure, Election of Title and Filing of Patent Application by Contractor

(1) The contractor will disclose each subject invention to the Federal Agency within two months after the inventor discloses it in writing to contractor personnel responsible for patent matters. The disclosure to the agency shall be in the form of a written report and shall identify the contract under which the invention was made and the inventor(s). It shall be sufficiently complete in technical detail to convey a clear understanding to the extent known at the time of the disclosure, of the nature, purpose, operation, and the physical, chemical, biological or electrical characteristics of the invention. The disclosure shall also identify any publication, on sale or public use of the invention and whether a manuscript describing the invention has been submitted for publication and, if so, whether it has been accepted for publication at the time of disclosure. In addition, after disclosure to the agency, the Contractor will promptly notify the agency of the acceptance of any manuscript describing the invention for publication or of any on sale or public use planned by the contractor.

(2) The Contractor will elect in writing whether or not to retain title to any such invention by notifying the Federal agency within two years of disclosure to the Federal agency. However, in any case where publication, on sale or public use has initiated the one year statutory period wherein valid patent protection can still be obtained in the United States, the period for election of title may be shortened by the agency to a date that is no more than 60 days prior to the end of the statutory period.

(3) The contractor will file its initial patent application on a subject invention to which it elects to retain title within one year after election of title or, if earlier, prior to the end of any statutory period wherein valid patent protection can be obtained in the United States after a publication, on sale, or public use. The contractor will file patent applications in additional countries or international patent offices within either ten months of the corresponding initial patent application or six months from the date permission is granted by the Commissioner of Patents and Trademarks to file foreign patent applications where such filing has been prohibited by a Secrecy Order.

(4) Requests for extension of the time for disclosure, election, and filing under subparagraphs (1), (2), and (3) may, at the discretion of the agency, be granted.

(d) Conditions When the Government May Obtain Title

The contractor will convey to the Federal agency, upon written request, title to any subject invention—

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(1) If the contractor fails to disclose or elect title to the subject invention within the times specified in (c), above, or elects not to retain title; provided that the agency may only request title within 60 days after learning of the failure of the contractor to disclose or elect within the specified times.

(2) In those countries in which the contractor fails to file patent applications within the times specified in (c) above; provided, however, that if the contractor has filed a patent application in a country after the times specified in (c) above, but prior to its receipt of the written request of the Federal agency, the contractor shall continue to retain title in that country.

(3) In any country in which the contractor decides not to continue the prosecution of any application for, to pay the maintenance fees on, or defend in reexamination or opposition proceeding on, a patent on a subject invention.

(e) Minimum Rights to Contractor and Protection of the Contractor Right to File

(1) The contractor will retain a nonexclusive royalty-free license throughout the world in each subject invention to which the Government obtains title, except if the contractor fails to disclose the invention within the times specified in (c), above. The contractor’s license extends to its domestic subsidiary and affiliates, if any, within the corporate structure of which the contractor is a party and includes the right to grant sublicenses of the same scope to the extent the contractor was legally obligated to do so at the time the contract was awarded. The license is transferable only with the approval of the Federal agency except when transferred to the successor of that party of the contractor’s business to which the invention pertains.

(2) The contractor’s domestic license may be revoked or modified by the funding Federal agency to the extent necessary to achieve expeditious practical application of the subject invention pursuant to an application for an exclusive license submitted in accordance with applicable provisions at 37 CFR part 404 and agency licensing regulations (if any). This license will not be revoked in that field of use or the geographical areas in which the contractor has achieved practical application and continues to make the benefits of the invention reasonably accessible to the public. The license in any foreign country may be revoked or modified at the discretion of the funding Federal agency to the extent the contractor, its licensees, or the domestic subsidiaries or affiliates have failed to achieve practical application in that foreign country.

(3) Before revocation or modification of the license, the funding Federal agency will furnish the contractor a written notice of its intention to revoke or modify the license, and the contractor will be allowed thirty days (or such other time as may be authorized by the funding Federal agency for good cause shown by the contractor) after the notice to show cause why the license should not be revoked or modified. The contractor has the right to appeal, in accordance with applicable regulations in 37 CFR part 404 and agency regulations (if any) concerning the licensing of Government-owned inventions, any decision concerning the revocation or modification of the license.

(f) Contractor Action to Protect the Government’s Interest

(1) The contractor agrees to execute or to have executed and promptly deliver to the Federal agency all instruments necessary to (i) establish or confirm the rights the Government has throughout the world in those subject inventions to which the contractor elects to retain title, and (ii) convey title to the Federal agency when requested under paragraph (d) above and to enable the government to obtain patent protection throughout the world in that subject invention.

(2) The contractor agrees to require, by written agreement, its employees, other than clerical and nontechnical employees, to disclose promptly in writing to personnel identified as responsible for the administration of patent matters and in a format suggested by the contractor each subject invention made under contract in order that the contractor can comply with the disclosure provisions of paragraph (c), above, and to execute all papers necessary to file patent applications on subject inventions and to establish the government’s rights in the subject inventions. This disclosure format should require, as a minimum, the information required by (c)(1), above. The contractor shall instruct such employees through employee agreements or other suitable educational programs on the importance of reporting inventions in sufficient time to permit the filing of patent applications prior to U.S. or foreign statutory bars.

(3) The contractor will notify the Federal agency of any decisions not to continue the prosecution of a patent application, pay maintenance fees, or defend in a reexamination or opposition proceeding on a patent, in any country, not less than thirty days before the expiration of the response period required by the relevant patent office.

(4) The contractor agrees to include, within the specification of any United States patent applications and any patent issuing thereon covering a subject invention, the following statement, “This invention was made with government support under (identify the contract) awarded by (identify the Federal agency). The government has certain rights in the invention.”

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(g) Subcontracts

(1) The contractor will include this clause, suitably modified to identify the parties, in all subcontracts, regardless of tier, for experimental, developmental or research work to be performed by a small business firm or domestic nonprofit organization. The subcontractor will retain all rights provided for the contractor in this clause, and the contractor will not, as part of the consideration for awarding the subcontract, obtain rights in the subcontractor’s subject inventions.

(2) The contractor will include in all other subcontracts, regardless of tier, for experimental developmental or research work the patent rights clause required by (cite section of agency implementing regulations or FAR).

(3) In the case of subcontracts, at any tier, when the prime award with the Federal agency was a contract (but not a grant or cooperative agreement), the agency, subcontractor, and the contractor agree that the mutual obligations of the parties created by this clause constitute a contract between the subcontractor and the Federal agency with respect to the matters covered by the clause; provided, however, that nothing in this paragraph is intended to confer any jurisdiction under the Contract Disputes Act in connection with proceedings under paragraph (j) of this clause.

(h) Reporting on Utilization of Subject Inventions

The Contractor agrees to submit on request periodic reports no more frequently than annually on the utilization of a subject invention or on efforts at obtaining such utilization that are being made by the contractor or its licensees or assignees. Such reports shall include information regarding the status of development, date of first commercial sale or use, gross royalties received by the contractor, and such other data and information as the agency may reasonably specify. The contractor also agrees to provide additional reports as may be requested by the agency in connection with any march-in proceeding undertaken by the agency in accordance with paragraph (j) of this clause. As required by 35 U.S.C. 202(c)(5), the agency agrees it will not disclose such information to persons outside the government without permission of the contractor.

(i) Preference for United States Industry

Notwithstanding any other provision of this clause, the contractor agrees that neither it nor any assignee will grant to any person the exclusive right to use or sell any subject inventions in the United States unless such person agrees that any products embodying the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States. However, in individual cases, the requirement for such an agreement may be waived by the Federal agency upon a showing by the contractor or its assignee that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible.

(j) March-in Rights

The contractor agrees that with respect to any subject invention in which it has acquired title, the Federal agency has the right in accordance with the procedures in 37 CFR 401.6 and any supplemental regulations of the agency to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such a request the Federal agency has the right to grant such a license itself if the Federal agency determines that:

(1) Such action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use.

(2) Such action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee or their licensees;

(3) Such action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee or licensees; or

(4) Such action is necessary because the agreement required by paragraph (i) of this clause has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of such agreement.

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

(k) Special Provisions for Contracts with Nonprofit Organizations

If the contractor is a nonprofit organization, it agrees that:

(1) Rights to a subject invention in the United States may not be assigned without the approval of the Federal agency, except where such assignment is made to an organization which has as one of its primary functions the management of inventions, provided that such assignee will be subject to the same provisions as the contractor;

(2) The contractor will share royalties collected on a subject invention with the inventor, including Federal employee co-inventors (when the agency deems it appropriate) when the subject invention is assigned in accordance with 35 U.S.C. 202(e) and 37 CFR 401.10;

(3) The balance of any royalties or income earned by the contractor with respect to subject inventions, after payment of expenses (including payments to inventors) incidental to the administration of subject inventions, will be utilized for the support of scientific research or education; and

(4) It will make efforts that are reasonable under the circumstances to attract licensees of subject invention that are small business firms and that it will give a preference to a small business firm when licensing a subject invention if the contractor determines that the small business firm has a plan or proposal for marketing the invention which, if executed, is equally as likely to bring the invention to practical application as any plans or proposals from applicants that are not small business firms; provided, that the contractor is also satisfied that the small business firm has the capability and resources to carry out its plan or proposal. The decision whether to give a preference in any specific case will be at the discretion of the contractor. However, the contractor agrees that the Secretary may review the contractor’s licensing program and decisions regarding small business applicants, and the contractor will negotiate changes to its licensing policies, procedures, or practices with the Secretary when the Secretary’s review discloses that the contractor could take reasonable steps to implement more effectively the requirements of this paragraph (k)(4).

(l) Communication

(Complete According to Instructions at 401.5(b))

(b) When the Department of Energy (DOE) determines to use alternative provisions under Sec. 401.3(a)(4), the standard clause at Sec. 401.14(a), of this section, shall be used with the following modifications unless a substitute clause is drafted by DOE:

(1) The title of the clause shall be changed to read as follows: Patent Rights to Nonprofit DOE Facility Operators

(2) Add an “(A)” after ``(1)” in paragraph (c)(1) and add subparagraphs (B) and (C) to paragraph (c)(1) as follows:

(B) If the subject invention occurred under activities funded by the naval nuclear propulsion or weapons related programs of DOE, then the provisions of this subparagraph (c)(1)(B) will apply in lieu of paragraphs (c)(2) and (3). In such cases the contractor agrees to assign the government the entire right, title, and interest thereto throughout the world in and to the subject invention except to the extent that rights are retained by the contractor through a greater rights determination or under paragraph (e), below. The contractor, or an employee-inventor, with authorization of the contractor, may submit a request for greater rights at the time the invention is disclosed or within a reasonable time thereafter. DOE will process such a request in accordance with procedures at 37 CFR 401.15. Each determination of greater rights will be subject to paragraphs (h)-(k) of this clause and such additional conditions, if any, deemed to be appropriate by the Department of Energy.

(C) At the time an invention is disclosed in accordance with (c)(1)(A) above, or within 90 days thereafter, the contractor will submit a written statement as to whether or not the invention occurred under a naval nuclear propulsion or weapons-related program of the Department of Energy. If this statement is not filed within this time, subparagraph (c)(1)(B) will apply in lieu of paragraphs (c)(2) and (3). The contractor statement will be deemed conclusive unless, within 60 days thereafter, the Contracting Officer disagrees in writing, in which case the determination of the Contracting Officer will be deemed conclusive unless the contractor files a claim under the Contract Disputes Act within 60 days after the Contracting Officer’s determination. Pending resolution of the matter, the invention will be subject to subparagraph (c)(1)(B).

(3) Paragraph (k)(3) of the clause will be modified as prescribed at Sec. 401.5(g).

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Sec. 401.15 Deferred determinations.

(a) This section applies to requests for greater rights in subject inventions made by contractors when deferred determination provisions were included in the funding agreement because one of the exceptions at Sec. 401.3(a) was applied, except that the Department of Energy is authorized to process deferred determinations either in accordance with its waiver regulations or this section. A contractor requesting greater rights should include with its request information on its plans and intentions to bring the invention to practical application. Within 90 days after receiving a request and supporting information, or sooner if a statutory bar to patenting is imminent, the agency should seek to make a determination. In any event, if a bar to patenting is imminent, unless the agency plans to file on its own, it shall authorize the contractor to file a patent application pending a determination by the agency. Such a filing shall normally be at the contractor’s own risk and expense. However, if the agency subsequently refuses to allow the contractor to retain title and elects to proceed with the patent application under government ownership, it shall reimburse the contractor for the cost of preparing and filing the patent application.

(b) If the circumstances of concerns which originally led the agency to invoke an exception under Sec. 401.3(a) are not applicable to the actual subject invention or are no longer valid because of subsequent events, the agency should allow the contractor to retain title to the invention on the same conditions as would have applied if the standard clause at Sec. 401.14(a) had been used originally, unless it has been licensed.

(c) If paragraph (b) is not applicable the agency shall make its determination based on an assessment whether its own plans regarding the invention will better promote the policies and objectives of 35 U.S.C. 200 than will contractor ownership of the invention. Moreover, if the agency is concerned only about specific uses or applications of the invention, it shall consider leaving title in the contractor with additional conditions imposed upon the contractor’s use of the invention for such applications or with expanded government license rights in such applications.

(d) A determination not to allow the contractor to retain title to a subject invention or to restrict or condition its title with conditions differing from those in the clause at Sec. 401.14(a), unless made by the head of the agency, shall be appealable by the contractor to an agency official at a level above the person who made the determination. This appeal shall be subject to the procedures applicable to appeals under Sec. 401.11 of this part.

Sec. 401.16 Electronic filing.

Unless otherwise requested or directed by the agency,

(a) The written report required in (c)(1) of the standard clause in Sec. 401.14(a) may be electronically filed;

(b) The written election required in (c)(2) of the standard clause in Sec. 401.14(a) may be electronically filed; and

(c) The close-out report in (f)(1) and the information identified in (f)(2) and (f)(3) of Sec. 401.5 may be electronically filed.

{60 FR 41812, Aug. 14, 1995}

Sec. 401.17 Submissions and inquiries.

All submissions or inquiries should be directed to Director, Technology Competitiveness Staff, Office of Technology Policy, Technology Administration, telephone number 202-482-2100, Room H4418, U.S. Department of Commerce, Washington, DC 20230.

{60 FR 41812, Aug. 14, 1995}

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APPENDIX B

DEVELOPMENT AND COMMERCIALIZATION GOALS

Developmental Time Line

[ * ]

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APPENDIX C

SUGGESTED FORM OF ROYALTY REPORT

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OREGON STATE UNIVERSITY ROYALTY REPORT	LICENSEE:
Technology Transfer Office 312 Kerr Administration Building Corvallis, Oregon 97331-2140	LICENSE NO: _____________________________________
	Report Due Date: __________________________________
Reporting Period:_______________________________
This report must be submitted regardless of whether royalties are owed.
Please do not leave any column blank, state all information requested below.

OSU Docket No. Product Description Price
per Unit Quantity Net Sales Royalty % Royalty Due

Report Completed by: ________________________	TOTAL ROYALTIES DUE: ______________
Telephone No: _____________________________

Please make check payable to: Oregon State University

If you have questions please contact: Cynthia Hubbard, Accountant (541) 737-0669

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EX-10.42

EXHIBIT 10.42

[ * ] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

AMENDMENT NO. ONE TO

EXCLUSIVE LICENSE AGREEMENT

This Amendment No. One (“Amendment”) to the Exclusive License Agreement (“Agreement”) dated April 4, 2005 is entered into this 2^nd day of October, 2007 by and between Kosan Biosciences Incorporated, having an address at 3832 Bay Center Place, Hayward, California 94545 (“Company”) and the State of Oregon, acting by and through the State Board of Higher Education on behalf of Oregon State University, an institution of higher education in the State of Oregon, located at Corvallis, Oregon (“University”).

RECITALS

WHEREAS, University owns U.S. Patent No. 7,145,018 (“‘018 patent”) that is exclusively licensed to Company in accordance with this Agreement;

WHEREAS, the ‘018 patent is involved in Interference No. 105,557 declared by the United States Patent and Trademark Office on June 29, 2007;

WHEREAS, also involved in the interference is U.S. Application Serial No. 10/435,408 owned by the Sloan-Kettering Institute for Cancer Research (“SKI”) that is exclusively licensed to Company under the terms of the Research and License Agreement dated August 25, 2000 and related amendment;

WHEREAS, Company, University and SKI on October 2, 2007 entered into a Settlement Agreement setting forth the agreed upon plan to conduct, and resolve all issues in, Interference No. 105,557 and;

WHEREAS, in furtherance of the resolution of Interference No. 105,557, Company and University wish to make certain amendments to the Agreement.

NOW THEREFORE, the Company and University agree as follows:

1. Article I is hereby amended by the addition of the following new definitions:

T. “SKI Agreement” shall mean that certain Research and License Agreement and any amendments between Company and the Sloan-Kettering Institute for Cancer Research dated August 25, 2000.

U. “SKI Patent Rights” shall mean any claim of any issued patents licensed to Company by the Sloan-Kettering Institute for Cancer Research under the SKI Agreement that have any composition of matter, method of making, method of use or administration or formulation claims covering Company’s trans-9,10-dehydroepothilone D compound designated KOS-1584 (or R1645), unless such claim has lapsed, expired, been canceled, been abandoned or been held invalid by a court or other appropriate body of competent jurisdiction in a decision that is unappealable or unappealed within the time allowed for appeal or been admitted to be invalid or unenforceable through reissue or disclaimer or otherwise.

2. Article V, Section A is hereby amended to read in its entirety as follows.

2

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A. In addition to license fees payable under Article IV, Company agrees to pay University a royalty of [ * ] percent ([ * ]%) of Net Sales of Licensed Products sold in countries where there is a Valid Claim in [ * ] within Licensed Patents by Company, its distributors, Affiliates and is sublicenses of Licensed Patents. If there is no [ * ] in [ * ] within Licensed Patents covering Company’s compound designated KOS-1584 requiring payment of a royalty to University in accordance with the immediately preceding sentence, but products containing KOS-1584 are covered by at least one [ * ] of a [ * ] patent within the SKI Patent Rights, Company agrees to pay University a payment of [ * ] percent ([ * ]%) of Net Sales of such product containing KOS-1584 sold in [ * ] and such payment shall be due and payable from the first commercial sale of such KOS-1584 products until [ * ].

3. Article V, Section D is hereby amended by the addition of the following sentence:

The provisions of this Section V.D shall not apply in respect of any royalties paid by Company to the Sloan-Kettering Institute for Cancer Research on account of KOS-1584.

4. Article IX is hereby amended by the addition of the following new Sections F and G.

F. In accordance with its obligations under Article IX, Section E, Company agrees to reimburse University for its actual out-of pocket expenses incurred after [ * ] for conducting Interference No. 105,557 up to a total [ * ]. Within sixty (60) days after receipt by Company of an invoice detailing such expenses, Company shall pay University or its designee all amounts directly related to Interference No. 105,557 up to [ * ].

3

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G. Notwithstanding anything to the contrary herein, if any Licensed Patents become involved in any interference proceeding or priority contest with any patent application or patent directed to epothilones, or their use or manufacture, that is controlled by Sloan-Kettering Institute for Cancer Research, whether such proceeding is before the United State Patent and Trademark Office or any U.S. federal court, University shall be responsible for its own costs and Company shall have no obligation whatsoever to pay for such proceedings or reimburse University.

5. Article XII is hereby amended by the addition of the following new Sections L and M.

L. If there is no [ * ] in [ * ] within Licensed Patents covering Company’s compound designated KOS-1584, then [ * ] shall be deemed to be a [ * ] until [ * ].

M. If Company or the Sloan-Kettering Institute for Cancer Research should terminate or substantively amend the SKI Agreement in a manner that affects University’s rights under this Agreement for any reason, Company will immediately notify University.

6. Except as specifically amended herein, the terms of the Agreement shall remain in full force and effect. The Agreement (including the exhibits and schedules thereto) and this Amendment No. One and the Settlement Agreement constitute the entire agreement between University and Company with respect to the subject matter within and therein and supersede all revisions, agreements and understandings between the parties whether written or oral. If there is a conflict between the terms of the Agreement and this Amendment, the terms of this Amendment shall govern.

4

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7. Company expressly acknowledges that the payments specified in Sections 2, 3 and 4 are made in consideration of the Settlement Agreement and expressly waives the right to assert any defense that these payment provisions are unenforceable or constitute patent misuse.

IN WITNESS WHEREOF, Company and University by their duly authorized officers have amended this Amendment No. One to the Agreement as of the date of the first written above.

STATE OF OREGON, Acting by and through the STATE BOARD OF HIGHER EDUCATION on behalf of OREGON STATE UNIVERSITY		KOSAN BIOSCIENCES INCORPORATED
By:	/s/ John M. Cassady, Ph.D.	By:	/s/ Robert G. Johnson, Jr.
	(Signature)		(Signature)
Name:	John M. Cassady, Ph.D.	Name:	Robert G. Johnson, Jr.
	(Please Print)		(Please Print)
Title:	Vice President for Research	Title:	President & CEO
Date:	2nd October 2007	Date:	2 October 2007

5

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EX-31.1

EXHIBIT 31.1

I, Robert G. Johnson, Jr., M.D., Ph.D. certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kosan Biosciences Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2007

/s/ Robert G. Johnson, Jr.

Robert G. Johnson, Jr., M.D., Ph.D.

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

I, Gary S. Titus, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Kosan Biosciences Incorporated;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2007

/s/ Gary S. Titus

Gary S. Titus

Senior Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION¹

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. § 1350), Robert G. Johnson, Jr., M.D., Ph.D., President and Chief Executive Officer of Kosan Biosciences Incorporated (the “Company”), and Gary S. Titus, Senior Vice President and Chief Financial Officer of the Company, each hereby certifies that, to the best of his knowledge:

1. The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

In Witness Whereof, the undersigned have set their hands hereto as of November 9, 2007

/s/ Robert G. Johnson, Jr.

Robert G. Johnson, Jr., M.D., Ph.D.

President and Chief Executive Officer

/s/ Gary S. Titus

Gary S. Titus

Senior Vice President and Chief Financial Officer

¹ This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Kosan Biosciences Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

A signed original of this written statement required by Section 906 has been provided to Kosan Biosciences Incorporated and will be retained by Kosan Biosciences Incorporated and furnished to the Securities and Exchange Commission or its staff upon request.