10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Name of each exchange on which registered:
Common Stock, $.001 par value per share	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [  ]    No [ x ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes [  ]    No [ x ]

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 such filing requirements for the past 90 days.

Yes [ x ]    No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ].

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]    No [ x ]

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $204,935,000 as of June 29, 2007, based upon the closing sale price on the NASDAQ Global Market reported for such date. The determination of affiliate status for the purposes of this calculation is not necessarily a conclusive determination for other purposes. The calculation excludes approximately 3,267,000 shares held by directors, officers and stockholders whose ownership exceeded ten percent of the registrant’s outstanding Common Stock as of June 29, 2007. Exclusion of these shares should not be construed to indicate that such person controls, is controlled by or is under common control with the registrant.

The number of shares of common stock of the registrant outstanding at February 29, 2008 was 42,592,302 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Proxy Statement in connection with the registrant’s 2008 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report on Form 10-K, are incorporated by reference into Part III of this report.

Kosan Biosciences Incorporated

Form 10-K

For the Fiscal Year Ended December 31, 2007

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
Item 9A.	Controls and Procedures	45
Item 9B.	Other Information	48
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	49
Item 11.	Executive Compensation	49
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
Item 13.	Certain Relationships and Related Transactions, and Director Independence	50
Item 14.	Principal Accountant Fees and Services	50
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	51
Signatures		56
Financial Statements		F-1

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PART I

KOSAN BIOSCIENCES

ITEM 1. BUSINESS

Forward-Looking Statements and Risk Factors

This Annual Report on Form 10-K 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, the 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 Annual Report on Form 10-K, including the sections entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements involve risks and uncertainties, including the risks discussed in “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 in “Item 1A. Risk Factors” and elsewhere in this report should be considered in evaluating our prospects and future 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 Annual Report are the property of their respective holders.

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.

Hsp90 inhibitors have a novel mechanism of action targeting multiple pathways involved in cancer cell growth and survival. Our Hsp90 inhibitor product candidates may have the potential to overcome resistance after relapse and to synergize the initial activity of existing cancer therapies. Our first and second generation Hsp90 inhibitor product candidates have demonstrated antitumor activity in multiple indications in early clinical trials. Our proprietary injectable suspension formulation of tanespimycin, or KOS-953, our first-generation Hsp90 inhibitor and most advanced product candidate, is in a Phase 3 clinical trial in combination with Velcade^® (bortezomib) for multiple myeloma, as well as in a Phase 2 clinical trial in combination with Herceptin^® (trastuzumab) for HER2-positive metastatic breast cancer.

Epothilones inhibit cell division with a mechanism of action similar to taxanes, one of the most successful classes of anti-tumor agents. KOS-1584 is our epothilone anticancer product candidate that is being evaluated in dose-escalating Phase 1 clinical trials in patients with solid tumors. We expect to initiate our Phase 2 clinical program with KOS-1584 in the first quarter 2008.

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KOSAN BIOSCIENCES

Our epothilone program was partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (collectively “Roche”) through a global development and commercialization agreement. Our agreement with Roche was terminated in its entirety effective in late February 2008. Following the termination of the agreement, the rights licensed to Roche reverted to us, and in connection with the termination, Roche provided 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 continued until the termination date in late February 2008, after which Roche is obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials.

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 Inc. 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 is conducting 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.

Our Strategy

Our goal is to develop and commercialize innovative cancer therapeutics. Our strategy includes the following components:

Focus on Advancing Later Stage Product Candidates. We are focused on advancing our lead product candidate, Hsp90 inhibitor tanespimycin, in multiple myeloma and in metastatic breast cancer, and our lead epothilone candidate, KOS-1584, in non-small cell lung cancer and potentially other indications. We have prioritized our development portfolio to focus resources on product candidates that we believe represent the highest therapeutic potential and commercial value for the company in the near-term.

Disciplined Management of Our Financial Resources. We intend to focus our financial resources on advancing our clinical product candidates towards regulatory approval and commercialization.

Establish and Leverage Existing Partnering Arrangements. We have a license agreement with Pfizer for the development and commercialization of our motilin agonist program. We plan to establish additional partnering arrangements with pharmaceutical companies and other research and development organizations to help us advance product candidates into or through clinical trials and to the market.

Develop Cancer Therapeutic Products with First-In-Class or Best-In-Class Potential. We have developed a core expertise in the discovery and development of potential cancer therapeutics. We plan to continue to focus on cancer indications to best utilize our expertise and develop potential first-in-class or best-in-class therapies.

Strategically Invest in Our Drug Discovery Efforts and Polyketide Technology Platform. We intend to continue internal research activities on polyketide biosynthesis and chemical synthesis with the goal of advancing high-quality product candidates into preclinical and clinical development. All of our programs are based on the development of polyketides. Polyketides are complex natural products produced by certain microorganisms. Numerous pharmaceutical products in many therapeutic areas have been derived from polyketides. We focus on polyketides because of our expertise in genetic manipulation, chemistry and production of polyketides. We use our technology to improve the structure of known polyketides with validated targets to make potential product candidates. We also improve the efficiency of large-scale production in order to more cost-effectively access promising compounds that cannot be obtained from nature in sufficient quantities to permit development and potential commercialization.

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Product Pipeline

The following chart indicates the most advanced stage of development for each of our product candidates.

Oncology

Hsp90 Inhibitors

We are developing compounds that have been shown to cause the degradation of numerous proteins involved in the growth and survival of cancer cells. These compounds bind to and disrupt the function of Hsp90. Hsp90 is a molecular “chaperone” in cells that maintains the stability and function of “client proteins” that are important for cell proliferation, angiogenesis and metastasis of tumors. By preventing Hsp90 from protecting its client proteins, Hsp90 inhibitors cause the client proteins to degrade. By simultaneously depleting multiple proteins involved in the genesis and maintenance of cancer cells, Hsp90 inhibitors may serve as chemotherapeutic agents in a number of cancers. Moreover, studies suggest that Hsp90 inhibitors re-sensitize cancer cells to drugs to which they have become resistant. Hsp90 inhibitors may also enhance the initial activity of existing cancer therapies when used in combination. Hsp90 inhibitors, such as tanespimycin, can simultaneously target several of the key attributes of cancers and may have broad therapeutic activity against multiple types of cancers.

Tanespimycin. Our proprietary injectable suspension formulation of tanespimycin, or KOS-953 (also known as 17-AAG), is in a Phase 3 clinical trial in combination with Velcade^® (bortezomib) for multiple myeloma, as well as a Phase 2 clinical trial in combination with Herceptin^® (trastuzumab) in HER2-positive metastatic breast cancer. 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 has been initiated. We also plan to conduct a second trial in multiple myeloma to support the pivotal TIME-1 trial with additional safety

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KOSAN BIOSCIENCES

and efficacy data. We plan to initiate the supporting trial in early 2009 and anticipate that the trial can be completed within the timeframe of TIME-1. The TIME program is utilizing our tanespimycin injectable suspension formulation that replaced the prior Cremophor-based formulation. In addition to multiple myeloma, we intend to advance tanespimycin in metastatic breast cancer. We anticipate presenting updated data with the injectable suspension formulation from our Phase 2 clinical trial of tanespimycin in combination with Herceptin in patients with HER2-positive metastatic breast cancer in the first half of 2008. We expect to conduct enabling studies evaluating tanespimycin as monotherapy and in combination with other agents such as Taxol^® (paclitaxel), Xeloda^® (capecitabine^®) and/or Herceptin^® beginning in late 2008 or early 2009. Finally, our Phase 2 clinical trial of tanespimycin in metastatic melanoma was recently completed. As we did not observe sufficient clinical activity to warrant continued pursuit of this indication, we do not plan to develop tanespimycin in this indication.

In 2004, tanespimycin received orphan drug designations from both the European Medicines Agency, or EMEA, and the U.S. Food and Drug Administration, or FDA, for the treatment of two hematologic cancers, multiple myeloma and chronic myelogenous leukemia. Orphan drug designation makes a compound eligible for orphan drug exclusivity and, in the United States, specific tax credits. Generally, if a company receives the first marketing approval for a compound with an orphan drug designation in the clinical indication for which it has such designation, the compound is entitled to orphan drug exclusivity. Orphan drug exclusivity means that another application to market the same compound for the same indication may not be approved, except in limited circumstances, for a period of up to 10 years in Europe (reviewable after six years), and for a period of seven years in the United States.

Alvespimycin. Alvespimycin, or KOS-1022 (also known as 17-DMAG), is a highly-potent, water-soluble and orally-active Hsp90 inhibitor. We have evaluated both intravenous and oral formulations of alvespimycin in clinical trials. In February 2008, we terminated development of alvespimycin in order to focus our resources on the development of tanespimycin.

Epothilones

Epothilones are polyketides that inhibit cancer cells by a mechanism of action similar to a class of cytotoxic drugs known as taxanes, including paclitaxel, marketed as Taxol^® by Bristol-Myers Squibb Company, and docetaxel, marketed as Taxotere^® by Sanofi-Aventis. Epothilones may address a key limitation of the taxane class because they have shown activity against taxane-resistant human tumor cell lines in vitro and in animal models, as well as activity against taxane-sensitive human tumors cells in these models. Through late February 2008, our epothilone program was partnered with Roche through a September 2002 global development and commercialization agreement.

KOS-1584. KOS-1584 is our lead epothilone product candidate being evaluated in dose-escalating Phase 1 clinical trials in patients with solid tumors. KOS-1584 has demonstrated antitumor activity and favorable tolerability in Phase 1 clinical trials in patients with solid tumors, including non-small cell lung, ovarian and pancreatic cancers. We intend to initiate a Phase 2 clinical trial of KOS-1584 in non-small cell lung cancer patients who have received one prior chemotherapy regimen in early 2008. We may conduct additional Phase 2 trials of KOS-1584. Kosan believes that KOS-1584 has best-in-class potential based on the compound’s activity and tolerability profile, which may contrast with currently marketed and other development-stage compounds in this class.

Gastrointestinal Motility

Motilin receptor agonists, called motilides, may be useful to treat diseases such as gastroparesis and other conditions in which GI motility is impaired. Preclinical data indicate that our compound, KOS-2187, is a potent motilin receptor agonist that has high oral bioavailability, is rapidly absorbed and significantly accelerates gastric emptying. 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

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related to the motilin agonist program. Pfizer is conducting Phase 1 clinical testing of KOS-2187 as a potential treatment for GERD.

Early-Stage Programs

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.

Research and Development Expenses

Our research and development expenses consist primarily of salaries and other personnel-related expenses, clinical trial-related services performed by clinical research organizations and research institutions and other outside service providers, licensing-related expenses, lab consumables and facility-related expenses. Our research and development expenses were approximately $47.3 million in 2007, $37.2 million in 2006 and $38.4 million in 2005.

Intellectual Property

Our intellectual property consists of patents, copyrights, trademarks, trade secrets and know-how. Our ability to compete effectively depends in large part on our ability to obtain patents and trademarks for our technologies and products, maintain trade secrets, operate without infringing the rights of others and prevent others from infringing our proprietary rights. We will be able to protect our technologies from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, or are effectively maintained as trade secrets. Accordingly, patents or other proprietary rights are an essential element of our business. As of December 31, 2007, we owned or exclusively licensed approximately 143 patents and 79 patent applications in the U.S. and approximately 80 foreign patents and 265 foreign patent applications. We pursue patent protection in countries where we believe it is commercially reasonable and advantageous to do so. Generally, U.S. and foreign patents are granted for a term of 20 years counting from the date of filing or the earliest claimed priority date, whichever is earlier. The aforementioned patents licensed or owned by Kosan have filing or earliest priority dates ranging from 1993 to the present.

Our practice is to file patent applications to protect technology and compounds commercially important to our business. We also rely on trade secrets to protect our technology where patent protection is deemed inappropriate or unobtainable. We protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, collaborators and certain contractors.

Collaborative Research, Development and License Agreements

Roche

In September 2002, we entered into a research and collaboration agreement with Roche. Our agreement with Roche was terminated in its entirety effective in late February 2008. Following the termination of the agreement, the rights licensed to Roche reverted to us, and in connection with the termination, Roche provided 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 continued until the termination date in February 2008, after which Roche is obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials.

We recognized under this agreement approximately $12.0 million and $11.3 million of contract revenue in 2007 and 2006, respectively, of which $2.0 million was related to a non-recurring milestone earned in 2006. Included in 2007 and 2006 revenue was the ratable portion of the $25.0 million up-front fee that was recognized through the estimated clinical development period. As of December 31, 2007, we had received approximately $88.0 million from our collaboration with Roche.

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KOSAN BIOSCIENCES

Pfizer

In December 2006, we entered into an exclusive license agreement with Pfizer under which we granted to Pfizer a worldwide exclusive license to our motilin agonist program. Under the terms of the agreement, Pfizer and we agreed to collaborate on filing of regulatory documents for the initiation of a Phase 1 clinical trial of our clinical candidate, KOS-2187. Pfizer will be responsible for all development, regulatory and commercial activities related to the motilin agonist program.

We received an up-front fee of $12.5 million in December 2006 and are 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. We recognized revenue of approximately $10.7 million and $1.8 million in contract revenue in 2007 and 2006, respectively, which represents the ratable portion of the $12.5 million up-front fee that was recognized over the estimated period of the Company’s participation in the development of KOS-2187.

Under the agreement, we agreed to assign to Pfizer all of our non-United States patent rights related to the technology licensed under the agreement, and Pfizer is primarily responsible for the prosecution and maintenance of these patent rights. We also agreed to assign to Pfizer all of our United States patent rights related to the technology licensed to Pfizer at a later stage of clinical development.

Either party may terminate the agreement at any time for the other party’s uncured material breach of the agreement. Pfizer may terminate the agreement for convenience. Upon a termination by Pfizer for uncured material breach by us, the license rights shall become perpetual and irrevocable. In the event of a termination by Pfizer for convenience or by us for uncured material breach by Pfizer, the licensed rights would revert to us, Pfizer may be required to provide us with certain license rights, regulatory filings, data and technical transfer assistance. Unless earlier terminated, the agreement will remain in effect for the life of the relevant patents or a specified number of years from the first commercial sale on a country-by-country basis.

Sloan-Kettering Institute for Cancer Research

Effective August 2000, we entered into a research and license agreement with the Sloan-Kettering Institute for Cancer Research, or Sloan-Kettering, relating to epothilones. Under the agreement, we worked collaboratively with Sloan-Kettering to develop epothilone compounds and production methods. In addition, Sloan-Kettering granted us an exclusive license for all further development and commercialization of compounds selected by us in accordance with the agreement.

Under the agreement, we paid Sloan-Kettering an initial license fee and funding for the collaborative research program and we are required to pay annual maintenance fees and patent fees during the term of the agreement. In addition, we must pay Sloan-Kettering milestone payments if clinical development milestones are reached, royalty payments based on net sales of products covered by the collaboration, and a share of some sublicensing revenues.

We may terminate the agreement in whole or on a product-by-product basis at any time. Either party may terminate the agreement upon the material breach of the agreement by the other party. Upon termination, all licenses granted by one party to the other revert to the granting party, and we are required to transfer to Sloan-Kettering any marketing authorizations, data and regulatory filings with respect to any compounds covered by the agreement. Unless earlier terminated, the agreement will remain in effect for the life of the relevant patents or a specified number of years from product launch. Effective September 2002, we received a consent from Sloan-Kettering to enter into a sublicense agreement with Roche and amended the research and license agreement with Sloan-Kettering to harmonize it with the collaboration agreement with Roche.

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In 2003, we and Sloan-Kettering agreed that rights to certain epothilone analogs, including KOS-1584, are included in the exclusive license to us under the August 2000 research and license agreement. The agreement provided for an up-front payment to Sloan-Kettering and provides for additional payments to Sloan-Kettering upon the achievement of certain development milestones.

Stanford University

Effective March 1996, we entered into an exclusive license agreement with the Board of Trustees of the Leland Stanford Junior University, or Stanford University, for certain technology and related patent rights and materials for the recombinant production of novel polyketides. Under the terms of the agreement, we paid a license issue fee to Stanford University, and we pay annual maintenance fees and patent fees, make milestone payments based on achievement of specified events with licensed products, pay royalties on net sales of products claimed in or originating from the licensed technology and pay a share of some sublicensing fees. In March 2000, we amended the agreement to provide us an exclusive option to acquire an exclusive or non-exclusive license to future patents or patent applications that are related to certain technology developed by one of our founders and directors, Chaitan S. Khosla, Ph.D., related to polyketides or their production, and chosen by Stanford University in its discretion. Under the March 2000 amendment, we paid an issue fee in preferred stock that was subsequently converted to common stock in our initial public offering, and we are obligated to pay an option fee and patent expenses for each patent or patent application included in our option rights. We are also obligated to pay Stanford University a license fee and an annual fee, as well as royalties on net sales and a share of some sublicensing fees under the original agreement, with respect to each patent or patent application for which we exercise our option. Effective September 2002, we received a consent from Stanford University to enter into a sublicense agreement with Roche and amended the research and license agreement to harmonize it with the collaboration agreement with Roche and effect certain other changes.

NIH/NCI

Under a November 2002 license agreement with the NIH, we obtained exclusive commercial rights under patent rights relating to the formulation of tanespimycin being studied by the NCI, alvespimycin and other geldanamycin analogs. Initially, our license was limited to specified medical fields of use, including the treatment of cancer, and the prevention of undesired cell growth or its deleterious effects, such as the prevention of restenosis and neurodegenerative diseases. In May 2005, we amended the license to include several additional fields of use. We paid the NIH an up-front fee and will owe annual minimum royalties, patent fees, royalties based on net sales of licensed products, milestone payments if clinical development milestones are reached and a portion of any sublicensing revenues. Our license could terminate if we are not diligent in developing licensed products or otherwise default in performing our material obligations under the agreement and fail to cure the deficiency. We may terminate the agreement on a country-by-country basis. The agreement contains standard NIH licensing terms. Unless the agreement is earlier terminated, our license will remain in effect for the life of the licensed patents. We developed our proprietary formulations of tanespimycin independently from the NIH.

Oregon State University

Under an April 2005 license agreement with Oregon State University, or OSU, we obtained an exclusive right to a patent and related intellectual property for synthesizing epothilones and epothilone analogs. Under the terms of the agreement, we paid a license issue fee to OSU, and we pay annual maintenance fees and patent fees, make milestone payments based on achievement of specified events with licensed products, pay royalties on net sales of products claimed in or originating from the licensed technology and pay a share of some sublicensing fees. Our license could terminate if we are not diligent in developing licensed products or otherwise default in performing our material obligations under the agreement and fail to cure the deficiency. Unless the agreement is earlier terminated, our license will remain in effect for the life of the licensed patents. In October 2007, we amended the license agreement

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because we entered into a settlement agreement with OSU and Sloan-Kettering setting forth the agreed upon procedure to conduct an interference hearing. This amendment confirms, as well as makes certain adjustments to, our financial obligations to OSU under our license agreement regardless of which party ultimately prevails in the interference.

Competition

The pharmaceutical and biotechnology industries are intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively engaged in research and development of drugs for the treatment of the same diseases and conditions as our current and potential future product candidates. Many of these companies have substantially greater financial and other resources, larger research and development staffs and more extensive marketing and manufacturing organizations than we do. In addition, some of them have considerable experience in preclinical testing, clinical trials and other regulatory approval procedures. There are also academic institutions, governmental agencies and other research organizations that are conducting research in areas in which we are working. They may also market commercial products, either on their own or through collaborative efforts.

We expect to encounter significant competition for any of the pharmaceutical products we develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their products before their competitors may achieve a significant competitive advantage. We are aware that many other companies or institutions are pursuing the development of drugs and technologies directly targeted at applications for which we are developing our drug compounds. Companies with competing Hsp90 inhibitors include Biogen Idec Inc., which has initiated Phase 1 and 2 clinical trials in solid tumors with its oral synthetic Hsp90 inhibitor; Infinity Pharmaceuticals, which has initiated a Phase 1/2 clinical trials of its intravenous Hsp90 inhibitor in gastrointestinal stromal tumors, and has an oral formulation in preclinical development in collaboration with MedImmune, Inc. (now a part of the AstraZeneca group of companies); Abraxis BioScience, Inc., which has an albumin-bound particle suspension formulation of 17-AAG in preclinical development; 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 initiated a Phase 1 clinical trial in late 2007; Serenex, Inc., which has initiated Phase 1 clinical trials for its oral Hsp90 inhibitor in solid and hematological tumors and has agreed to be acquired by Pfizer; and Synta Pharmaceuticals Corp., which initiated Phase 1 clinical trials for its Hsp90 inhibitor in melanoma, 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. 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 and Bristol-Myers Squibb Company is reported to be in numerous post-marketing clinical trials of ixabepilone. Gastrointestinal motility competitors include Chugai Pharmaceuticals, whose motilide agonist is reported to be in Phase 2 clinical trials.

Government Regulation

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, manufacture and marketing of pharmaceutical products. These agencies and other federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, distribution, post-marketing surveillance, advertising and promotion of our potential products.

The process required by the FDA before our products may be marketed in the United States generally involves the following:

• preclinical laboratory and animal tests;

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• submission of an IND, which must become effective before clinical trials may begin;

• adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use; and

• FDA approval of a New Drug Application, or NDA, or Biologics License Application, or BLA.

Satisfaction of FDA requirements or similar requirements of state, local and foreign regulatory agencies typically takes multiple years, and the actual time required may vary substantially based upon the type, complexity and novelty of the product or indication.

In the United States, prior to commencing clinical trials, which are typically conducted in three sequential phases, we must submit an IND application to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises concerns or questions about the conduct of the trial and places the trial on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our submission of an IND may not result in FDA authorization to commence a clinical trial. Outside of the United States, mechanisms to commence clinical trials vary, but often require submission of supporting information and prior health authority approval. Further, an independent institutional review board or ethics committee must review and approve the plan for the clinical trial before it commences.

The FDA (or foreign equivalent), an institutional review board, data safety monitoring board or the trial sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.

In an effort to obtain marketing authorization in the United States, the results of product development, preclinical studies and clinical trials are submitted to the FDA as part of an NDA or BLA. The FDA may deny an NDA or BLA if the applicable regulatory criteria are not satisfied, require additional clinical data or ultimately determine that the NDA or BLA does not satisfy the criteria for approval. After review of an NDA or BLA, the FDA can grant a normal marketing authorization, or full approval, or a marketing authorization under accelerated approval conditions. Under accelerated approval conditions, FDA may grant a marketing authorization for a new drug on the basis of adequate and well-controlled clinical trials establishing that the drug product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. Accelerated approval under this condition will require the applicant to study the drug further to verify and describe its clinical benefit.

Even if a product receives regulatory approval, the approval may be significantly limited to specific indications and dosages. Further, even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

Any products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including record-keeping requirements and reporting of adverse experiences with the drug. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with good manufacturing practices, which impose certain procedural and documentation requirements upon us and our third-party manufacturers.

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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.

Outside the United States, our ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary from country to country. At present, foreign marketing authorizations are applied for at a national level, although within the European Union, or EU, centralized registration procedures are available to companies seeking to market a product throughout the EU community. If the regulatory authority is satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted. These foreign regulatory approval processes involve all of the risks associated with FDA clearance and may be influenced by FDA actions with respect to a product candidate.

We are also subject to various federal, state and local laws and regulations relating to such matters as the use, handling and disposal of hazardous or potentially hazardous substances used in connection with our research, development and manufacturing operations. We believe that we are in compliance with these laws and regulations in all material respects.

Employees

As of February 29, 2008, we had 91 full-time employees, 34 of whom held Ph.D. degrees and 73 of whom were engaged in research and development activities. None of our employees is represented by a collective bargaining agreement, nor have we experienced any work stoppage.

Corporate Information

Kosan was incorporated under the laws of the state of California in January 1995 and commenced operations in 1996. In July 2000, we were reincorporated under the laws of the state of Delaware. We maintain a website at www.kosan.com; however, information found on, or that can be accessed through, our website is not incorporated by reference into this report.

Available Information

We file electronically with the U.S. Securities and Exchange Commission our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available on our website at www.kosan.com, free of charge, copies of these reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Further, copies of these reports are located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov.

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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 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 net losses since our inception, including a net loss of approximately $28.7 million for the year ended December 31, 2007. As of December 31, 2007, we had an accumulated deficit of approximately $189.0 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. We currently have no commitments from third parties for external funding of our product development efforts (other than limited clinical trial cost reimbursements from Roche) and absent any new partnering arrangements with third parties, we will be required to independently to fund any development and clinical trial activities that we may undertake.

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, 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. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Result of Operations.”

We believe that our existing cash and investments 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 the following:

• our ability to establish 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 potential future partners, if any;

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

• the costs of any drugs used in combination with our product candidates in our clinical trials;

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• any acceleration or expansion of our clinical development plans;

• our ability to maintain or extend our existing licensing arrangement 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.

We may raise additional financing through public or private equity offerings, debt financings, partnering or licensing arrangements, government grant awards or any combination of the foregoing or other arrangements. To the extent that 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, we would be required to relinquish some rights to our technologies, product candidates or marketing territories.

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, particularly 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, our collaboration arrangement with Roche for our epothilone program was terminated by Roche, effective in late February 2008, and our cooperative research and development agreements with the NCI with respect to the clinical development of tanespimycin and alvespimycin have also expired. 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 would likely limit the number of product candidates that we will be able to develop and commercialize and significantly increase our capital requirements and may reduce the likelihood of successful product introduction. We may also be required to further 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 partner our Hsp90 inhibitor program may be difficult because the composition of matter of patent for 17-AAG is in the public domain. Our novel formulation patent applications combined with method of treatment patent applications may not be sufficient to attract partners. In addition, there may be new information that may weaken the strength of the issued patent for 17-DMAG or alvespimycin. Our ability to start new research and development programs may also be materially harmed if we are unable to establish new partnering arrangements with third parties.

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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 obtained 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. We also have a license agreement with Pfizer pursuant to which Pfizer is responsible for development, regulatory and commercial activities related to our motilin agonist program, which may be terminated by Pfizer at any time for its convenience. If we do not maintain, extend or replace our license agreement with Pfizer, we may be required to seek new third parties to undertake motilin agonist development and commercialization or to undertake such efforts 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. Even 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 potential 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.

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 December 31, 2007, subject to certain conditions and restrictions. Kingsbridge will

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not be obligated to purchase shares under the CEFF unless certain conditions are met, which include a minimum price for our common stock (which condition, for example, would not have been met as of March 5, 2008 and will not be met unless the volume weighted average market price of our common stock is at least $2.00), 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. In the past, we have experienced turnover among our management, including the resignations in 2007 of our former General Counsel and former Chief Medical Officer, and the recently-announced resignation of our former Chief Executive Officer. We may have difficulty attracting and retaining required personnel as a result of our management turnover, our need for additional financing and the associated perceived risk of expense reductions, or for other reasons. 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 pursue potential partnering arrangements and develop our product candidates and research programs, which would likely have an adverse effect on our business.

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Our only product candidates currently in clinical development are tanespimycin, our first-generation Hsp90 inhibitor product candidate, and KOS-1584, our epothilone anticancer product candidate. Substantial additional effort and expense will be necessary for further clinical development of tanespimycin and KOS-1584 and there can be assurance that our clinical trials will show that tanespimycin, KOS-1584 or our potential future product candidates are safe and effective treatments.

Our only product candidates currently in clinical development are tanespimycin and KOS-1584. Our motilin agonist program has been exclusively licensed to Pfizer, and our remaining potential product candidates are in preclinical development. We may not be able to develop product candidates, including tanespimycin and KOS-1584, that prove to be safe and effective, meet applicable regulatory standards, are capable of being manufactured at reasonable costs or can be marketed successfully. Tanespimycin, KOS-1584 and our potential future product candidates 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 or any other drugs used in combination with our product candidates for these studies.

Our product candidates 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 product candidates 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 product candidates. Further, we may incur significant development costs for one or more of our product candidates and subsequently discontinue the development of any of these product candidates as a result of clinical trial failures or other factors. For example, we recently ceased the development of alvespimycin, our former second-generation Hsp90 inhibitor product candidate, as a result of a reprioritization of our development portfolio and we do not expect to receive any return on our investment in that product candidate.

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 product candidates 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. We could experience failures in current or future clinical testing of our product candidates or determine to discontinue the development of any of our product candidates as a result of clinical trial failures or other factors.

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.

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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. 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 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 clinical trial.

Tanespimycin and KOS-1584 are 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 significant patient withdrawals.

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, 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.

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 governmental 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 we or our partners, if any, 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, Pfizer’s or our 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 3 clinical trial of tanespimycin in combination with Velcade

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in first-relapse patients with multiple myeloma and we plan to commence an additional supportive clinical trial in multiple myeloma in 2009, and, if the results are favorable, we believe that these clinical trials will support the filing of an 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. The 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 our clinical trials, and those third parties may not perform satisfactorily.

We do not have the ability to independently conduct all clinical trials for our product candidates, and we rely on third parties such as Pfizer with respect to KOS-2187, 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 our Phase 3 clinical trial for tanespimycin but rely on contract research organizations and testing laboratories to assist in the conduct of the trial. In 2007, we initiated a broad, multinational registration program for the treatment of multiple myeloma. The tanespimycin in myeloma evaluation, or TIME program, includes a Phase 3 clinical trial that we initiated in the first quarter of 2008 and an additional supportive clinical trial that we plan to commence in 2009. 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 includes a multinational clinical trial. 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 product 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 potential 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.

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

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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, if any, or us, including requiring withdrawal of the product from the market.

If we, Pfizer, potential future partners or any of our product candidates that become approved for marketing by a regulatory authority 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, if any;

• 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 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.

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Any patents that we or our potential future 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, 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’ pending patent applications will result in issued patents;

• any of our or our licensors’ 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 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 potential 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.

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,

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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 are the exclusive licensee to two patent rights claiming our epothilone product 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.

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, Pfizer 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.

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KOSAN BIOSCIENCES

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 Pfizer or potential future 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.

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

We currently use contract manufacturers to make and supply us with the tanespimycin active pharmaceutical ingredient. 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 maintain a limited inventory of tanespimycin 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,

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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. In addition, in our clinical trials for tanespimycin, tanespimycin is being evaluated in combination with another pharmaceutical compound. If any of the manufacturers of the drug compounds used in these combination therapy clinical trials are unable to continue to manufacture these drug compounds, or those manufacturers’ manufacturing or inventory facilities encounter delays, are destroyed or otherwise become unavailable, then the clinical development of tanespimycin, or submissions for its 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.

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.

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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 and 2 clinical trials in solid tumors with its oral synthetic Hsp90 inhibitor; Infinity Pharmaceuticals, which has initiated a Phase 1/2 clinical trials of its intravenous Hsp90 inhibitor in gastrointestinal stromal tumors, and has an oral formulation in preclinical development in collaboration with MedImmune, Inc. (now a part of the AstraZeneca group of companies); Abraxis BioScience, Inc., which has an albumin-bound particle suspension formulation of 17-AAG in preclinical development; 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 initiated a Phase 1 clinical trial in late 2007; Serenex, Inc., which has initiated Phase 1 clinical trials for its oral Hsp90 inhibitor in solid and hematological tumors and has agreed to be acquired by Pfizer; and Synta Pharmaceuticals Corp., which initiated Phase 1 clinical trials for its Hsp90 inhibitor in melanoma, 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. 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 and Bristol-Myers Squibb Company is reported to be in numerous post-marketing clinical trials of ixabepilone. Gastrointestinal motility competitors include Chugai Pharmaceuticals, whose motilide agonist is reported to be in Phase 2 clinical trials. 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 us and our current or potential future partners at a significant disadvantage and could prevent us from realizing significant commercial benefit from such compounds.

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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.

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, Pfizer and potential future partners develop our product candidates;

• our, Pfizer’s and potential future partners’ ability to design and successfully execute appropriate clinical trials;

• our, Pfizer’s and potential future partners’ ability to obtain regulatory approvals to market our product candidates and the timing and scope of any regulatory approvals;

• our, Pfizer’s and potential future 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 current or potential future 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.

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 January 1, 2007 through December 31, 2007, our common stock traded between $3.20 and $7.35 on the

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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;

• our ability to enter into new partnering arrangements on favorable terms, or at all;

• announcements of data from clinical trials 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 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 our current license agreements, or announcements that we have entered into new partnering, 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 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 partnering arrangements that we may establish;

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

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

• general and industry specific economic conditions, which may affect Pfizer’s and potential future 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 the failure to enter into new partnering arrangements or as a result of the expiration, termination or amendment of our current licensing agreements or other factors, we may not be able to reduce our operating expenses correspondingly. In addition, we expect operating expenses to continue to increase since, absent any new partnering arrangements with third parties, we will be required to independently to fund any development and clinical trial activities that we may undertake. 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 our internal control over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our internal control over financial reporting, our stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, on an annual basis, our management is required to report on, and our independent auditors to attest to, the effectiveness of our internal control 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, 2007, 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 control over financial reporting 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 control over financial reporting, investor confidence and our stock price could be adversely affected.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our facilities consist of research and office space located in Hayward, California. Our lease commitments expire in February 2013, although we have options to renew for an additional period of five years. We believe that our current facilities are adequate for our needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

KOSAN BIOSCIENCES

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity

Our common stock trades on the NASDAQ Global Market under the symbol “KOSN.” The following table shows the high and low sales prices per share of our common stock as reported on the NASDAQ Global Market for the periods indicated:

2007	High		Low		2006	High		Low
Fourth Quarter	$	6.29	$	3.20	Fourth Quarter	$	5.68	$	3.70
Third Quarter	$	6.40	$	4.00	Third Quarter	$	5.00	$	2.88
Second Quarter	$	6.58	$	4.83	Second Quarter	$	5.93	$	3.65
First Quarter	$	7.35	$	4.90	First Quarter	$	6.19	$	4.43

As of February 29, 2008, there were approximately 90 record holders of our common stock.

Dividend Policy

We have never declared or paid dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.

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Performance Graph⁽¹⁾

The following graph shows the total stockholder return of an investment of $100 in cash on December 31, 2002 through December 29, 2007, the last date of trading of the 2007 fiscal year, for (i) our common stock, (ii) the NASDAQ Stock Market (U.S.) Index and (iii) the NASDAQ Pharmaceutical Index. All values assume reinvestment of the full amount of all dividends.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS

PERFORMANCE GRAPH FOR

KOSAN BIOSCIENCES INCORPORATED

(1) This section is not “soliciting material,” is not deemed “filed” with the SEC 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 hereof and irrespective of any general incorporation language in any such filing.

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ITEM 6. SELECTED FINANCIAL DATA

The statement of operations data for each of the years ended December 31, 2007, 2006 and 2005, and the balance sheet data as of December 31, 2007 and 2006, have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. We have derived the statement of operations data for the years ended December 31, 2004 and 2003, and the balance sheet data as of December 31, 2005, 2004 and 2003 from our audited financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of results to be expected for any future period. The data presented below have been derived from financial statements that have been prepared in accordance with accounting principles generally accepted in the United States and should be read with our financial statements, including the notes, and with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

(in thousands, except per share data)
	Year Ended December 31,
	2007			2006 (2)			2005			2004			2003
STATEMENT OF OPERATIONS DATA:
Contract revenue	$	22,707		$	13,105		$	11,916		$	20,493		$	28,482
Grant revenue		—			401			1,494			2,399			2,907
Total revenues		22,707			13,506			13,410			22,892			31,389
Operating expenses (1):
Research and development		47,283			37,179			38,400			40,175			36,789
General and administrative		8,162			7,823			6,038			5,934			5,137
Total operating expenses		55,445			45,002			44,438			46,109			41,926
Loss from operations		(32,738	)		(31,496	)		(31,028	)		(23,217	)		(10,537	)
Interest and other income, net		4,080			2,027			1,391			1,091			869
Net loss	$	(28,658	)	$	(29,469	)	$	(29,637	)	$	(22,126	)	$	(9,668	)
Basic and diluted net loss per common share	$	(0.69	)	$	(0.88	)	$	(1.01	)	$	(0.77	)	$	(0.38	)
Shares used in computing basic and diluted net loss per common share		41,685			33,394			29,227			28,913			25,567
(1) Includes non-cash charges for stock-based compensation as follows:
Research and development	$	1,698		$	1,419		$	224		$	594		$	695
General and administrative		1,493			1,046			131			163			232
	$	3,191		$	2,465		$	355		$	757		$	927

(2) Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) or SFAS 123R, “Share-Based Payment,” using the modified prospective transition method and therefore have not restated prior periods’ results. See Note 3 to the financial statements.

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(in thousands, except per share data)
	Year Ended December 31,
	2007			2006			2005			2004			2003
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments	$	70,008		$	63,138		$	54,177		$	67,560		$	81,459
Working capital		54,222			42,262			44,458			60,276			75,773
Restricted cash		949			949			949			949			904
Long-term investments		—			—			—			14,884			22,936
Total assets		77,867			71,187			65,997			96,613			123,189
Deferred revenue, current portion		3,268			13,992			3,277			3,277			5,625
Deferred revenue, less current portion		—			5,599			8,876			12,153			15,234
Equipment loans, less current portion		699			899			1,785			2,283			2,701
Accumulated deficit		(188,964	)		(160,306	)		(130,837	)		(101,200	)		(79,074	)
Stockholders’ equity		59,560			41,754			41,106			69,186			89,452

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read with “Selected Financial Data” and our financial statements and notes included elsewhere in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this Annual Report on Form 10-K should be read as applying to all related forward-looking statements wherever they appear in this Annual Report on Form 10-K. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in Item 1A. “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

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

Hsp90 Inhibitors

Tanespimycin

Our proprietary injectable suspension formulation of tanespimycin, or KOS-953 (also known as 17-AAG), is in a Phase 3 clinical trial in combination with Velcade^® (bortezomib) for multiple myeloma, as well as a Phase 2 clinical trial in combination with Herceptin^® (trastuzumab) for HER2-positive metastatic breast cancer. Our Tanespimycin in Myeloma Evaluation, or TIME, clinical program includes TIME-1, a Phase 3 pivotal clinical trial of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, which has been initiated. We also plan to conduct a second clinical trial in multiple myeloma to support the pivotal TIME-1 clinical trial with additional safety and efficacy data. We plan to initiate the supporting clinical trial in early 2009 and anticipate that the clinical trial can be completed within the timeframe of TIME-1. The TIME program is utilizing our tanespimycin injectable suspension formulation that replaced the prior Cremophor-based formulation. In addition to multiple myeloma, we intend to advance tanespimycin in metastatic breast cancer. We anticipate presenting updated data with the injectable suspension formulation of tanespimycin from our Phase 2 clinical trial of tanespimycin in combination with Herceptin in patients with HER2-positive metastatic breast cancer in the first half of 2008. We expect to conduct enabling studies evaluating tanespimycin as monotherapy and in combination with other agents such as Taxol^® (paclitaxel), Xeloda^® (capecitabine^®) and/or Herceptin^® beginning in late 2008 or early 2009.

Alvespimycin

Alvespimycin, or KOS-1022 (also known as 17-DMAG), is a highly-potent, water-soluble and orally-active Hsp90 inhibitor. We have evaluated both intravenous and oral formulations of alvespimycin in clinical trials. In February 2008, we terminated development of alvespimycin in order to focus our resources on the development of tanespimycin.

Epothilones

KOS-1584. KOS-1584 is our lead epothilone anticancer product candidate being evaluated in dose-escalating Phase 1 clinical trials in patients with solid tumors. KOS-1584 has demonstrated antitumor activity and favorable tolerability in Phase 1 clinical trials in patients with solid tumors, including non-small cell lung, ovarian and pancreatic cancers. We intend to initiate in the first quarter of 2008 a Phase 2 clinical trial of KOS-1584 in non-small cell lung cancer patients who have received one prior chemotherapy regimen. Kosan may conduct additional Phase 2 trials of KOS-1584.

Our epothilone program was partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd., or collectively Roche, through a global development and commercialization agreement. Our agreement with Roche was terminated in its entirety effective late in February 2008. Following the termination of the agreement, the rights licensed to Roche

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reverted to us, and in connection with the termination, Roche provided 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 continued until the termination date in late February 2008, after which Roche is obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials.

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 is conducting Phase 1 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 December 31, 2007, our accumulated deficit was approximately $189.0 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 investment securities 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, and we expect that additional financing will be required in order to fund our operations.

Critical Accounting Policies and Estimates

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.

We believe the following critical accounting policies and estimates, which have been reviewed by our Audit Committee, affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery of the services, supplies or technology license has occurred; (iii) the price is fixed and determinable; and (iv) collectibility is reasonably assured. We recognize license and other up-front fees pursuant to research and development collaboration agreements over our estimated period of continuing involvement with the 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.

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Contract revenues related to collaborative 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 collaboration project and the related research and development expenses incurred or as other deliverables under the contracts are fulfilled.

In the first quarter of 2007, upon the decision to advance KOS-1584 into Phase 2 clinical trials, we determined that the estimated clinical development period of our agreement with Roche extended from 2009 to 2012. The change in this estimate as of March 1, 2007, resulted in a further deferral of the unrecognized portion of the Roche up-front fee. On October 25, 2007, we received notice from Roche that it is terminating our agreement in its entirety, which termination was effective in late February 2008. The termination of our agreement resulted in an acceleration of the unrecognized portion of the Roche up-front fee to 2008. The net effect of these changes resulted in increased revenue of approximately $2.3 million in 2007. We expect that we will recognize the remaining portion of the Roche up-front fee of approximately $3.3 million in the first quarter of 2008.

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 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.

Stock-Based Compensation

Effective January 1, 2006, we adopted the fair value expense recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) or “SFAS 123R”, “Share-Based Payment”, using the modified prospective transition method and therefore we did not restate prior periods’ results. Under this transition method, stock-based compensation expense beginning January 1, 2006 included compensation expense 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 provisions of SFAS 123. Stock-based compensation expense for all stock-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. We recognize 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.

We use the Black-Scholes model to value stock-based compensation expense. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected term is based on the simplified method allowed under the provisions of Staff Accounting Bulletin No. 107. The risk-free interest rate is based on the U.S. Treasury zero coupon issues with an equivalent remaining term at the time of the option grant. Expected volatility is based on the historical volatility of our stock price and other factors. The assumptions used to value stock-based compensation to employees are subject to periodic adjustment. As such, changes to these assumptions in the future could be substantial.

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Stock-based compensation expense for options granted to non-employees has been determined in accordance with SFAS 123 and Emerging Issues Task Force 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 stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. As such, changes to these future period measurements could be substantial should we experience significant changes in our stock price.

Impairment of Investments

We carry our investments of debt securities at fair value, estimated as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. In 2007, the credit markets began reacting to these changing factors and the prices of many securities backed by subprime mortgages began to decline. Lower volumes of transactions in certain types of collateralized securities might make it more difficult to obtain relevant market information to estimate the fair value of these financial instruments. However, we do not hold any mortgage-backed securities, auction rate securities or other securities where credit risk have increased significantly in the current markets. In accordance with our investment policy, we diversify our credit risk and invest in debt securities with high credit quality. Substantially all of our investments held as of December 31, 2007 are actively traded and our estimate of fair value is based upon quoted market prices. We will continue to monitor our credit risks and evaluate the potential need for impairment charges related to credit risks in future periods. We recognize 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. We consider various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to 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 our intent and ability to hold the marketable security for a period of time sufficient to allow for any anticipated recovery in market value. We do not believe any unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of these dates. We have the intention and ability to hold such securities until the maturity dates, which are all currently within one year. For the years ended December 31, 2007, 2006 and 2005, we did not recognize an impairment charge related to our investment securities.

Concentration of Risk

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, investments and restricted cash. Substantially all of our cash, cash equivalents and restricted cash are held by two financial institutions that we believe are of high credit quality. Such deposits may, at times, exceed federally insured limits. We have not experienced any losses on our deposits of cash, cash equivalents and restricted cash. Our investments are held in high-credit quality government sponsored enterprise and corporate obligations. We believe that our guidelines for investment of our excess cash maintain safety and liquidity through diversification and investment maturity. We are exposed to credit risk in the event of default by the institutions holding our cash, cash equivalents, investments and restricted cash to the extent of the amounts recorded on our balance sheets.

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Results of Operations

Revenues

(in thousands except percentages)
	Year Ended December 31,						Annual Percent Change
	2007		2006		2005		2007/2006		2006/2005
Contract revenue	$	22,707	$	13,105	$	11,916	73	%	10	%
Grant revenue		—		401		1,494	(100	)%	(73	)%
Total revenues	$	22,707	$	13,506	$	13,410	68	%	1	%

Revenues for the years ended December 31, 2007, 2006 and 2005 were approximately $22.7 million, $13.5 million and $13.4 million, respectively, of which $2.0 million was related to a non-recurring milestone earned in 2006. Revenues in 2007 and 2006 consisted primarily of contract revenue recognized under our agreements with Roche and Pfizer. Revenues in 2005 consisted primarily of contract revenue recognized under our agreement with Roche and funded research related to government grant awards.

The increase in revenues of approximately 68%, or $9.2 million, in 2007 compared to 2006 was the result of the following:

• approximately $8.9 million in increased contract revenue from Pfizer, reflecting the amortization of the $12.5 million up-front payment received in December 2006;

• approximately $0.7 million in increased contract revenue from Roche, reflecting an acceleration of the unrecognized portion of our up-front fee and higher funding for our KOS-1584 program, partially offset by the $2.0 million non-recurring milestone and a decrease in KOS-862 development activities due to the conclusion of certain clinical trials; offset by

• approximately $0.4 million in decreased grant revenue.

The increase in revenues of approximately 1%, or $0.1 million, in 2006 compared to 2005 was the result of the following:

• approximately $1.8 million in contract revenue from Pfizer, reflecting the amortization of the $12.5 million up-front payment received in December 2006; and

• approximately $0.6 million in lower contract revenue from Roche, reflecting a decrease in KOS-862 development activities due to the conclusion of certain clinical trials, partially offset by the $2.0 million non-recurring milestone; offset by

• approximately $1.1 million in decreased grant revenue due to fewer grant awards in 2006.

On October 25, 2007, we received notice from Roche that it was terminating our agreement in its entirety, which termination was effective in late February 2008. The termination of our agreement resulted in an acceleration of the unrecognized portion of the up-front fee. Roche’s development funding commitments under the agreement continued until the termination date, after which Roche is obligated to reimburse us for certain costs of completing the KOS-1584 Phase 1 clinical trials. Accordingly, we expect that we will recognize the remaining portion of the Roche up-front fee of approximately $3.3 million in the first quarter of 2008 and that our contract revenues from Roche will significantly decrease in 2008 compared to 2007 as a result of the termination of our agreement. 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.

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Research and Development Expenses

For the years ended December 31, 2007, 2006 and 2005, our research and development expenses were approximately $47.3 million, $37.2 million, and $38.4 million, respectively. Our research and development activities 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. We group these activities into two major categories: “clinical development” and “research and preclinical.” We are unable to estimate the nature, timing or costs to complete our major 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 are fully discussed in this Annual Report under Part I, Item 1A. “Risk Factors.”

The costs associated with clinical development and research and preclinical activities approximated the following:

(In thousands, except for percentages)
	Year Ended December 31,						Annual Percent Change				Inception – December 31, 2007
	2007		2006		2005		2007/2006		2006/2005
Clinical development
Epothilones	$	8,303	$	7,627	$	11,170	9	%	(32	)%	$	65,471
Hsp90 inhibitors		26,694		16,680		9,616	60	%	73	%		58,448
Total clinical development		34,997		24,307		20,786	44	%	17	%		123,919
Research and preclinical (1)		12,286		12,872		17,614	(5	)%	(27	)%		163,418
Total research and development	$	47,283	$	37,179	$	38,400	27	%	(3	)%	$	287,337

(1) “Research and preclinical” constitutes research and development costs for our early stage programs in the areas of cancer, gastrointestinal motility and technology development in 2007, 2006 and 2005 and infectious disease in 2005. Expenses for the years ended December 31, 2007, 2006, and 2005 include allocated personnel-related expenses of approximately $4.8 million, $6.1 million and $8.2 million, allocated facility-related expenses of approximately $3.3 million, $3.9 million and $5.5 million and allocated lab consumables of approximately $0.5 million, $0.5 million and $1.2 million, respectively. Expenses for the period from inception through December 31, 2007 include allocated personnel-related expenses of approximately $79.4 million, allocated facility-related expense of approximately $40.6 million and allocated lab consumables of approximately $10.8 million.

The increase of 27%, or approximately $10.1 million, in research and development expenses for the year ended December 31, 2007 compared to 2006 was primarily due to the following:

• an increase of approximately $10.7 million in clinical development, 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 and preparation for the KOS-1584 phase 2 clinical program, which preparation was funded by Roche; offset by

• a decrease of approximately $0.6 million in preclinical and research costs primarily related to reorganization related expenses and a reduction in investment in certain early-stage research programs in 2006, partially offset by costs associated with the development our next generation epothilone, KOS-1803.

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The decrease of 3%, or approximately $1.2 million, in research and development expenses for the year ended December 31, 2006 compared to 2005 was primarily due to the following, including the recognition of stock-based compensation expense due to the implementation of SFAS 123R:

• approximately $4.7 million decrease in preclinical and research costs primarily related to reduced investment in certain non-oncology, early-stage research programs; offset by

• an increase of approximately $3.5 million in clinical development primarily due to the advancement of our clinical product candidates in the Hsp90 inhibitor program.

We allocate salary-driven and space-use-driven overhead expenses to research and development and to general and administrative expenses based on salaries and utilization by each respective area. Our research and development employees increased to 76 employees in 2007 from 62 in 2006, primarily in support of our clinical development programs. We initiated TIME-1, a Phase 3 pivotal clinical trial of tanespimycin in combination with Velcade in first-relapse patients with multiple myeloma, and plan to initiate a supporting clinical trial in multiple myeloma in early 2009. We also expect to initiate our Phase 2 clinical program with KOS-1584 in non-small cell lung cancer in the first quarter of 2008. These clinical trials will result in an increase in our research and development expenses over the next several quarters.

Phase 1 clinical trials generally are expected to last between 12 and 18 months, Phase 2 clinical trials are expected to last between 18 and 24 months and Phase 3 clinical trials are expected to last between 24 and 42 months. The length of clinical development depends on the specific disease and patient population. For product candidates that are in preclinical development, the timing of an IND filing varies significantly and is difficult to predict and therefore not reflected in the table above.

General and Administrative Expenses

For the years ended December 31, 2007, 2006 and 2005, general and administrative expenses were approximately $8.2 million, $7.8 million and $6.0 million, respectively.

(in thousands, except percentages)
	Year Ended December 31,						Annual Percent Change
	2007		2006		2005		2007/2006		2006/2005
General and administrative	$	8,162	$	7,823	$	6,038	4	%	30	%

The increase of 4%, or approximately $0.3 million, in general and administrative expenses in 2007 compared to 2006 was primarily due to increased personnel costs to support our increasing development activities. The increase of 30%, or approximately $1.8 million, in general and administrative expenses in 2006 compared to 2005 was primarily due to severance related payments in 2006 to a former officer and the recognition of stock-based compensation expense due to the implementation of SFAS 123R. Our general and administrative employees increased to 18 in 2007 from 17 in 2006, primarily to support our increasing development activities. We expect our general and administrative expenses to increase in the first quarter of 2008 due to payments associated with the resignation of our former Chief Executive Officer in February 2008.

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Interest Income and Interest Expense

(in thousands except percentages)
	Year Ended December 31,									Annual Percent Change
	2007			2006			2005			2007/2006		2006/2005
Interest income	$	4,283		$	2,549		$	1,711		68	%	49	%
Interest expense		(230	)		(522	)		(320	)	(56	)%	63	%
Gain on sale of property and equipment		27			—			—		100	%	—
Other income, net	$	4,080		$	2,027		$	1,391		101	%	46	%

Interest Income. Interest income increased to approximately $4.3 million in 2007 from approximately $2.5 million in 2006. We received approximately $42.3 million in net proceeds from the sale of our common stock in February 2007. The increase in interest income in 2007 compared to 2006 primarily resulted from higher average investment balances in 2007 compared to 2006. Interest income increased to approximately $2.5 million in 2006 from approximately $1.7 million in 2005. We received approximately $24.0 million in net proceeds from the sale of our common stock in April 2006. The increase in interest income in 2006 compared to 2005 primarily resulted from higher returns in a rising interest rate environment, partially offset by lower average investment balances in 2006 compared to 2005.

Interest Expense. Interest expense decreased to approximately $0.2 million in 2007 from approximately $0.5 million in 2006. Interest expense increased to $0.5 million in 2006 from approximately $0.3 million in 2005. The changes from year-to-year primarily resulted from fees associated with our Silicon Valley Bank line of credit facility, which expired in May 2006.

Provision for Income Taxes

We incurred net operating losses in the years ended December 31, 2007, 2006 and 2005 and consequently did not pay federal or state income taxes. As of December 31, 2007, we had approximately $148.2 million of federal and $138.0 million of state net operating loss carryforwards available to offset future taxable income. The federal net operating loss carryforwards will expire at various dates beginning in the year 2010 through 2027, if not utilized. The state net operating loss carryforwards will expire at various dates from 2012 through 2017, if not utilized. At December 31, 2007, we also had federal and state research and development tax credit carryforwards of approximately $5.4 million and $4.9 million, respectively, and federal orphan drug credit carryforwards of approximately $6.2 million. The federal tax credit carryforwards will begin to expire in 2011, if not utilized. The state tax credit carryforwards do not expire. Use of the net operating losses and credits may be subject to a substantial annual limitation due to the change in ownership provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. See Note 10 of our financial statements.

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 December 31, 2007, we had received approximately $221.5 million from the sales of equity securities, approximately $131.9 million from contract payments received under our corporate collaboration and license agreements and government grant awards, approximately $22.7 million from interest income and approximately $14.9 million from equipment financing arrangements. As of December 31, 2007, we had approximately $71.0 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 sponsored enterprise and corporate obligations.

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Cash used in operating activities was approximately $34.7 million in 2007, compared to approximately $16.4 million in 2006. Our net loss of approximately $28.7 million in 2007 was partially offset by non-cash expenses of approximately $4.7 million related to stock-based compensation, depreciation and amortization of property and equipment and investment premiums and discounts, and an approximately $10.8 million decrease in assets and liabilities primarily due to the net effect of deferred revenue from the up-front fees from Pfizer and Roche. Our net loss of approximately $29.5 million in 2006 was partially offset by non-cash expenses of approximately $4.6 million related to stock-based compensation, depreciation and amortization of property and equipment and investment premiums and discounts, and an approximately $8.5 million increase in assets and liabilities primarily due to the net effect of deferred revenue from the up-front fees from Pfizer and Roche. We do not anticipate generating cash from operating activities at least for the next several years.

Cash used in investing activities, excluding changes in our restricted cash and investments, for the year ended December 31, 2007 was approximately $1.7 million, compared to approximately $1.1 million in 2006. Investing activities in 2007 and 2006 primarily reflected the purchase of additional laboratory and office equipment.

Cash provided by financing activities was approximately $42.6 million for the year ended December 31, 2007, compared to approximately $26.0 million in 2006. Financing activities in 2007 included approximately $43.3 million in net proceeds from the sale of our common stock, stock option exercises and stock purchases made under our 2000 Employee Stock Purchase Plan and approximately $0.7 million of equipment debt financing, offset by approximately $1.3 million of scheduled payments on equipment loans. Financing activities in 2006 included approximately $27.5 million in net proceeds from the sale of our common stock, stock option exercises and stock purchases made under our 2000 Employee Stock Purchase Plan and approximately $0.5 million of equipment debt financing, offset by approximately $1.9 million of scheduled payments on equipment loans.

On July 19, 2006, we entered into a Committed Equity Financing Facility, or CEFF, with Kingsbridge, pursuant to which Kingsbridge committed to purchase up to $50.0 million of our common stock, subject to certain conditions including a minimum price for our common stock (which condition will not be met unless the volume weighted average market price of our common stock is at least $2.00). The CEFF allows us to raise capital as required, at the time and in the amounts deemed suitable to us, through September 25, 2009. We are not obligated to sell any of the $50.0 million of common stock available under the CEFF, and there are no minimum commitments or minimum use penalties. Under the terms of the CEFF, the maximum number of shares that we may sell to Kingsbridge is 6,879,868 shares (exclusive of the shares underlying a warrant), which may limit the amount of proceeds that we are able to obtain from the CEFF. In connection with the CEFF, we issued a warrant to Kingsbridge to purchase 285,000 shares of our common stock at an exercise price of $4.94 per share. The warrant is currently exercisable and expires in 2011. In October 2006, we received $3.0 million in gross proceeds for the sale of 770,351 shares of our common stock to Kingsbridge.

We believe that our existing cash and investment securities 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, and we expect that additional financing will be required in order to fund our operations. Our future capital uses and requirements depend on numerous forward-looking factors, including those set forth in Part I, Item 1A. “Risk Factors.”

In addition, we review from time to time potential opportunities to expand our technologies or add to our portfolio of product 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 in order to fund our operations. We expect to finance future cash needs through public or private equity offerings, debt financings, additional partnering 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 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, including a minimum price for our common stock (which condition will not be met unless the volume weighted average market price of our common stock is at least $2.00).

We have no current commitments to offer and sell any securities that may be offered or sold pursuant to the registration statements described above. To the extent that 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, we would be required to relinquish some rights to our technologies, product candidates or marketing territories. 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. In addition, see Part I, Item 1A. “Risk Factors.”

As of December 31, 2007, our obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows:

(in thousands)
	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		4-5 Years		After 5 Years
Equipment financing obligations	$	1,695	$	941	$	715	$	39	$	—
Operating leases		11,319		1,988		4,303		4,630		398
Total contractual obligations	$	13,014	$	2,929	$	5,018	$	4,669	$	398

Off-Balance Sheet Arrangements

As of December 31, 2007, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

44

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary objective of our investment activities is to preserve our capital for the purpose of funding our operations while at the same time maximizing 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 value of 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, which may include 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 December 31, 2007 and 2006 rates, the fair value of our portfolio on those dates would decline by approximately $20,000 and $0.1 million, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The reports of our Independent Registered Public Accounting Firm, Financial Statements and Notes to Financial Statements begin on page F-1 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of December 31, 2007, our principal executive officer and chief financial officer have concluded that our 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.

Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Under the supervision and with the participation of our management, including our principal executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become

45

KOSAN BIOSCIENCES

inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our evaluation under the framework in Internal Controls – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

Ernst & Young LLP, an independent registered public accounting firm, has issued an unqualified opinion on the effectiveness of our internal control over financial reporting, as stated in their report included below.

46

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Kosan Biosciences Incorporated

We have audited Kosan Biosciences Incorporated’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Kosan Biosciences Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Kosan Biosciences Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying balance sheets of Kosan Biosciences Incorporated as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 13, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

San Francisco, California

March 13, 2008

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KOSAN BIOSCIENCES

Changes in Internal Controls over Financial Reporting. There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. Our management, including our principal 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 our 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 principal 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.

ITEM 9B. OTHER INFORMATION

None.

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PART III

KOSAN BIOSCIENCES

Certain information required by Part III is omitted from this Annual Report on Form 10-K since we intend to file our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “2008 Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included in the Proxy Statement is incorporated herein by reference.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

(1) The information required by this Item concerning our directors and nominees for director, including information with respect to our audit committee and audit committee financial experts, may be found under the section entitled “Proposal 1 – Election of Directors” appearing in the 2008 Proxy Statement. Such information is incorporated herein by reference.

(2) The information required by this Item concerning our executive officers may be found under the section entitled “Executive Officers” appearing in the 2008 Proxy Statement. Such information is incorporated herein by reference.

(3) The information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 may be found in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” appearing in the 2008 Proxy Statement. Such information is incorporated herein by reference.

(4) We have adopted a Code of Business Conduct and Ethics that applies to our employees, officers and directors. We have posted the text of our Code of Business Conduct and Ethics on our website at www.kosan.com on the “Corporate Governance” page under the “Investors/Press” tab. In addition, we intend to promptly disclose (1) the nature of any amendment to our Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our Code of Business Conduct and Ethics that is granted to one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future.

ITEM 11. EXECUTIVE COMPENSATION

(1) The information required by this Item concerning director and executive compensation is incorporated herein by reference to the information from the 2008 Proxy Statement under the sections entitled “Executive Compensation” and “Director Compensation.”

(2) The information required by this Item concerning Compensation Committee interlocks and insider participation is incorporated herein by reference to the information from the 2008 Proxy Statement under the section entitled “Compensation Committee Interlocks and Insider Participation.”

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KOSAN BIOSCIENCES

(3) The information required by this Item concerning our Compensation Committee’s review and discussion of the Compensation Discussion and Analysis section of the 2008 Proxy Statement is incorporated herein by reference to the information from the 2008 Proxy Statement under the section entitled “Compensation Committee Report.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

(1) The information required by this Item with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the information from the 2008 Proxy Statement under the section entitled “Security Ownership of Certain Beneficial Owners and Management.”

(2) The following table summarizes the securities for issuance under our equity compensation plans as of December 31, 2007, including our 1996 Stock Option Plan, 2000 Non-Employee Director Stock Option Plan, 2000 Employee Stock Purchase Plan and 2006 Equity Incentive Plan:

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted Average Exercise Price of Outstanding Options, Warrants and Rights (b)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans(1) (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	5,049,480	$	6.83	3,496,299
Equity compensation plans not approved by security holders	—		—	—
Total	5,049,480	$	6.83	3,496,299

(1) As of December 31, 2007, 159,500 shares of common stock remained available for future issuance under our 2000 Non-Employee Director Stock Option Plan and 3,244,173 shares of common stock remained available for future issuance under our 2006 Equity Incentive Plan. In addition, as of December 31, 2007, 92,626 shares of common stock remained available for future issuance under our 2000 Employee Stock Purchase Plan and 30,716 shares were subject to outstanding purchase rights under our 2000 Employee Stock Purchase Plan. The number of shares reserved for issuance under our 2000 Employee Stock Purchase Plan automatically increases on January 1 of each year equal to the lesser of (i) 150,000 shares, (ii) 0.75% of the outstanding shares on such date, or (iii) a lesser amount determined by our board of directors.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

(1) The information required by this Item concerning related party transactions is incorporated herein by reference to the information from the 2008 Proxy Statement under the section entitled “Certain Relationships and Related Party Transactions.”

(2) The information required by this Item concerning director independence is incorporated herein by reference to the information from the 2008 Proxy Statement under the section entitled “Proposal 1 – Election of Directors – Independence of the Board of Directors.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the information from the 2008 Proxy Statement under the section entitled “Proposal 2 – Ratification of Selection of Independent Registered Public Accounting Firm.”

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PART IV

KOSAN BIOSCIENCES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) The following documents are filed or incorporated by reference as part of this Annual Report on Form 10-K:

(1) Financial Statements:

Report of Independent Registered Public Accounting Firm

Balance Sheets—December 31, 2007 and 2006

Statements of Operations—Years Ended December 31, 2007, 2006, and 2005

Statement of Changes in Stockholders’ Equity—Years Ended December 31, 2007, 2006 and 2005

Statements of Cash Flows—Years Ended December 31, 2007, 2006 and 2005

Notes to Financial Statements

(2) Financial Statement Schedules:

All financial statement schedules are omitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.

(3) Exhibits:

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of Registrant. (1)
3.2	Amended and Restated Bylaws of Registrant. (2)
4.1	Specimen Registrant’s 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)
10.1	Form of Indemnification Agreement entered into by Registrant with each of its directors and executive officers.
10.2	Form of Level I Change of Control and Severance Benefit Agreement. (6)*
10.3	Form of Level II Change of Control and Severance Benefit Agreement. (6)*
10.4	1996 Stock Option Plan, as amended. (3)*
10.5	2000 Employee Stock Purchase Plan and related agreements. (3)*
10.6	2000 Non-Employee Director Stock Option Plan and related agreements, as amended. (7)*
10.7	2006 Equity Incentive Plan. (8)*
10.8	Form of Stock Option Grant Notice and Stock Option Agreement under the 2006 Equity Incentive Plan. (8)*

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KOSAN BIOSCIENCES

Exhibit No.	Description
10.9	Non-Employee Director Compensation Arrangements, effective as of July 2006. (9)*
10.10	2007 Compensation Information for Executive Officers.*
10.11	Summary of 2007 Executive Officer Cash Bonus Plan. (10)*
10.12†	Research and License Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated August 25, 2000. (3)
10.13†	Consent and Amendment to the License Agreement, effective as of September 16, 2002, by and between Registrant and The Sloan-Kettering Institute for Cancer Research. (11)
10.14†	Settlement Agreement, entered into September 19, 2003, by and between Registrant and The Sloan-Kettering Institute for Cancer Research. (12)
10.15†	Letter Agreement between Registrant and The Sloan-Kettering Institute for Cancer Research, dated May 4, 2006. (7)
10.16†	License Agreement between Registrant and The Board of Trustees of The Leland Stanford Junior University, dated March 11, 1996. (3)
10.17†	Amendment No. 1 to License Agreement with the Board of Trustees of The Leland Stanford Junior University, dated March 1996; Letter to Mona Wan to confirm the agreement between Registrant and the Board of Trustees of The Leland Stanford Junior University, dated September 21, 1998; and Amendment No. 3 to License Agreement, dated March 10, 2000. (3)
10.18†	Consent and Amendment to the License Agreement, effective as of September 16, 2002, by and between Registrant and Stanford University. (11)
10.19†	License Agreement between Registrant and President and Fellows of Harvard College, dated December 2, 1998. (3)
10.20	Employment Agreement between Registrant and Robert G. Johnson, Jr., dated September 5, 2000. (3)*
10.21	Rights Agreement, dated as of October 5, 2001, between Registrant and Mellon Investor Services, LLC. (4)
10.22	Lease Agreement, dated as of June 7, 2002, by and between EOP-Industrial Portfolio, L.L.C. and Registrant. (13)
10.23	Landlord Consent to Assignment and Assumption of Lease, dated as of June 20, 2002, by and among EOP-Industrial Portfolio, L.L.C., Aventis Pharmaceuticals, Inc. and Registrant. (13)
10.24†	Collaborative Research, Development and Commercialization Agreement, dated as of September 19, 2002, by and among Registrant, Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (11)
10.25	Amendment to Collaborative Research, Development and Commercialization Agreement, effective July 1, 2004, by and among Registrant, Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd. (14)
10.26†	Letter agreement among Registrant, Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd. dated March 27, 2006. (15)

52

Exhibit No.	Description
10.27	Loan and Security Agreement between the Registrant and Silicon Valley Bank dated July 15, 2005. (16)
10.28	First Amendment to Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of February 21, 2006. (6)
10.29	Employment Agreement between Registrant and Peiter Timmermans, Ph.D. dated December 6, 2004. (6)*
10.30	Employment Agreement between Registrant and Margaret A. Horn dated December 1, 2005. (17)*
10.31	Consulting Agreement between Registrant and Susan M. Kanaya dated January 1, 2006. (6)*
10.32	Separation and Consulting Agreement between Registrant and Daniel V. Santi, M.D., Ph.D. dated March 20, 2006. (15)*
10.33	Common Stock Purchase Agreement between Registrant and Kingsbridge Capital Limited, dated July 19, 2006. (5)
10.34	Amendment No. 1 to Common Stock Purchase Agreement between Registrant and Kingsbridge Capital Limited, dated January 24, 2007. (21)
10.35	Scientific Advisory Board Agreement between Registrant and Chaitan S. Khosla, Ph.D., dated July 19, 2006. (18)*
10.36	Employment Agreement between Registrant and Gary S. Titus dated August 7, 2006. (19)*
10.37	Employment Agreement between Registrant and Robert L. De Jager, M.D., F.A.C.P. dated October 24, 2006. (20)*
10.38†	Exclusive License Agreement between Registrant and Pfizer Inc. dated December 19, 2006. (21)
10.39†	Consulting Agreement, dated August 24, 2007, by and between the Registrant and Margaret A. Horn. (22)
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. (22)
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. (22)
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. (22)
10.43	2008 Compensation Information for Executive Officers.*
10.44	Summary of 2008 Executive Officer Cash Bonus Plan. (23)*
10.45	Employment Agreement between Registrant and Helen S. Kim dated December 5, 2007.*
10.46	Employment Agreement between Registrant and Jonathan Wright dated October 29, 2007.*

53

KOSAN BIOSCIENCES

Exhibit No.	Description
10.47‡	Form of Executive Employee Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2006 Equity Incentive Plan.*
10.48	Form of Non-Executive Employee Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the 2006 Equity Incentive Plan.*
10.49	Severance Benefits and Consulting Agreement, effective as of August 8, 2007, by and between the Registrant and Robert L. De Jager, M.D., F.A.C.P.*
10.50	Non-Employee Director Compensation Arrangements, effective as of January 1, 2008.*
10.51	Employment Agreement between Registrant and Peter J. Licari, Ph.D., dated July 10, 1998.*
23.1	Consent of Independent Registered Public Accounting Firm.
24.1	Power of Attorney (included in signature page hereto).
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 Chief Financial Officer of Kosan Biosciences Incorporated, as required by Rule 13a-14(b) or 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350). (24)

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

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

(6) Incorporated herein by reference to an exhibit of our Annual Report on Form 10-K for the period ended December 31, 2005.

(7) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2006.

(8) Incorporated herein by reference to an exhibit of our current report on Form 8-K filed on June 1, 2006.

(9) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2006.

(10) Incorporated herein by reference to an exhibit of our current report on Form 8-K filed on December 22, 2006.

(11) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2002.

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

(13) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2002.

54

(14) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2004.

(15) Incorporated herein by reference to an exhibit of our quarterly report on Form 10-Q for the period ended March 31, 2006.

(16) Incorporated by reference to an exhibit of our quarterly report on Form 10-Q for the period ended June 30, 2005.

(17) Incorporated by reference to an exhibit of our current report on Form 8-K filed on December 7, 2005.

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

(19) Incorporated by reference to an exhibit of our current report on Form 8-K filed on August 15, 2006.

(20) Incorporated by reference to an exhibit of our current report on Form 8-K filed on October 26, 2006.

(21) Incorporated herein by reference to an exhibit of our Annual Report on Form 10-K for the period ended December 31, 2007.

(22) Incorporated by reference to an exhibit of our quarterly report on Form 10-Q for the period ended September 30, 2007.

(23) Incorporated by reference to an exhibit of our current report on Form 8-K filed on January 29, 2008.

(24) This certification accompanies this Annual Report on Form 10-K and shall not be deemed “filed” by Registrant for purposes of Section 18 of the Exchange Act.

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

‡ 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.

* Represents a management or director compensation plan.

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KOSAN BIOSCIENCES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
March 14, 2008	By:	/s/ Helen Kim
		Helen S. Kim
		President and Chief Business Officer

POWER OF ATTORNEY

KNOW TO ALL PERSONS BY THESE PRESENTS, that the persons whose signatures appear below each severally constitutes and appoints Helen S. Kim and Gary S. Titus or either of them, his or her true and lawful attorneys-in-fact and agents, with full powers of substitution and re-substitution, for him or her and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto the attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that the attorneys-in-fact and agents, or either of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Helen Kim Helen S. Kim	President and Chief Business Officer (Principal Executive Officer)	March 14, 2008
/s/ Gary S. Titus Gary S. Titus	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 14, 2008
/s/ Peter Davis, Ph.D. Peter Davis, Ph.D.	Chairman	March 14, 2008
/s/ Bruce A. Chabner, M.D. Bruce A. Chabner, M.D.	Director	March 14, 2008
/s/ Kevan E. Clemens, Ph. D. Kevan E. Clemens, Ph. D.	Director	March 14, 2008
/s/ Jean Deleage, Ph.D. Jean Deleage, Ph.D.	Director	March 14, 2008
/s/ Charles J. Homcy, M.D. Charles J. Homcy, M.D.	Director	March 14, 2008
/s/ Chaitan S. Khosla, Ph.D. Chaitan S. Khosla, Ph.D.	Director	March 14, 2008
/s/ Christopher T. Walsh, Ph.D. Christopher T. Walsh, Ph.D.	Director	March 14, 2008

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INDEX TO FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets—December 31, 2007 and 2006	F-3
Statements of Operations—Years ended December 31, 2007, 2006 and 2005	F-4
Statements of Stockholders’ Equity—Years ended December 31, 2007, 2006 and 2005	F-5
Statements of Cash Flows—Years ended December 31, 2007, 2006 and 2005	F-6
Notes to Financial Statements	F-7

F-1

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Kosan Biosciences Incorporated

We have audited the accompanying balance sheets of Kosan Biosciences Incorporated as of December 31, 2007 and 2006, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of Kosan Biosciences Incorporated’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kosan Biosciences Incorporated at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the Notes to Financial Statements, under the heading Organization and Summary of Significant Accounting Policies – Stock-Based Compensation, in 2006 Kosan Biosciences Incorporated changed its method of accounting for employee stock-based compensation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Kosan Biosciences Incorporated’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2008 expressed an unqualified opinion thereon.

/S/ ERNST & YOUNG LLP

San Francisco, California

March 13, 2008

F-2

Kosan Biosciences Incorporated

BALANCE SHEETS

(in thousands, except share and per share data)

	December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	46,950		$	35,655
Short-term investments		23,058			27,483
Accounts receivable		1,301			1,152
Prepaid and other current assets		521			907
Total current assets		71,830			65,197
Restricted cash		949			949
Property and equipment, net		4,848			4,801
Other assets		240			240
Total assets	$	77,867		$	71,187
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,840		$	1,323
Accrued liabilities		10,656			6,331
Current portion of deferred revenue		3,268			13,992
Current portion of equipment loans		844			1,289
Total current liabilities		17,608			22,935
Deferred revenue, less current portion		—			5,599
Equipment loans, less current portion		699			899
Commitments
Stockholders’ equity:
Convertible preferred stock, $0.001 par value, 10,000,000 shares authorized, 1,000,000 shares designated as Series A junior preferred stock, no shares issued and outstanding at December 31, 2007 and 2006		—			—
Common stock, $0.001 par value, 100,000,000 shares authorized 42,592,302 and 35,389,717 shares issued and outstanding at December 31, 2007 and 2006, respectively		43			35
Additional paid-in capital		248,452			202,016
Accumulated other comprehensive income		29			9
Accumulated deficit		(188,964	)		(160,306	)
Total stockholders’ equity		59,560			41,754
Total liabilities and stockholders’ equity	$	77,867		$	71,187

See accompanying notes.

F-3

Kosan Biosciences Incorporated

STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended December 31,
	2007			2006			2005
Revenues:
Contract revenue	$	22,707		$	13,105		$	11,916
Grant revenue		—			401			1,494
Total revenues		22,707			13,506			13,410
Operating expenses:
Research and development (including charges for stock-based compensation of $1,698, $1,419 and $224 for the years ended December 31, 2007, 2006 and 2005, respectively)		47,283			37,179			38,400
General and administrative (including charges for stock-based compensation of $1,493, $1,046 and $131 for the years ended December 31, 2007, 2006 and 2005, respectively)		8,162			7,823			6,038
Total operating expenses		55,445			45,002			44,438
Loss from operations		(32,738	)		(31,496	)		(31,028	)
Interest income		4,283			2,549			1,711
Interest expense		(230	)		(522	)		(320	)
Gain from sale of property and equipment		27			—			—
Net loss	$	(28,658	)	$	(29,469	)	$	(29,637	)
Basic and diluted net loss per common share	$	(0.69	)	$	(0.88	)	$	(1.01	)
Shares used in computing basic and diluted net loss per common share		41,685			33,394			29,227

See accompanying notes.

F-4

Kosan Biosciences Incorporated

STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except shares)

	Convertible Preferred Stock			Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss/(Income)			Total Accumulated Deficit			Stockholders’ Equity
	Shares	Amount		Shares	Amount
BALANCES AT DECEMBER 31, 2004	—	$	—	29,096,333	$	29	$	170,735		$	(378	)	$	(101,200	)	$	69,186
Issuance of common stock upon exercise of options for cash	—		—	80,400		—		320			—			—			320
Issuance of common stock under employee stock purchase plan	—		—	194,869		—		673			—			—			673
Stock-based compensation	—		—	—		—		355			—			—			355
Comprehensive income (loss):
Net loss	—		—	—		—		—			—			(29,637	)		(29,637	)
Change in unrealized gain on available-for-sale securities, net	—		—	—		—		—			209			—			209
Comprehensive loss																	(29,428	)
BALANCES AT DECEMBER 31, 2005	—	$	—	29,371,602	$	29	$	172,083		$	(169	)	$	(130,837	)	$	41,106
Issuance of common stock in a direct offering, net of offering costs of $1,520	—		—	5,100,000		5		23,975			—			—			23,980
Issuance of common stock upon exercise of options for cash	—		—	59,994		—		222			—			—			222
Issuance of common stock under employee stock purchase plan	—		—	87,770		—		379			—			—			379
Issuance of common stock in connection with committed equity financing facility, net of issuance costs of $107	—		—	770,351		1		2,892			—			—			2,893
Financing cost of warrant issued in connection with committed equity financing facility	—		—	—		—		(629	)		—			—			(629	)
Issuance of warrant in connection with committed equity financing facility	—		—	—		—		629			—			—			629
Stock-based compensation	—		—	—		—		2,465			—			—			2,465
Comprehensive income (loss):
Net loss	—		—	—		—		—			—			(29,469	)		(29,469	)
Change in unrealized gain on available-for-sale securities, net	—		—	—		—		—			178			—			178
Comprehensive loss																	(29,291	)
BALANCES AT DECEMBER 31, 2006	—	$	—	35,389,717	$	35	$	202,016		$	9		$	(160,306	)	$	41,754
Issuance of common stock in a direct offering, net of offering and shelf registration costs of $3,240	—		—	7,000,000		7		42,253			—			—			42,260
Issuance of common stock upon exercise of options for cash	—		—	81,308		—		487			—			—			487
Issuance of common stock under employee stock purchase plan	—		—	121,277		1		505			—			—			506
Stock-based compensation	—		—	—		—		3,191			—			—			3,191
Comprehensive income (loss):
Net loss	—		—	—		—		—			—			(28,658	)		(28,658	)
Change in unrealized gain on available-for-sale securities, net	—		—	—		—		—			20			—			20
Comprehensive loss																	(28,638	)
BALANCES AT DECEMBER 31, 2007	—	$	—	42,592,302	$	43	$	248,452		$	29		$	(188,964	)	$	59,560

See accompanying notes.

F-5

Kosan Biosciences Incorporated

STATEMENTS OF CASH FLOWS

(in thousands)

	Year Ended December 31,
	2007			2006			2005
OPERATING ACTIVITIES
Net loss	$	(28,658	)	$	(29,469	)	$	(29,637	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,246			2,326			2,532
Amortization of investment premiums and discounts		(688	)		(224	)		610
Stock-based compensation expense		3,191			2,465			355
Gain on sale of property and equipment		(27	)		—			—
Changes in assets and liabilities:
Accounts and other receivables		(149	)		2,167			711
Prepaid and other current assets		386			285			68
Other assets and notes receivable from related parties		—			59			55
Accounts payable and accrued liabilities		5,305			(1,445	)		1,301
Deferred revenue		(16,323	)		7,438			(3,277	)
Net cash used in operating activities		(34,717	)		(16,398	)		(27,282	)
INVESTING ACTIVITIES
Acquisition of property and equipment		(1,839	)		(1,066	)		(1,434	)
Proceeds from sale of property and equipment		110			—			—
Purchase of investments and restricted cash		(64,103	)		(39,004	)		(28,287	)
Proceeds from maturity of investments and restricted cash		69,236			47,350			61,126
Net cash provided by investing activities		3,404			7,280			31,405
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs		43,253			27,474			993
Proceeds from equipment loans		678			458			2,005
Principal payments under equipment loans		(1,323	)		(1,909	)		(2,148	)
Net cash provided by financing activities		42,608			26,023			850
Net increase in cash and cash equivalents		11,295			16,905			4,973
Cash and cash equivalents at beginning of period		35,655			18,750			13,777
Cash and cash equivalents at end of period	$	46,950		$	35,655		$	18,750
SUPPLEMENTAL DISCLOSURE
Interest paid	$	230		$	522		$	320
NON-CASH FINANCING ACTIVITIES
Issuance of warrant in connection with committed equity financing facility	$	—		$	629		$	—

See accompanying notes.

F-6

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS

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. Kosan’s Hsp90 inhibitor product candidates may have the potential to overcome resistance after relapse and to synergize the initial activity of existing cancer therapies. Kosan’s Hsp90 inhibitor product candidates have demonstrated antitumor activity in multiple indications in early clinical trials. Kosan’s proprietary injectable suspension formulation of tanespimycin (KOS-953), its first-generation Hsp90 inhibitor and most advanced product candidate, is in a Phase 3 clinical trial in combination with Velcade^® (bortezomib) for multiple myeloma, as well as a Phase 2 clinical trial in combination with Herceptin^® (trastuzumab) for HER-2 positive metastatic breast cancer. In February 2008, the Kosan terminated the development of alvespimycin, which it had evaluated in clinical trials, in order to focus the Kosan’s resources on the development of tanespimycin.

Kosan is also developing KOS-1584 in Phase 1 dose-escalating clinical trials in patients with solid tumors. Epothilones inhibit cell division with a mechanism of action similar to taxanes, one of the most successful classes of anti-tumor agents. The epothilone program was partnered with Hoffmann-La Roche, Inc. and F. Hoffmann-La Roche Ltd. (collectively, “Roche”) through a global development and commercialization agreement. The agreement with Roche was terminated in its entirety effective in late February 2008.

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 all development, regulatory and commercial activities related to the motilin agonist program. Pfizer is conducting a Phase 1 clinical trial of KOS-2187 as a potential treatment for gastroesophageal reflux disease.

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 also based on the use of the Company’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.

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. All investment securities are classified as available-for-sale and are recorded at fair value based on

F-7

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

quoted market prices, with unrealized gains and losses excluded from earnings and reported in other comprehensive 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 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 and the severity to 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 each of the three years ended December 31, 2007, the Company did not recognize an impairment charge related to its investment securities.

Restricted Cash

The Company held a restricted investment consisting of a certificate of deposit of approximately $949,000 at December 31, 2007 and 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.

Concentration of Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments and restricted cash. Substantially all the Company’s cash, cash equivalents and restricted cash are held by two financial institutions that the Company believes are of high credit quality. Such deposits may, at times, exceed federally insured limits. The Company has not experienced any losses on its deposits of cash, cash equivalents and restricted cash. The Company’s investments are held in high-credit quality government sponsored enterprise and corporate obligations. The Company believes that its guidelines for investment of its excess cash maintain safety and liquidity through diversification and investment maturity. The Company is exposed to credit risk in the event of default by the institutions holding the cash, cash equivalents, investments and restricted cash to the extent of the amounts recorded on the balance sheets.

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 license 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 and determinable; and (iv) collectibility 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

F-8

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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, services performed by clinical research organizations and research institutions 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 protocols and 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, up-front fees received under such arrangements.

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

Net Loss Per Share

Basic and diluted net loss per common share have been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss 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.

The Company has excluded all convertible preferred stock and 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. The total number of outstanding stock options and warrants excluded from the calculations of diluted net loss per share, prior to application of the treasury stock method for options, was 5,334,480, 4,652,852, and 4,902,597 for the years ended December 31, 2007, 2006 and 2005, respectively. Such securities, had they been dilutive, would have been included in the computations of diluted net loss per share. See Notes 3 and 9 for further information on these securities.

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

F-9

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 common 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 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 stock-based compensation to non-employees is subject to periodic adjustment as the underlying securities vest. As such, changes to these measurements could be substantial should the Company experience significant changes in its stock price.

Comprehensive Loss

Comprehensive loss is comprised of net income and other comprehensive loss, which includes certain changes in equity that are excluded from net income. The Company includes unrealized gains and losses on available-for-sale securities in other comprehensive loss.

Income Taxes

Since inception, the Company has recognized income taxes under the liability method. Deferred income taxes are recognized for differences between the financial statement and tax basis of assets and liabilities at enacted statutory rates in effect for years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

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. 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 recognizes interest and penalties related to income taxes in income tax expense. See Note 10 for further information.

Segment Reporting

The Company has determined that it operates in only one segment. Accordingly, no segment disclosures have been included in the accompanying notes to the financial statements.

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, except that, with

F-10

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

respect to the nonfinancial assets and nonfinancial liabilities, the effective date is January 1, 2009. The Company is currently evaluating the impact of SFAS 157 on its financial statements.

In June 2007, the Emerging Issues Task Force (“EITF”) of the FASB 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.

In December 2007, the FASB ratified EITF No. 07-1, “Accounting for Collaborative Arrangements.” EITF 07-1 defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 also establishes the appropriate income statement presentation and classification guidance for joint operating activities and payments between participants, as well as the sufficiency of the disclosures related to these arrangements. EITF 07-1 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of EITF 07-1 on its financial statements.

In December 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 110, which permits entities, under certain circumstances, to continue to use the simplified method as the basis for estimating the expected term of plain vanilla share options as allowed under the provisions of SAB 107. Expected term is a valuation assumption used to determine stock-based compensation expense. The use of the simplified method was scheduled to expire on December 31, 2007. SAB 110 is effective beginning January 1, 2008. The Company currently uses the simplified method as prescribed by SAB 107 and the extension of this method under SAB 110 will have no impact on the Company’s financial statements.

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 provided, among other things, for the Company to receive payments for the reimbursement of agreed upon research and development expenditures. The Roche Agreement was terminated in its entirety effective in late February 2008. Following the termination of the agreement, the rights licensed to Roche reverted to the Company, and in connection with the termination, Roche provided the Company 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 continued until the termination date in late February 2008, after which Roche will be obligated to reimburse the Company for certain costs of completing the KOS-1584 Phase 1 clinical trials.

For the years ended December 31, 2007, 2006 and 2005, the Company recognized revenue related to the Roche Agreement of approximately $12.0 million, $11.3 million, and $11.9 million, respectively, representing approximately

F-11

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

2. RESEARCH AND DEVELOPMENT AGREEMENTS (Continued)

53%, 84%, and 89%, respectively, of total revenues, of which $2.0 million was related to a non-recurring milestone earned in 2006. 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 total Roche-related revenue for 2007, 2006 and 2005 was approximately $5.6 million, $3.3 million, and $3.3 million, respectively, related to the ratable portion of the $25.0 million up-front fee that is being recognized through the current 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 of its agreement with Roche extended from 2009 to 2012. The change in this estimate as of March 1, 2007, resulted in a further deferral of the unrecognized portion of the Roche up-front fee. On October 25, 2007, as a result of the termination of the Company’s agreement with Roche, the amortization of the unrecognized portion of the Roche up-front fee was accelerated to 2008. The net effect of these changes resulted in increased revenue of approximately $2.3 million in 2007. The Company expects that it will recognize the remaining portion of the Roche up-front fee of approximately $3.3 million in the first quarter of 2008. The Company’s research and development expenses do not reflect the costs incurred by Roche associated with the clinical trials it is conducting in connection with the Company’s epothilone program. At December 31, 2007 and 2006, approximately $1.3 million and $1.1 million, or 100% and 95%, respectively, of accounts receivable were due from Roche.

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 product 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 years ended December 31, 2007 and 2006, the Company recognized revenue of approximately $10.7 million and $1.8 million of contract revenue from Pfizer, representing approximately 47% and 13% of total revenues for fiscal year 2007 and 2006, respectively. Such amounts represent the ratable portion of the $12.5 million up-front fee that was recognized through the current estimated period of the Company’s participation in the development of KOS-2187.

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 $227,000, $578,000, and $428,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

3. STOCK-BASED COMPENSATION

At December 31, 2007, the Company had the following stock-based compensation plans:

2006 Equity Incentive Plan

The Company’s 2006 Equity Incentive Plan (the “2006 Plan”) provides for the granting of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights and other forms of equity compensation. The 2006 Plan also provides for the granting of performance stock awards and performance cash awards so that the Compensation Committee of the Company’s board of directors may use

F-12

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

performance criteria in establishing specific targets to be attained as a condition to the grant or vesting of one or more awards under the 2006 Plan. Incentive and nonstatutory stock options may be granted with exercise prices not less than fair value on the date of determination. The fair value of grants is determined by the closing sales price of the Company’s common stock as listed on an established stock exchange on the last market trading date preceding the date of grant. Stock options granted to a stockholder owning more than 10% of voting stock of the Company may be granted with an exercise price of not less than 110% of the fair value on the date of grant. Options expire no later than ten years from the date of the grant. The number of shares, terms and exercise periods are determined by the Company’s board of directors or its delegates. Options generally vest at 25% per year over a four-year period. Certain option awards are subject to accelerated vesting if there is a change in control.

1996 Stock Option Plan

The Company’s 1996 Stock Option Plan (the “1996 Plan”) provided for the granting of incentive stock options and nonstatutory stock options to employees, officers, directors and consultants of the Company. Incentive stock options were granted with exercise prices not less than fair value, and nonstatutory stock options were granted with exercise prices not less than 85% of the fair value on the date of grant. The fair value of grants was determined by the closing sales price of the Company’s common stock as listed on any established stock exchange for the last market trading day prior to the time of determination. Stock options granted to a stockholder owning more than 10% of voting stock of the Company were granted with an exercise price of not less than 110% of the fair value on the date of grant. Options expire no later than ten years from the date of the grant. The number of shares, terms and exercise period were determined by the Company’s board of directors or its delegates. Options generally vest at 25% per year over a four-year period. Certain option awards are subject to accelerated vesting if there is a change in control. The 1996 Plan expired in June 2006.

Shares subject to outstanding options under the 1996 Plan as of May 25, 2006 that expire or otherwise terminate without being exercised in full will be added to the share reserve under the 2006 Plan. The maximum number of shares of common stock authorized for issuance under the 1996 Plan and the 2006 Plan was 11,475,000 as of December 31, 2007.

2000 Employee Stock Purchase Plan

The Company’s 2000 Employee Stock Purchase Plan (the “Purchase Plan”) permits eligible employees to purchase common stock at a discount through payroll deductions during defined offering periods. The maximum number of shares authorized for issuance pursuant to the Purchase Plan was 900,000 as of December 31, 2007. The Purchase Plan provides for an annual increase of shares on January 1 of each year equal to the lesser of 150,000 shares, 0.75% of the outstanding shares on such date or such amount as determined by the Company’s board. The price at which the stock is purchased is equal to the lower of 85% of the fair market value of the common stock on the first day of the offering or 85% of the fair market value of the Company’s common stock on the purchase date. Each offering is for a six-month period. As of December 31, 2007, 807,374 shares were issued under the Purchase Plan.

2000 Non-Employee Director Stock Option Plan

The Company’s 2000 Non-Employee Director Stock Option Plan (the “Directors’ Plan”) provides for the granting of nonstatutory stock options to non-employee directors of the Company. The maximum number of shares of common stock authorized for issuance pursuant to the Directors’ Plan was 500,000 as of December 31, 2007. Under the Directors’ Plan, as amended, each non-employee director who becomes a director of the Company will be automatically granted a non-statutory stock option to purchase 20,000 shares of common stock on the date on which such person first becomes a director, and such option will vest over four years. Beginning with the 2002 Annual

F-13

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

Stockholders Meeting and each year thereafter, each non-employee director will automatically be granted, one day following each year’s annual meeting of stockholders, a non-statutory option to purchase 5,000 shares of common stock, which will vest one day before the annual meeting of stockholders subsequent to the date of grant. The exercise price of options under the Directors’ Plan will be equal to the fair market value of the common stock on the date of grant. The maximum term of the options granted under the Directors’ Plan is ten years. As of December 31, 2007, options to purchase 340,500 shares were granted under the Director’s Plan.

Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, as if the fair value method defined by SFAS 123 had been applied to its stock-based compensation. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated prior periods’ results. Under this transition method, stock-based compensation expense beginning January 1, 2006 included compensation expense 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 provisions of SFAS 123. Stock-based compensation expense for all share-based payment 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.

As a result of adopting SFAS 123R on January 1, 2006, the Company’s net loss for the year ended December 31, 2006 was approximately $2.1 million greater than if the Company had continued to account for stock-based compensation under APB 25. The impact on both basic and diluted earnings per share for the year ended December 31, 2006 was $0.06 per share. Due to the Company’s lack of earnings history, no income tax benefit or cash flow effect is recognized as any resulting deferred tax asset is fully offset by a valuation allowance.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data) had the Company applied the fair value recognition provisions under SFAS 123 for the year ended December 31, 2005:

Net loss as reported	$	(29,637	)
Plus: Stock-based employee compensation expense included in reported net loss		—
Less: Stock-based employee compensation expense determined under fair value based method for all awards		(2,312	)
Pro forma net loss	$	(31,949	)
Basic and diluted net loss per common share:
As reported	$	(1.01	)
Pro forma	$	(1.09	)

F-14

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

The Company uses the Black-Scholes model to value stock-based compensation expense. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The table below presents the valuation assumptions used to determine stock-based compensation expense under the provisions of SFAS 123R and SFAS 123 for each of the three years ended December 31, 2007. Expected term under SFAS 123R is based on the simplified method allowed under the provisions of SAB No. 107. The risk-free interest rate is based on the U.S. Treasury zero coupon issues with an equivalent remaining term at the time of the option grant. Expected volatility is based on the historical volatility of the Company’s stock price and other factors.

	Year Ended December 31,
	2007		2006		2005
Risk-free interest rate	3.9%-4.8	%	4.6%-5.0	%	4.0	%
Expected dividends	—		—		—
Expected term (in years)	6.25		6.25		4.0
Expected volatility	61%-66	%	65%-67	%	64	%

A summary of stock option activity as of December 31, 2007, and changes during the year then ended is presented below:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Instrinsic Value
	(in thousands)				(in years)	(in thousands)
Outstanding at January 1, 2007	4,368		$	7.16
Granted	1,167		$	5.42
Forfeited or expired	(405	)	$	6.53
Exercised	(81	)	$	5.99
Outstanding at December 31, 2007	5,049		$	6.83	5.57	$	300
Vested and expected to vest at December 31, 2007	4,504		$	6.97	5.53	$	285
Exercisable at December 31, 2007	3,351		$	7.53	4.49	$	247

The weighted-average grant-date fair value of options granted for the years ended December 31, 2007, 2006 and 2005 was $5.42, $2.73 and $2.41 per share, respectively. The total intrinsic value of options exercised for the years ended December 31, 2007, 2006 and 2005 was approximately $16,000, $107,000 and $295,000, respectively. The unamortized compensation expense related to unvested options as of December 31, 2007, excluding estimated forfeitures, was $2.9 million. The weighted-average period over which compensation expense related to these options is expected to be recognized is 1.5 years.

The Company recognized stock-based compensation of approximately $2.8 million, $2.1 million and $0 for the years ended December 31, 2007, 2006 and 2005, respectively.

F-15

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

3. STOCK-BASED COMPENSATION (Continued)

Non-Employee Stock-Based Compensation

As of December 31, 2007, the Company had issued consultant stock options totaling approximately 1.4 million shares with exercise prices ranging from $0.15 to $14.40 and terms up to ten years. Compensation related to the grants of stock options is recorded in accordance with SFAS 123 and EITF 96-18 using the Black-Scholes Model. The measurement of stock-based compensation to non-employees is subject to periodic adjustment as the underlying awards vest. The Company recognized non-employee stock-based compensation of approximately $0.4 million for each of the three years ended December 31, 2007, 2006 and 2005.

4. INVESTMENTS

The amortized cost and fair value of securities, with gross unrealized gains and losses, at December 31, were as follows (in thousands):

	2007									2006
	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
			Gains		Losses							Gains		Losses
Debt Securities:
Government Sponsored Enterprise notes	$	10,458	$	19		—		$	10,477	$	23,637	$	12	$	(3	)	$	23,646
Corporate bonds		12,574		8		(1	)		12,581		3,837		—		—			3,837
	$	23,032	$	27	$	(1	)	$	23,058	$	27,474	$	12	$	(3	)	$	27,483

At December 31, 2007, all available-for-sale securities had remaining contractual maturities of less than one year.

5. PROPERTY AND EQUIPMENT

Property and equipment at December 31, consisted of the following (in thousands):

	2007			2006
Lab equipment	$	12,959		$	11,499
Leasehold improvements		5,211			5,128
Computer equipment and software		2,268			2,211
Office furniture		537			517
		20,975			19,355
Less accumulated depreciation and amortization		(16,127	)		(14,554	)
	$	4,848		$	4,801

Depreciation and amortization expense was approximately $2.2 million, $2.3 million, and $2.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.

F-16

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

6. EQUIPMENT FINANCING

The Company financed certain equipment and facility improvements under debt obligations. The term of the debt obligations is 48 months. Interest rates are fixed at the time of the draw down, with rates ranging from 6.86% to 9.09%. Obligations under the loans are secured by the underlying assets financed. As of December 31, 2007, future minimum loan payments under these obligations were as follows (in thousands):

Year Ended December 31,
2008	$	941
2009		488
2010		227
2011		39
Total minimum debt payments		1,695
Less amount representing interest		(152	)
Present value of net minimum payments		1,543
Less current portion		(844	)
Long-term portion	$	699

7. FACILITY LEASES

The Company holds two non-cancelable operating leases, both of which expire in February 2013, with options to renew for an additional five years. Minimum annual rental commitments at December 31, 2007 were as follows (in thousands):

Year Ended December 31,
2008		1,988
2009		2,112
2010		2,191
2011		2,272
2012		2,358
Thereafter		398
Total minimum payments	$	11,319

Rent expense for operating leases was approximately $1.7 million for each of the three years ended December 31, 2007.

The Company holds a stand-by letter of credit for approximately $903,000 from a commercial bank as security for the Company’s obligation under one of its facility leases. The letter of credit is secured by a certificate of deposit in the amount of $949,000 held in an investment account that the Company must maintain for the term of the letter of credit. The investment account is classified as restricted cash on the balance sheet.

F-17

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

8. ACCRUED LIABILITIES

Accrued liabilities at December 31, consisted of the following (in thousands):

	2007		2006
Research and development-related	$	7,775	$	3,538
Compensation-related		1,639		1,564
Professional services		632		486
Facilities-related		514		508
Other		96		235
	$	10,656	$	6,331

9. STOCKHOLDERS’ EQUITY

Common Stock Offering

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.

Committed Equity Financing Facility

In July 2006, the Company entered into a Committed Equity Financing Facility (“CEFF”) with Kingsbridge Capital Limited (“Kingsbridge”) which entitles the Company to sell and obligates Kingsbridge to purchase, subject to certain conditions, up to $50.0 million of the Company’s common stock. The CEFF allows the Company to raise capital as required, at the time and in the amounts deemed suitable to the Company, during the three-year period following September 25, 2006, the date of effectiveness of the registration statement filed by the Company with the Securities and Exchange Commission covering the resale of the shares of the Company’s common stock issuable in connection with the CEFF and the shares of common stock underlying the warrant discussed below. The Company can draw down on the CEFF in tranches of up to a maximum of 2.0% of the Company’s market capitalization at the time of draw down, or $10.0 million, whichever is less, subject to certain conditions. The purchase price of these shares will be between 90% and 94% of the volume weighted average price of the Company’s common stock for each of the eight trading days following the election to sell shares. Kingsbridge is not obligated to purchase shares at prices below $2.00 per share or at a price below 85% of the closing share price of the Company’s stock on the trading day immediately preceding the commencement of the draw down. The Company is 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 the Company delivers a blackout notice in certain circumstances, or if the resale registration statement is not effective in circumstances not permitted by the agreement, then the Company 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.

In connection with the CEFF, the Company issued a warrant to Kingsbridge to purchase 285,000 shares of the Company’s common stock at an exercise price of $4.94 per share. The warrant is exercisable beginning six months after the date of grant and for a period of five years thereafter. The fair value of the warrant was valued on the date of issuance under the Black-Scholes method using the following assumptions: contractual life of 5.5 years, risk free

F-18

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

9. STOCKHOLDERS’ EQUITY (Continued)

interest rate of 4.84%, volatility of 66% and no dividends. The fair value of the warrant was $629,000 and was recorded as a contra-equity amount in additional paid-in-capital. As of December 31, 2007, a warrant to purchase 285,000 shares was outstanding.

The Company is not obligated to sell any of the $50.0 million of common stock available under the CEFF, and there are no minimum commitments or minimum use penalties. Under the terms of the CEFF, the maximum number of shares the Company may sell to Kingsbridge is 6,879,868 shares (exclusive of the shares underlying the warrant), which may limit the amount of proceeds the Company is able to obtain from the CEFF. The CEFF does not contain any restrictions on the Company’s operating activities, automatic pricing resets or minimum market volume restrictions.

In October 2006, the Company received proceeds of $3.0 million, before expenses of approximately $0.1 million relating to the execution of the CEFF in July 2006 and the sale of 770,351 shares of common stock to Kingsbridge in October 2006.

Stockholder Rights Plan

In October 2001, the board of directors of the Company adopted a Stockholder Rights Plan (the “Rights Plan”) under which all stockholders received rights (the “Rights”) to purchase shares of a new series of Preferred Stock. 1,000,000 shares of Junior A Preferred Stock were authorized in conjunction with the Series A Junior Participating Preferred Stock under certain circumstances at an exercise price of $70.00 per adoption of the Rights Plan. Each Right entitles the holder to purchase one one-hundredth of a share of a Series A Junior Participating Preferred Stock under certain circumstances at an exercise price of $70.00 per one-one hundredth of a share. The Rights were distributed as a non-taxable dividend and expire on October 29, 2011. At the time of the adoption, the Rights were neither exercisable nor traded separately from the common stock. However, subject to certain exceptions, the Rights will become exercisable at such time that a person (or group of affiliated persons) acquires beneficial ownership of 20% or more of the outstanding Company common stock (an “Acquiring Person”) or on the tenth business day after a person or entity commences, or expresses an intention to commence, a tender or exchange offer that would result in such person acquiring 20% or more of the outstanding Company common stock.

In the event a person becomes an Acquiring Person, each Right held by all persons other than the Acquiring Person will become the right to acquire one share of Company common stock at a price equal to 50% of the then-current market value of the Company common stock. Furthermore, in the event an Acquiring Person effects a merger of the Company, each Right will entitle the holder thereof to purchase one share of common stock of the Acquiring Person or the Acquiring Person’s ultimate parent at a price equal to 50% of the then-current market value of the Acquiring Person’s or the Acquiring Person’s ultimate parent’s common stock.

The board of directors can redeem the Rights at any time prior to a person becoming an Acquiring Person at a redemption price of $0.001 per Right. In addition, the board of directors may, after any time a person becomes an Acquiring Person, exchange each Right for one share of common stock of the Company. As of December 31, 2007, no shares had been issued under the Rights Plan.

10. INCOME TAXES

As of December 31, 2007, the Company had approximately $148.2 million of federal and $138.0 million of state net operating loss carryforwards available to offset future taxable income. The federal net operating loss carryforwards will expire at various dates beginning in the year 2010 through 2027, if not utilized. The state net operating loss

F-19

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

10. INCOME TAXES (Continued)

carryforwards will expire at various dates from 2012 through 2017, if not utilized. At December 31, 2007, the Company also had federal and state research and development tax credit carryforwards of approximately $5.4 million and $4.9 million, respectively, and federal orphan drug credit carryforwards of approximately $6.2 million. The federal tax credit carryforwards will begin to expire in 2011, if not utilized. The state tax credit carryforwards do not expire.

Utilization of the federal net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting and the amount used for income tax purposes. Significant components of the Company’s deferred tax assets for federal income taxes as of December 31 were as follows (in thousands):

	2007			2006
Deferred tax assets:
Net operating loss carryforwards	$	58,670		$	43,700
Deferred revenue		1,310			7,830
Depreciable assets		1,550			1,210
Research and development and orphan drug credits		7,420			5,330
Capitalized research and development expenses		760			1,050
Other		3,260			1,370
Total deferred tax assets		72,970			60,490
Valuation allowance		(72,970	)		(60,490	)
Net deferred taxes	$	—		$	—

Based on the available evidence, management of the Company believes it is more likely than not that the net deferred tax assets will not be realized. Accordingly, the Company has provided a full valuation allowance against its deferred tax assets for all periods presented. The valuation allowance increased by $12.5 million and $13.6 million during the years ended December 31, 2007 and 2006, respectively.

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. 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.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

Balance at January 1, 2007	$	5,460
Additions based on tax positions related to the current year		2,790
Additions for tax positions related to prior years		—
Reductions for tax positions related to prior years		—
Balance at December 31, 2007	$	8,250

F-20

Kosan Biosciences Incorporated

NOTES TO FINANCIAL STATEMENTS (Continued)

10. INCOME TAXES (Continued)

In the event that any unrecognized tax benefits are recognized, the effective tax rate will be affected. Approximately $7.4 million of unrecognized tax benefit would impact the effective tax rate if recognized. The Company’s policy is to classify interest accrued or penalties related to unrecognized tax benefits as a component of income tax expense. No such interest or penalties have been recorded to date.

All tax years remain open to examination by the major taxing jurisdictions to which the Company is subject. The Company does not anticipate significant changes to its uncertain tax positions through the next twelve months.

11. RESTRUCTURING CHARGE

In March 2006, the Company implemented and completed a corporate restructuring, reflecting a realignment of research priorities and corporate operations to support its clinical product candidates and pipeline opportunities. As a result, the Company reduced its workforce by 39 positions, from 119 to 80 full-time employees, primarily in research and general and administrative. The reduction in workforce resulted in a one-time severance-related charge of approximately $0.6 million, all of which was recognized and paid in 2006.

12. QUARTERLY INFORMATION (Unaudited)

The Company’s quarterly results were as follows (in thousands, except per share amounts):

	Quarter Ended												Total
	March 31,			June 30,			September 30,			December 31,
2007
Revenue	$	12,918		$	2,206		$	1,947		$	5,636		$	22,707
Income/(Loss) from operations		1,777			(11,938	)		(12,203	)		(10,374	)		(32,738	)
Net Income/(Loss)		2,744			(10,788	)		(11,133	)		(9,481	)		(28,658	)
Basic and diluted earnings per common share	$	0.07		$	(0.25	)	$	(0.26	)	$	(0.22	)	$	(0.69	)
2006
Revenue	$	2,961		$	2,666		$	2,169		$	5,710		$	13,506
Loss from operations		(10,948	)		(7,176	)		(8,175	)		(5,197	)		(31,496	)
Net loss		(10,581	)		(6,789	)		(7,540	)		(4,559	)		(29,469	)
Basic and diluted earnings per common share	$	(0.36	)	$	(0.20	)	$	(0.22	)	$	(0.13	)	$	(0.88	)

F-21

EX-10.1

Exhibit 10.1

KOSAN BIOSCIENCES INCORPORATED

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (“Agreement”) is made as of             by and between Kosan Biosciences Incorporated, a Delaware corporation (which, together with the California corporation which was its predecessor, is known herein as the “Company”), and             (“Indemnitee”).

WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors’ and officers’ liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance;

WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the coverage of liability insurance has been limited;

WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and

WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.

NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:

1. Indemnification.

(a)     Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee

1

reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith, (ii) Indemnitee did not act in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or (iii) with respect to any criminal action or proceeding, Indemnitee had no reasonable cause to believe that Indemnitee’s conduct was unlawful.

(b)     Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee’s duty to the Company and its stockholders unless and only to the extent that the court in which such action or suit is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses and then only to the extent that the court shall determine.

2.     Agreement to Serve. In consideration of the protection afforded by this Agreement, if Indemnitee is a director of the Company, he agrees to serve at least for the balance of the current term as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the Company not serving under an employment contract, he agrees to serve in such capacity at least for the balance of the current fiscal year of the Company and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to continue to serve in such capacity at the will of the Company (or under separate agreement, if such agreement exists) so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing. Nothing contained in this Agreement is intended to or shall create in Indemnitee any right to continued employment.

2

3. Expenses; Indemnification Procedure.

(a)     Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such expenses advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company.

(b)     Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

(c)     Procedure. Any indemnification provided for in Section 1 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter submit his claim to arbitration as described in Section 14 to recover the unpaid amount of the claim and, subject to Section 15 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such claim. It shall be a defense to any such action (other than a claim brought for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists or an arbitration panel as described in Section 14. It is the parties’ intention that if the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court or arbitration panel to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the

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Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.

(d)     Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Subsection 3(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(e)     Selection of Counsel. In the event the Company shall be obligated under Subsection 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel (other than the counsel retained by the Company) subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his own counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company.

4. Additional Indemnification Rights; Nonexclusivity.

(a)     Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee’s rights and Company’s obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its Board of Directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

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(b)     Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action or other covered proceeding.

5.     Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines, penalties or amounts paid in settlement actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.

6.     Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.

7.     Directors’ and Officers’ Liability Insurance. The Company shall, from time to time, make a good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors’ and officers’ liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if Indemnitee is a director; or of the Company’s officers, if Indemnitee is not a director of the Company but is an officer; or of the Company’s key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company.

8.     Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement

5

shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

9.     Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:

(a)     Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be indemnified under the Delaware General Corporation Law; or

(b)     Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such claim; or

(c)     Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction or the arbitration panel determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or

(d)     Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors’ and officers’ liability insurance maintained by the Company; or

(e)     Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute.

10.   Effectiveness of Agreement. To the extent that the indemnification permitted under the terms of certain provisions of this Agreement exceeds the scope of the indemnification provided for in the Delaware General Corporation Law, such provisions shall not be effective unless and until the Company’s Certificate of Incorporation authorizes such additional rights of indemnification. In all other respects, the balance of this Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred

6

prior to such date if Indemnitee was an officer, director, employee or other agent of the Company or any subsidiary of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred.

11. Construction of Certain Phrases.

(a)     For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

(b)     For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries.

12.   Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.

13.   Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee’s estate, heirs, legal representatives and assigns.

14.   Arbitration. It is understood and agreed that the Company and Indemnitee shall carry out this Agreement in the spirit of mutual cooperation and good faith and that any differences, disputes or controversies shall be resolved and settled amicably among the parties hereto. In the event that the dispute, controversy or difference is not so settled in the above manner within forty-five (45) days, then the matter shall be exclusively submitted to arbitration in Alameda County, California before three independent technically qualified arbitrators in accordance with the Commercial Arbitration Rules of the American Arbitration Association and under the laws of Delaware, without reference to conflict of laws principles. Subject to Sections 1(b) and 6, arbitration shall be the exclusive forum and the decision and award by the arbitrator(s) shall be final and binding upon the parties concerned and may be entered in any state court of California having jurisdiction.

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15.   Attorneys’ Fees. In the event that any action is instituted or claim is submitted to arbitration by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action or arbitration, unless as a part of such action, a court of competent jurisdiction or the arbitrator(s) determines that each of the material assertions made by Indemnitee as a basis for such claim were not made in good faith or were frivolous. In the event of an action instituted or a claim submitted to arbitration by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court and arbitration costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action or claim (including with respect to Indemnitee’s counterclaims and cross-claims made in such action or arbitration), unless as a part of such action the court or the arbitrator(s) determines that each of Indemnitee’s material defenses to such action or claim were made in bad faith or were frivolous.

16.   Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

17.   Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California in Alameda County and that any arbitration proceeding which arises out of or relates to this Agreement shall be held in Alameda County, California.

18.   Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents entered into and performed entirely within Delaware.

19.   Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.

20.   Continuation of Indemnification. All agreements and obligations of the Company contained herein shall continue during the period that Indemnitee is a director, officer or agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein.

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21.   Amendment and Termination. Subject to Section 20, no amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto.

22.   Integration and Entire Agreement. This Agreement (a) sets forth the entire understanding between the parties relating to the subject matter hereof, (b) supersedes all previous written or oral negotiations, commitments, understandings and agreements relating to the subject matter hereof and (c) merges all prior and contemporaneous discussions between the parties relating to the subject matter hereof.

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

KOSAN BIOSCIENCES INCORPORATED
By:
Name:
Title:
Address:	3832 Bay Center Place
	Hayward, CA 94545

AGREED TO AND ACCEPTED:

INDEMNITEE:

Signature

Name

Address

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EX-10.10

Exhibit 10.10

2007 COMPENSATION INFORMATION FOR EXECUTIVE OFFICERS

The table below provides certain information regarding (i) the annual base salaries as of January 1, 2007 (except as noted) of the current and former executive officers of Kosan Biosciences Incorporated (the “Company”) listed below; (ii) the cash bonuses awarded to the current and former executive officers of the Company listed below under the Company’s 2007 Executive Officer Cash Bonus Plan (the “Bonus Plan”); and (iii) the number of shares of the Company’s common stock subject to stock options granted in January 2007 (except as noted) to the current and former executive officers of the Company listed below:

Executive Officer	2007 Annual Base Salary ($)	Cash Bonus Award ($)	Number of Shares Subject to Stock Options (#)5
Gary S. Titus, C.P.A.	312,000	99,782	15,000
Senior Vice President and Chief Financial Officer
Pieter J. Licari	254,000	73,438	37,500
Senior Vice President, Manufacturing and Operations
Pieter B.M.W.M. Timmermans	260,000	71,273	37,500
Senior Vice President, Drug Discovery and Preclinical Development
Jonathan Wright1	280,000	—	140,000
Senior Vice President, General Counsel and Secretary
Robert G. Johnson, Jr.2	416,000	165,672	100,000
Former President and Chief Executive Officer
Margaret A. Horn3	312,000	—	45,000
Former Senior Vice President, Legal and Corporate Development, General Counsel and Secretary
Robert De Jager4	326,000	—	—
Former Senior Vice President, Clinical Development and Chief Medical Officer

¹ Mr. Wright was appointed as the Company’s Senior Vice President, General Counsel and Secretary effective December 4, 2007. Mr. Wright was not a participant in the Company’s 2007 Executive Officer Cash Bonus Plan. The option granted to Mr. Wright as shown in the table above was granted in November 2007.

² Dr. Johnson resigned as the Company’s President and Chief Executive Officer effective February 27, 2008.

³ Ms. Horn resigned as the Company’s Senior Vice President, Legal and Corporate Development, General Counsel and Secretary effective August 24, 2007.

⁴ Dr. De Jager resigned as the Company’s Senior Vice President, Clinical Development and Chief Medical Officer effective August 8, 2007.

⁵ Stock options vest over a period of four years subject to continuous service and were granted with an exercise price equal to the fair market value on the date of grant (as determined in accordance with the Company’s 2006 Equity Incentive Plan).

EX-10.43

Exhibit 10.43

2008 COMPENSATION INFORMATION FOR EXECUTIVE OFFICERS

The table below provides certain information regarding (i) the annual base salaries as of January 1, 2008 (except as noted) of the current and former executive officers of Kosan Biosciences Incorporated (the “Company”) listed below; (ii) the target cash bonus awards established for the current and former executive officers of the Company listed below under the Company’s 2008 Executive Officer Cash Bonus Plan (the “Bonus Plan”), expressed as a percentage of applicable base salary; (iii) the number of shares of the Company’s common stock subject to stock options granted in January 2008 to the executive officer of the Company listed below; and (iv) the number of restricted stock units (“RSUs”) granted in January 2008 to the current and former executive officers of the Company listed below:

Executive Officer	2008 Annual Base Salary ($)	2008 Target Bonus (%)	Number of Shares Subject to Stock Options (#)3	Number of RSUs (#)4
Helen Kim1	280,000	35	140,000	15,100
President and Chief Business Officer
Gary S. Titus, C.P.A.	322,000	35	—	32,200
Senior Vice President and Chief Financial Officer
Pieter J. Licari	270,000	35	—	32,200
Senior Vice President, Manufacturing and Operations
Pieter B.M.W.M. Timmermans	270,000	35	—	32,200
Senior Vice President, Drug Discovery and Preclinical Development
Jonathan Wright	280,000	35	—	15,100
Senior Vice President, General Counsel and Secretary
Robert G. Johnson, Jr.2	430,000	45	—	68,103
Former President and Chief Executive Officer

¹ Ms. Kim was appointed as the Company’s Senior Vice President and Chief Business Officer on January 3, 2008 and was appointed as the Company’s President effective February 27, 2008.

² Dr. Johnson resigned as the Company’s President and Chief Executive Officer effective February 27, 2008.

³ Option vests over a period of four years subject to continuous service and was granted with an exercise price equal to the fair market value on the date of grant (as determined in accordance with the Company’s 2006 Equity Incentive Plan).

⁴ The RSUs vest as follows: (i) 50% of RSUs will vest, if at all, if the executive officer remains an employee of the Company through December 31, 2008 and the Company has entered into a written agreement on or before a specified date with a pharmaceutical or biotechnology company for the development and commercialization of a Company-developed Hsp90 inhibitor and/or epothilone product, provided such agreement includes certain minimum financial terms, (ii) another 25% of the RSUs will vest, if at all, if the executive officer remains an employee of the Company through December 31, 2009 and (iii) another 25% of the RSUs will vest, if at all, if the executive officer remains an employee of the Company through December 31, 2010. In the event that one or more RSUs vest, the Company will deliver to the executive officer one share of the Company’s common stock for each RSU that has vested.

EX-10.45

Exhibit 10.45

December 5, 2007

Helen S. Kim

[Address]

Dear Helen:

On behalf of Kosan Biosciences Incorporated (“Kosan” or the “Company”), I am pleased to extend to you an offer of employment for the position of Sr. Vice President and Chief Business Officer reporting to me. This letter sets forth the terms and conditions of your employment with Kosan. Please read it carefully.

Your initial monthly base salary will be $23,333.33 ($280,000 on an annualized basis). Also, you will be eligible to participate in our annual performance bonus program and can earn a performance bonus of up to 35% of your annual base salary, based on achieving your personal performance goals and objectives, and Kosan’s achievement of its Corporate goals and objectives. The applicable goals and objectives will be determined by the Company in its sole discretion and provided to you in writing. The Company will determine whether the applicable goals and objectives have been achieved, and the amount of any earned bonus. In addition, you must remain employed through the end of the year in order to earn an annual bonus.

As a full-time regular employee, you will be eligible to participate in the Company’s general employee benefits, including but not limited to health care coverage, life and disability insurance coverage, and automatic enrollment in our 401(k) plan, pursuant to the terms and conditions of the applicable benefit plans. Your personal coverage under Kosan’s current benefit plans will become effective on your first day of full-time work at Kosan (your “start date”). The Company retains the discretion to modify your compensation (including base salary and annual bonus program) and benefits from time to time, in its sole discretion.

You will work out of the Company’s corporate offices in Hayward, California. Normal business hours are from 8:30 a.m. to 5:30 p.m., Monday through Friday. As an exempt salaried employee, you will be expected to work additional hours as required by the nature of your work assignments, and you will not be eligible for overtime pay. Your start date will be as soon as can be arranged, but no later than January 3, 2008.

As soon as your employment commences, we will recommend to Kosan’s Board of Directors (the “Board”) or appropriately authorized members of senior management (“Senior Management”) that you be granted an option to purchase 140,000 shares of Kosan Common Stock under the Kosan Stock Option Plan (the “Plan”) at an exercise price equal to the fair market value of the stock on the date of grant as determined by the Board or Senior Management, as applicable. The option shares will vest over four years conditioned upon your

3832 Bay Center Place, Hayward, CA 94545. Tel: (510)732 8400. Fax: (510)732 8401

Web Site: http://www.kosan.com

continued service to the Company (as defined in the Plan), with one-fourth vesting after one year of continued service and the remainder vesting in equal monthly increments over the remaining three years as provided in the Plan and your stock option agreement. The option grant will be governed in full by the Plan and your grant documentation, including your stock option agreement.

This offer of employment is contingent upon your successfully passing a background check pursuant to your written authorization, as well as the Company’s receipt of positive references. Your employment with the Company is for no specified period and constitutes at will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without advance notice. In addition, the Company may change other terms and conditions of your employment at its discretion at any time, including but not limited to your job position, duties, reporting relationship, work schedule, and office location.

As a condition of your employment, you must carefully review, sign, and comply with the enclosed Employee Proprietary Information and Invention Assignment Agreement. Also as a condition of your employment, you agree to abide by the Company’s policies and procedures, as adopted from time to time, and agree to refrain from any activities that conflict with your obligations to the Company. You represent that you do not have any agreements with any third parties (e.g., former employers), including but not limited to non-competition or proprietary information agreements, that will conflict with or limit your ability to discharge your duties to Kosan unless such agreements were previously disclosed to Kosan. You agree that, in the course of your work for Kosan, you will not make unauthorized use or disclosure of any confidential information or materials, including trade secrets, of any former employer or other third party. Rather, you will be expected to use only that information generally known and used by persons with training and experience comparable to your own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise lawfully provided or developed by the Company or by you on behalf of the Company. You represent that you will be able to perform your employment duties within the guidelines described in this paragraph.

The Immigration Reform and Control Act of 1986 requires that every person present to potential employers proof of identity and eligibility or authorization to accept employment in the United States. In order to comply with this law, this offer is contingent upon your ability to provide appropriate documentation to prove both your identity and legal eligibility to be employed by Kosan. Acceptable forms of documentation are described on the attachment to this offer letter. Please be sure to bring this documentation with you on your first day of employment.

This letter (together with your Employee Proprietary Information and Inventions Agreement and any stock option grant agreement you receive) constitutes the complete and exclusive statement of your agreement with Kosan concerning the subject matter hereof. The terms of this letter agreement supersede any other agreements or promises made to you by anyone, whether oral or written. The terms of this letter agreement cannot be changed (except with respect to those changes expressly reserved to Kosan’s discretion in this letter) without a written agreement signed by you and a duly authorized officer of Kosan.

We are very excited at the prospect of your joining Kosan Biosciences and becoming a key contributor to our efforts. Please do not hesitate to contact Human Resources if you have any questions. This offer will remain open until December 6, 2007 at which time it will expire if you have not returned the fully signed letter to us.

To indicate your acceptance of our offer, please sign and date one copy of this letter and the Employee Proprietary Information and Invention Assignment Agreement and return them to me.

Sincerely,

Kosan Biosciences		UNDERSTOOD AND ACCEPTED
By:	/s/ Robert G. Johnson, Jr.	/s/ Helen S. Kim
Robert G. Johnson, Jr., MD, PhD		Helen S. Kim
President & Chief Executive Officer
		Date: December 6, 2007
		Date your employment begins:
		January 3, 2008

EX-10.46

Exhibit 10.46

October 29, 2007

Jonathan K. Wright, Esq.

[Address]

Dear Jonathan,

On behalf of Kosan Biosciences Incorporated (“Kosan” or the “Company”), I am pleased to extend to you an offer of employment for the position of Sr. Vice President, General Counsel and Secretary of the Corporation reporting to me. This letter sets forth the terms and conditions of your employment with Kosan. Please read it carefully.

Your initial monthly base salary will be $23,333.33 ($280,000 on an annualized basis). Also, starting in 2008 you will be eligible to participate in our annual performance bonus program and can earn a performance bonus of up to 35% of your annual base salary, based on achieving your personal performance goals and objectives, and Kosan’s achievement of its Corporate goals and objectives. The applicable goals and objectives will be determined by the Company in its sole discretion and provided to you in writing. The Company will determine whether the applicable goals and objectives have been achieved, and the amount of any earned bonus. In addition, you must remain employed through the end of the year in order to earn an annual bonus.

As a full-time regular employee, you will be eligible to participate in the Company’s general employee benefits, including but not limited to health care coverage, life and disability insurance coverage, and automatic enrollment in our 401(k) plan, pursuant to the terms and conditions of the applicable benefit plans. Your personal coverage under Kosan’s current benefit plans will become effective on your first day of full-time work at Kosan (your “start date”). The Company retains the discretion to modify your compensation (including base salary and annual bonus program) and benefits from time to time, in its sole discretion.

You will work out of the Company’s corporate offices in Hayward, California. Normal business hours are from 8:30 a.m. to 5:30 p.m., Monday through Friday. As an exempt salaried employee, you will be expected to work additional hours as required by the nature of your work assignments, and you will not be eligible for overtime pay. Your start date will be as soon as can be arranged, but no later than November 26, 2007.

As soon as your employment commences, we will recommend to Kosan’s Board of Directors (the “Board”) or appropriately authorized members of senior management (“Senior Management”) that you be granted an option to purchase 140,000 shares of Kosan Common Stock under the Kosan Stock Option Plan (the “Plan”) at an exercise price equal to the fair market value of the stock on the date of grant as determined by the Board or Senior Management, as applicable. The option shares will vest over four years conditioned upon your continued service to the Company (as defined in the Plan), with one-fourth vesting after one year

3832 Bay Center Place, Hayward, CA 94545. Tel: (510)732 8400. Fax: (510)732 8401

Web Site: http://www.kosan.com

of continued service and the remainder vesting in equal monthly increments over the remaining three years as provided in the Plan and your stock option agreement. The option grant will be governed in full by the Plan and your grant documentation, including your stock option agreement.

This offer of employment is contingent upon your successfully passing a background check pursuant to your written authorization, as well as the Company’s receipt of positive references. Your employment with the Company is for no specified period and constitutes at will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without advance notice. In addition, the Company may change other terms and conditions of your employment at its discretion at any time, including but not limited to your job position, duties, reporting relationship, work schedule, and office location.

As a condition of your employment, you must carefully review, sign, and comply with the enclosed Employee Proprietary Information and Invention Assignment Agreement. Also as a condition of your employment, you agree to abide by the Company’s policies and procedures, as adopted from time to time, and agree to refrain from any activities that conflict with your obligations to the Company. You represent that you do not have any agreements with any third parties (e.g., former employers), including but not limited to non-competition or proprietary information agreements, that will conflict with or limit your ability to discharge your duties to Kosan unless such agreements were previously disclosed to Kosan. You agree that, in the course of your work for Kosan, you will not make unauthorized use or disclosure of any confidential information or materials, including trade secrets, of any former employer or other third party. Rather, you will be expected to use only that information generally known and used by persons with training and experience comparable to your own, which is common knowledge in the industry or otherwise legally in the public domain, or which is otherwise lawfully provided or developed by the Company or by you on behalf of the Company. You represent that you will be able to perform your employment duties within the guidelines described in this paragraph.

The Immigration Reform and Control Act of 1986 requires that every person present to potential employers proof of identity and eligibility or authorization to accept employment in the United States. In order to comply with this law, this offer is contingent upon your ability to provide appropriate documentation to prove both your identity and legal eligibility to be employed by Kosan. Acceptable forms of documentation are described on the attachment to this offer letter. Please be sure to bring this documentation with you on your first day of employment.

This letter (together with your Employee Proprietary Information and Inventions Agreement and any stock option grant agreement you receive) constitutes the complete and exclusive statement of your agreement with Kosan concerning the subject matter hereof. The terms of this letter agreement supersede any other agreements or promises made to you by anyone, whether oral or written. The terms of this letter agreement cannot be changed (except with respect to those changes expressly reserved to Kosan’s discretion in this letter) without a written agreement signed by you and a duly authorized officer of Kosan.

We are very excited at the prospect of your joining Kosan Biosciences and becoming a key contributor to our efforts. Please do not hesitate to contact me if you have any questions. This offer will remain open until November 2, 2007 at which time it will expire if you have not returned the fully signed letter to us.

To indicate your acceptance of our offer, please sign and date one copy of this letter and the Employee Proprietary Information and Invention Assignment Agreement and return them to me.

Sincerely,

Kosan Biosciences		UNDERSTOOD AND ACCEPTED
By:	/s/ Robert G. Johnson, Jr.	/s/ Jonathan K. Wright
Robert G. Johnson, Jr., MD, PhD		Jonathan K. Wright
President and Chief Executive Officer
		Date: 10/30/2007
		Date your employment begins:
		11/26/2007

EX-10.47

Exhibit 10.47

KOSAN BIOSCIENCES INCORPORATED

RESTRICTED STOCK UNIT GRANT NOTICE

(2006 EQUITY INCENTIVE PLAN)

Kosan Biosciences Incorporated (the “Company”), pursuant to Section 7(b) of the Company’s 2006 Equity Incentive Plan (the “Plan”), hereby awards to Participant a Restricted Stock Unit Award covering the number of restricted stock units (the “RSUs”) set forth below (the “Award”). This Award shall be evidenced by a Restricted Stock Unit Award Agreement (the “Award Agreement”). This Award is subject to all of the terms and conditions as set forth herein and in the applicable Award Agreement and the Plan, each of which are attached hereto and incorporated herein in their entirety.

Participant:
Date of Grant:
Vesting Commencement Date:
Number of RSUs:
Payment for Common Stock:	Participant’s services to the Company

Vesting Schedule: The RSUs vest in two components: a performance based component and time based component.

Performance-Based Vesting:

One-half of the number of RSUs set forth above shall vest if: •        you remain an Employee through December 31, 2008, and •        the Company has entered into a Collaboration Agreement during 2008. A “Collaboration Agreement” means a signed written agreement between the Company and a pharmaceutical or biotechnology company for the development and commercialization of a Company developed Hsp90 and/or epothilone product, which agreement provides for total milestone payments to the Company of at least [ * ], including upfront cash and/or equity compensation to the Company of at least [ * ], and royalties to the Company consistent with the size and nature of the agreement.

Time-Based Vesting:

If you remain an Employee through December 31, 2009, one-quarter of the number of RSUs set forth above shall vest. If you remain an Employee through December 31, 2010, one-quarter of the number of RSUs set forth above shall vest.

Delivery Schedule: Delivery of one share of Common Stock for each RSU which vests shall occur on the applicable vesting date, provided that delivery may be delayed as provided in Section 3 of the Award Agreement.

Special Tax Withholding Right:	x	You may direct the Company (i) to withhold, from shares otherwise issuable upon vesting of the Award, a portion of those shares with an aggregate fair market value (measured as of the delivery date) equal to the amount of the applicable withholding taxes, and (ii) to make a cash payment equal to such fair market value directly to the appropriate taxing authorities, as provided in Section 10 of the Award Agreement.
	¨	None

[ * ] = 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.

1.

Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Award Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the award of the RSUs and the underlying Common Stock and supersede all prior oral and written agreements on that subject with the exception of (i) Stock Awards previously granted and delivered to Participant under the Plan, and (ii) the following agreements only:

OTHER AGREEMENTS:
KOSAN BIOSCIENCES INCORPORATED		PARTICIPANT
By:
	Signature		Signature
Title:		Date:
Date:

ATTACHMENTS: Award Agreement, and Plan

[ * ] = 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.

2.

KOSAN BIOSCIENCES INCORPORATED

2006 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to the Restricted Stock Unit Grant Notice (“Grant Notice”) and this Restricted Stock Unit Award Agreement (“Agreement”), Kosan Biosciences Incorporated (the “Company”) has awarded you a Restricted Stock Unit Award pursuant to the Company’s 2006 Equity Incentive Plan (the “Plan”) for the number of restricted stock units (“RSUs”) as indicated in the Grant Notice (collectively, the “Award”). Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. Subject to adjustment and the terms and conditions as provided herein and in the Plan, each RSU shall represent the right to receive one (1) share of Common Stock.

The details of your Award, in addition to those set forth in the Grant Notice, are as follows.

1. NUMBER OF RSUS AND SHARES OF COMMON STOCK.

(a) The number of RSUs subject to your Award and the number of shares of Common Stock deliverable with respect to such RSUs may be adjusted from time to time for Capitalization Adjustments as described in Section 9(a) of the Plan. You shall receive no benefit or adjustment to your Award with respect to any cash dividend or other distribution that does not result from a Capitalization Adjustment as described in Section 9(a) of the Plan; provided, however, that this sentence shall not apply with respect to any shares of Common Stock that are delivered to you in connection with your Award after such shares have been delivered to you.

(b) Any additional RSUs, shares of Common Stock, cash or other property that becomes subject to the Award pursuant to this Section 1 shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other RSUs and Common Stock covered by your Award.

(c) Notwithstanding the provisions of this Section 1, no fractional RSUs or rights for fractional shares of Common Stock shall be created pursuant to this Section 1. The Board shall, in its discretion, determine an equivalent benefit for any fractional RSUs or fractional shares that might be created by the adjustments referred to in this Section 1.

2. VESTING. Except as provided in Section 11, the RSUs shall vest, if at all, as provided in the Vesting Schedule set forth in your Grant Notice, provided that vesting shall cease upon the termination of your service as an Employee that constitutes Continuous Service If an RSU with respect to one share of Common Stock would otherwise vest in fractional amounts pursuant to the Vesting Schedule set forth in your Grant Notice, such RSU shall instead vest, if at all, on the final vesting date under such Vesting Schedule.

[ * ] = 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.

3. DELIVERY OF SHARES OF COMMON STOCK.

(a) Subject to the provisions of this Award Agreement and the Plan, in the event one or more RSUs vests, the Company shall deliver to you one share of Common Stock for each RSU that vests on the applicable vesting date. However, if a scheduled delivery date falls on a date that is not a business day, such delivery date shall instead fall on the next following business day.

(b) Notwithstanding the foregoing, in the event that you are subject to the stock trading restrictions contained in the Company’s Amended and Restated Policy & Procedures Regarding Prevention of Insider Trading and Protection of Confidential Information (or any successor policy) and any shares covered by your Award are scheduled to be delivered on a day (the “Original Delivery Date”) that does not occur during an open “window period” applicable to you, as determined by the Company in accordance with such policy, then such shares shall not be delivered on such Original Delivery Date and shall instead be delivered on the first business day of the next occurring open “window period” but in no event later than the later of: (i) December 31st of the calendar year of the Original Delivery Date, or (ii) the fifteenth (15th) day of the third calendar month following the Original Delivery Date. The form of such delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined by the Company.

4. PAYMENT BY YOU. This Award was granted in consideration of your services for the Company. Subject to Section 10 below, except as otherwise provided in the Grant Notice, you will not be required to make any payment to the Company (other than your past and future services for the Company) with respect to your receipt of the Award, vesting of the RSUs, or the delivery of the shares of Common Stock underlying the RSUs.

5. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless either (i) the shares of Common Stock are then registered under the Securities Act, or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such receipt would not be in material compliance with such laws and regulations.

6. RESTRICTIVE LEGENDS. The Common Stock issued under your Award shall be endorsed with appropriate legends, if any, determined by the Company.

7. TRANSFER RESTRICTIONS. Prior to the time that shares of Common Stock have been delivered to you, you may not transfer, pledge, sell or otherwise dispose of the shares in respect of your Award. For example, you may not use shares that may be issued in respect of your RSUs as security for a loan, nor may you transfer, pledge, sell or otherwise dispose of such shares. This restriction on transfer will lapse upon delivery to you of shares in respect of your vested RSUs. Your Award is not transferable, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to receive any distribution of Common Stock to which you were entitled at the time of your death pursuant to 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.

4.

8. AWARD NOT A SERVICE CONTRACT. Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company or any Affiliate, or on the part of the Company or any Affiliate to continue such service. In addition, nothing in your Award shall obligate the Company or any Affiliate, their respective stockholders, boards of directors or employees to continue any relationship that you might have as an Employee or Consultant of the Company or any Affiliate.

9. UNSECURED OBLIGATION. Your Award is unfunded, and even as to any RSUs that vest, you shall be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue Common Stock pursuant to this Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the Common Stock acquired pursuant to this Agreement until such Common Stock is issued to you pursuant to Section 3 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company with respect to the Common Stock so issued. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.

10. WITHHOLDING OBLIGATIONS.

(a) On or before the time you receive a distribution of Common Stock pursuant to your Award, or at any time thereafter as requested by the Company, you hereby authorize any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any Affiliate which arise in connection with your Award (the “Withholding Taxes”). If specified in your Grant Notice, you may direct the Company to withhold shares of Common Stock with a Fair Market Value (measured as of the date shares of Common Stock are delivered pursuant to Section 3) equal to the amount of such Withholding Taxes; provided, however, that the number of such shares of Common Stock so withheld shall not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income.

(b) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to deliver to you any Common Stock.

11. CHANGE IN CONTROL.

(a) With respect to that portion of the RSUs subject to your Award that is subject to performance-based vesting under the Vesting Schedule set forth in your Grant Notice, such portion will vest in full upon the effective date of a Change in Control, provided you are an

[ * ] = 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.

Employee in Continuous Service on such date. With respect to that portion of the RSUs subject to your Award that is subject to time-based vesting under the Vesting Schedule set forth in your Grant Notice, such portion will vest in full if your Continuous Service as an Employee terminates either within twelve (12) months following or one (1) month prior to the effective date of a Change in Control due to an Involuntary Termination Without Cause.

(b) For purposes of this Agreement, “Involuntary Termination Without Cause” means the involuntary termination of your Continuous Service for reasons other than death, Disability, or Cause. For this purpose, “Cause” means that, in the reasonable determination of the Company, you have (i) committed an intentional act or acted with gross negligence that has materially injured the business of the Company; (ii) intentionally refused or failed to follow lawful and reasonable directions of the Board or the appropriate individual to whom you report; (iii) willfully and habitually neglected your duties for the Company; or (iv) been convicted of a felony involving moral turpitude that is likely to inflict or has inflicted material injury on the business of the Company. Notwithstanding the foregoing, Cause shall not exist based on conduct described in clause (ii) or (iii) unless the conduct described in such clause has not been cured within fifteen (15) days following your receipt of written notice from the Company specifying the particulars of the conduct constituting Cause. Any determination by the Company that your Continuous Service was terminated by reason of dismissal without Cause for the purposes of this Agreement shall have no effect upon any determination of the rights or obligations of you or the Company for any other purpose.

12. PARACHUTE PAYMENTS.

(a) If any payment or benefit you would receive in connection with a Change in Control from the Company or otherwise (“Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be determined, before any amounts of the Payment are paid to you, which of the following two alternative forms of payment would maximize your after-tax proceeds: (i) payment in full of the entire amount of the Payment (a “Full Payment”), or (ii) payment of only a part of the Payment so that you receive the largest payment possible without the imposition of the Excise Tax (a “Reduced Payment”), whichever amount results in your receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. For purposes of determining whether to make a Full Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and local income and employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes).

(b) If a Reduced Payment is made, (i) the Payment shall be paid only to the extent permitted under the Reduced Payment alternative, and you shall have no rights to any additional payments and/or benefits constituting the Payment, and (ii) reduction in payments and/or benefits shall occur in the following order unless you elect in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payment occurs): (1) reduction of cash payments; (2) cancellation of accelerated vesting of equity awards other than stock options; (3) cancellation

[ * ] = 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.

6.

of accelerated vesting of stock options; and (4) reduction of other benefits paid to you. In the event that acceleration of compensation from your equity awards is to be reduced, such acceleration of vesting shall be canceled in the reverse order of the date of grant (i.e., earliest granted Stock Award cancelled last) unless you elect in writing a different order for cancellation.

(c) The accounting firm engaged by the Company for general tax purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

(d) The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a Payment is triggered (if requested at that time by you or the Company) or such other time as requested by you or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish you and the Company with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon you and the Company.

13. NOTICES. Any notices required to be given or delivered to the Company under the terms of this Award shall be in writing and addressed to the Company at its principal corporate offices. Any notice required to be given or delivered to you shall be in writing and addressed to your address as on file with the Company at the time notice is given. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

14. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement or to affect the meaning of this Agreement.

15. AMENDMENT. This Agreement may be amended only by a writing executed by the Company and you which specifically states that it is amending this Agreement. Notwithstanding the foregoing, this Agreement may be amended solely by the Company by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Company reserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Award that has not been delivered to you in Common Stock pursuant to Section 3.

[ * ] = 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.

7.

16. MISCELLANEOUS.

(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

(d) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

(e) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control; provided, however, that Section 3 of this Agreement shall govern the timing of any distribution of Common Stock under your Award. The Company shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Board shall be final and binding upon you, the Company, and all other interested persons. No member of the Board shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.

18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any Affiliate except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee benefit plans of the Company or any Affiliate.

[ * ] = 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.

8.

19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of the state of California without regard to such state’s conflicts of laws rules.

20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

21. OTHER DOCUMENTS. You hereby acknowledge receipt or the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act (which includes the prospectus for the Plan). In addition, you acknowledge receipt of the Company’s Amended and Restated Policy & Procedures Regarding Prevention of Insider Trading and Protection of Confidential Information.

* * * * *

This Restricted Stock Unit Award Agreement shall be deemed to be signed by the Company and you upon the signing by you of the Restricted Stock Unit Grant Notice to which it is attached.

[ * ] = 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.

9.

EX-10.48

Exhibit 10.48

KOSAN BIOSCIENCES INCORPORATED

RESTRICTED STOCK UNIT GRANT NOTICE

(2006 EQUITY INCENTIVE PLAN)

Kosan Biosciences Incorporated (the “Company”), pursuant to Section 7(b) of the Company’s 2006 Equity Incentive Plan (the “Plan”), hereby awards to Participant a Restricted Stock Unit Award covering the number of restricted stock units (the “RSUs”) set forth below (the “Award”). This Award shall be evidenced by a Restricted Stock Unit Award Agreement (the “Award Agreement”). This Award is subject to all of the terms and conditions as set forth herein and in the applicable Award Agreement and the Plan, each of which are attached hereto and incorporated herein in their entirety.

Participant:
Date of Grant:
Vesting Commencement Date:
Number of RSUs:
Payment for Common Stock:	Participant’s services to the Company

Vesting Schedule: The RSUs vest in two components: a performance-based component and a time-based component.

Performance-Based Vesting:

One-third of the total number of RSUs set forth above shall vest if: •        the Company has met all of its 2008 Corporate Goals, as determined by the Compensation Committee of the Board (the “Committee”) in its sole and absolute discretion, provided that if the Committee determines that a percentage less than 100% of the Company’s 2008 Corporate Goals has been met (which such percentage shall be determined by the Committee in its sole and absolute discretion), then the number of RSUs that shall vest under this paragraph shall equal such percentage multiplied by one-third of the total number of RSUs set forth above, and •        you remain an Employee through the date that the Committee makes the determination set forth above.

Time-Based Vesting:

If you remain an Employee through December 31, 2009, one-third of the total number of RSUs set forth above shall vest. If you remain an Employee through December 31, 2010, one-third of the total number of RSUs set forth above shall vest.

Delivery Schedule: Delivery of one share of Common Stock for each RSU which vests shall occur on the applicable vesting date, provided that delivery may be delayed as provided in Section 3 of the Award Agreement.

Special Tax Withholding Right:	x	You may direct the Company (i) to withhold, from shares otherwise issuable upon vesting of the Award, a portion of those shares with an aggregate fair market value (measured as of the delivery date) equal to the amount of the applicable withholding taxes, and (ii) to make a cash payment equal to such fair market value directly to the appropriate taxing authorities, as provided in Section 10 of the Award Agreement.
	¨	None

1.

Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Award Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the award of the RSUs and the underlying Common Stock and supersede all prior oral and written agreements on that subject with the exception of (i) Stock Awards previously granted and delivered to Participant under the Plan, and (ii) the following agreements only:

OTHER AGREEMENTS:
KOSAN BIOSCIENCES INCORPORATED		PARTICIPANT
By:
	Signature		Signature
Title:		Date:
Date:

ATTACHMENTS: Award Agreement, and Plan

2.

KOSAN BIOSCIENCES INCORPORATED

2006 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to the Restricted Stock Unit Grant Notice (“Grant Notice”) and this Restricted Stock Unit Award Agreement (“Agreement”), Kosan Biosciences Incorporated (the “Company”) has awarded you a Restricted Stock Unit Award pursuant to the Company’s 2006 Equity Incentive Plan (the “Plan”) for the number of restricted stock units (“RSUs”) as indicated in the Grant Notice (collectively, the “Award”). Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. Subject to adjustment and the terms and conditions as provided herein and in the Plan, each RSU shall represent the right to receive one (1) share of Common Stock.

The details of your Award, in addition to those set forth in the Grant Notice, are as follows.

1. NUMBER OF RSUS AND SHARES OF COMMON STOCK.

(a) The number of RSUs subject to your Award and the number of shares of Common Stock deliverable with respect to such RSUs may be adjusted from time to time for Capitalization Adjustments as described in Section 9(a) of the Plan. You shall receive no benefit or adjustment to your Award with respect to any cash dividend or other distribution that does not result from a Capitalization Adjustment as described in Section 9(a) of the Plan; provided, however, that this sentence shall not apply with respect to any shares of Common Stock that are delivered to you in connection with your Award after such shares have been delivered to you.

(b) Any additional RSUs, shares of Common Stock, cash or other property that becomes subject to the Award pursuant to this Section 1 shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other RSUs and Common Stock covered by your Award.

(c) Notwithstanding the provisions of this Section 1, no fractional RSUs or rights for fractional shares of Common Stock shall be created pursuant to this Section 1. The Board shall, in its discretion, determine an equivalent benefit for any fractional RSUs or fractional shares that might be created by the adjustments referred to in this Section 1.

2. VESTING. Except as provided in Section 11, the RSUs shall vest, if at all, as provided in the Vesting Schedule set forth in your Grant Notice, provided that vesting shall cease upon the termination of your service as an Employee that constitutes Continuous Service. If an RSU with respect to one share of Common Stock would otherwise vest in fractional amounts pursuant to the Vesting Schedule set forth in your Grant Notice, such RSU shall instead vest, if at all, on the final vesting date under such Vesting Schedule.

1.

3. DELIVERY OF SHARES OF COMMON STOCK.

(a) Subject to the provisions of this Award Agreement and the Plan, in the event one or more RSUs vests, the Company shall deliver to you one share of Common Stock for each RSU that vests on the applicable vesting date. However, if a scheduled delivery date falls on a date that is not a business day, such delivery date shall instead fall on the next following business day.

(b) Notwithstanding the foregoing, in the event that you are subject to the stock trading restrictions contained in the Company’s Amended and Restated Policy & Procedures Regarding Prevention of Insider Trading and Protection of Confidential Information (or any successor policy) and any shares covered by your Award are scheduled to be delivered on a day (the “Original Delivery Date”) that does not occur during an open “window period” applicable to you, as determined by the Company in accordance with such policy, then such shares shall not be delivered on such Original Delivery Date and shall instead be delivered on the first business day of the next occurring open “window period” but in no event later than the later of: (i) December 31st of the calendar year of the Original Delivery Date, or (ii) the fifteenth (15th) day of the third calendar month following the Original Delivery Date. The form of such delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined by the Company.

4. PAYMENT BY YOU. This Award was granted in consideration of your services for the Company. Subject to Section 10 below, except as otherwise provided in the Grant Notice, you will not be required to make any payment to the Company (other than your past and future services for the Company) with respect to your receipt of the Award, vesting of the RSUs, or the delivery of the shares of Common Stock underlying the RSUs.

5. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless either (i) the shares of Common Stock are then registered under the Securities Act, or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such receipt would not be in material compliance with such laws and regulations.

6. RESTRICTIVE LEGENDS. The Common Stock issued under your Award shall be endorsed with appropriate legends, if any, determined by the Company.

7. TRANSFER RESTRICTIONS. Prior to the time that shares of Common Stock have been delivered to you, you may not transfer, pledge, sell or otherwise dispose of the shares in respect of your Award. For example, you may not use shares that may be issued in respect of your RSUs as security for a loan, nor may you transfer, pledge, sell or otherwise dispose of such shares. This restriction on transfer will lapse upon delivery to you of shares in respect of your vested RSUs. Your Award is not transferable, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to receive any distribution of Common Stock to which you were entitled at the time of your death pursuant to this Agreement.

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8. AWARD NOT A SERVICE CONTRACT. Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company or any Affiliate, or on the part of the Company or any Affiliate to continue such service. In addition, nothing in your Award shall obligate the Company or any Affiliate, their respective stockholders, boards of directors or employees to continue any relationship that you might have as an Employee or Consultant of the Company or any Affiliate.

9. UNSECURED OBLIGATION. Your Award is unfunded, and even as to any RSUs that vest, you shall be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue Common Stock pursuant to this Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the Common Stock acquired pursuant to this Agreement until such Common Stock is issued to you pursuant to Section 3 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company with respect to the Common Stock so issued. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.

10. WITHHOLDING OBLIGATIONS.

(a) On or before the time you receive a distribution of Common Stock pursuant to your Award, or at any time thereafter as requested by the Company, you hereby authorize any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any Affiliate which arise in connection with your Award (the “Withholding Taxes”). If specified in your Grant Notice, you may direct the Company to withhold shares of Common Stock with a Fair Market Value (measured as of the date shares of Common Stock are delivered pursuant to Section 3) equal to the amount of such Withholding Taxes; provided, however, that the number of such shares of Common Stock so withheld shall not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income.

(b) Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to deliver to you any Common Stock.

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11. CHANGE IN CONTROL.

(a) With respect to that portion of the RSUs subject to your Award that is subject to performance-based vesting under the Vesting Schedule set forth in your Grant Notice, such portion will vest in full upon the effective date of a Change in Control, provided you are an Employee in Continuous Service on such date. With respect to that portion of the RSUs subject to your Award that is subject to time-based vesting under the Vesting Schedule set forth in your Grant Notice, such portion will vest in full if your Continuous Service as an Employee terminates either within twelve (12) months following or one (1) month prior to the effective date of a Change in Control due to an Involuntary Termination Without Cause.

(b) For purposes of this Agreement, “Involuntary Termination Without Cause” means the involuntary termination of your Continuous Service for reasons other than death, Disability, or Cause. For this purpose, “Cause” means that, in the reasonable determination of the Company, you have (i) committed an intentional act or acted with gross negligence that has materially injured the business of the Company; (ii) intentionally refused or failed to follow lawful and reasonable directions of the Board or the appropriate individual to whom you report; (iii) willfully and habitually neglected your duties for the Company; or (iv) been convicted of a felony involving moral turpitude that is likely to inflict or has inflicted material injury on the business of the Company. Notwithstanding the foregoing, Cause shall not exist based on conduct described in clause (ii) or (iii) unless the conduct described in such clause has not been cured within fifteen (15) days following your receipt of written notice from the Company specifying the particulars of the conduct constituting Cause. Any determination by the Company that your Continuous Service was terminated by reason of dismissal without Cause for the purposes of this Agreement shall have no effect upon any determination of the rights or obligations of you or the Company for any other purpose.

12. PARACHUTE PAYMENTS.

(a) If any payment or benefit you would receive in connection with a Change in Control from the Company or otherwise (“Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Company shall cause to be determined, before any amounts of the Payment are paid to you, which of the following two alternative forms of payment would maximize your after-tax proceeds: (i) payment in full of the entire amount of the Payment (a “Full Payment”), or (ii) payment of only a part of the Payment so that you receive the largest payment possible without the imposition of the Excise Tax (a “Reduced Payment”), whichever amount results in your receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. For purposes of determining whether to make a Full Payment or a Reduced Payment, the Company shall cause to be taken into account all applicable federal, state and local income and employment taxes and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes).

(b) If a Reduced Payment is made, (i) the Payment shall be paid only to the extent permitted under the Reduced Payment alternative, and you shall have no rights to any additional payments and/or benefits constituting the Payment, and (ii) reduction in payments and/or benefits shall occur in the following order unless you elect in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payment occurs): (1) reduction of cash payments; (2) cancellation of accelerated vesting of equity awards other than stock options; (3) cancellation

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of accelerated vesting of stock options; and (4) reduction of other benefits paid to you. In the event that acceleration of compensation from your equity awards is to be reduced, such acceleration of vesting shall be canceled in the reverse order of the date of grant (i.e., earliest granted Stock Award cancelled last) unless you elect in writing a different order for cancellation.

(c) The accounting firm engaged by the Company for general tax purposes as of the day prior to the effective date of the Change in Control shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

(d) The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a Payment is triggered (if requested at that time by you or the Company) or such other time as requested by you or the Company. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, either before or after the application of the Reduced Amount, it shall furnish you and the Company with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment. Any good faith determinations of the accounting firm made hereunder shall be final, binding and conclusive upon you and the Company.

13. NOTICES. Any notices required to be given or delivered to the Company under the terms of this Award shall be in writing and addressed to the Company at its principal corporate offices. Any notice required to be given or delivered to you shall be in writing and addressed to your address as on file with the Company at the time notice is given. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

14. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement or to affect the meaning of this Agreement.

15. AMENDMENT. This Agreement may be amended only by a writing executed by the Company and you which specifically states that it is amending this Agreement. Notwithstanding the foregoing, this Agreement may be amended solely by the Company by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Company reserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Award that has not been delivered to you in Common Stock pursuant to Section 3.

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16. MISCELLANEOUS.

(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.

(d) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

(e) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control; provided, however, that Section 3 of this Agreement shall govern the timing of any distribution of Common Stock under your Award. The Company shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Board shall be final and binding upon you, the Company, and all other interested persons. No member of the Board shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.

18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any Affiliate except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee benefit plans of the Company or any Affiliate.

19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of the state of California without regard to such state’s conflicts of laws rules.

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20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

21. OTHER DOCUMENTS. You hereby acknowledge receipt or the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act (which includes the prospectus for the Plan). In addition, you acknowledge receipt of the Company’s Amended and Restated Policy & Procedures Regarding Prevention of Insider Trading and Protection of Confidential Information.

* * * * *

This Restricted Stock Unit Award Agreement shall be deemed to be signed by the Company and you upon the signing by you of the Restricted Stock Unit Grant Notice to which it is attached.

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EX-10.49

Exhibit 10.49

August 1, 2007

VIA HAND DELIVERY

Robert De Jager, M.D.

Re: Transition Terms

Dear Robert:

This letter confirms our agreement regarding your transition from Kosan Biosciences Incorporated (the “Company”). As agreed, your employment with the Company will terminate, effective, August 8, 2007 (“Termination Date”).

Severance Benefits and Consulting Agreement

If you sign and return this letter, and then on or after the Termination Date, you sign, date and return the Release Agreement enclosed herewith, and allow it to become effective, you will receive the following as your sole severance benefits (the “Severance Benefits”):

• Severance pay equal to four (4) months of your final base salary, subject to required payroll deductions and withholdings (“Severance Payment”),

• If you timely elect continued group health insurance coverage pursuant to federal COBRA law (discussed further below), the Company will pay your COBRA premiums sufficient to continue your group health insurance coverage (including your wife’s continued coverage, if elected) at the same level of coverage in effect as of the Termination Date, through the end of November 2007, and

• The Company will not expect repayment of your $50,000 sign on bonus, despite the termination of your employment within the first year. Of course, you understand and agree that you will be responsible for covering any expenses incurred by you following your Termination Date, including but not limited to expenses associated with your temporary housing in the Bay Area or your relocation to San Diego or any other location.

As a condition of your receipt of the Severance Benefits, you agree not to inform or confirm to others that you have received any severance benefits from the Company, with the exceptions of your immediate family, or your attorneys, accountants, auditors, tax preparers, and financial advisors. By way of example, but not limitation, you must not disclose the Severance Benefits to other Company employees or consultants.

In addition, if you meet the conditions for eligibility for the Severance Benefits as enumerated in this letter, the Company and you agree to enter into the Consulting Agreement enclosed with this letter, which establishes a consulting relationship between you and the Company effective on the Termination Date and continuing through no later than November 8, 2007 (“Consulting Agreement”).

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Severance Payment

The lump sum Severance Payment will be mailed to you within ten (10) business days after the Effective Date of the Release Agreement (as defined in the Release Agreement).

Final Pay, Expense Reimbursements and Benefits

Enclosed is your final pay. This amount includes your accrued salary through the Termination Date, and payment for your accrued but unused vacation through the Termination Date, less applicable taxes and required deductions.

If you have any outstanding business expenses, you must complete and submit a properly documented business expense reimbursement form as soon as possible and no later than within thirty (30) days after the Termination Date. The Company will, pursuant to its regular business practice, reimburse you for legitimate and documented business expenses incurred through the Termination Date, if any.

Your health care coverage will terminate on August 31, 2007, and, to the extent provided by the federal COBRA law or, if applicable, state insurance laws (collectively, “COBRA”), and by the Company’s current group health insurance policies, you will be eligible to continue your group health insurance benefits at your own expense thereafter, subject to Kosan’s commitment above, to cover your COBRA premiums (if elected) through November 2007. Within the timing required by applicable law, you will be provided with a separate notice describing your rights and obligations under COBRA.

Stock Options

During your employment, you have received options to purchase 150,000 shares of Kosan stock (the “Options”). Pursuant to the terms of the Company’s 2006 Equity Incentive Plan (the “Plan”) and your grant agreement(s), if the parties enter into the Consulting Agreement, vesting of your Options will continue so long as there is no termination or interruption of your “Continuous Service” (as defined in the Plan) to the Company. Once a termination or interruption of your Continuous Service occurs (which will be no later than the termination of the Consulting Agreement), then you will be entitled to exercise your vested shares subject to the Options, if any, within ninety (90) days thereafter pursuant to the terms and conditions of the Plan and your option agreement(s).

Please note that the Options will be taxed as a nonstatutory stock option upon exercise. Accordingly, as a condition to exercise any vested shares subject to the Options, you will be responsible (and you agree to reimburse the Company) for all applicable federal and state income and employment taxes that the Company is required to withhold as a result of such exercise, and no shares of the Company’s common stock will be issued to you in respect of your exercise of the Options unless and until you satisfy such tax withholding obligations. You hereby acknowledge that the Company is not providing tax advice to you and that you have been advised by the Company to seek independent tax advice with respect to the exercise of the Options and your receipt of the Severance Benefits.

Proprietary Obligations

You are reminded of your obligations under your Employee Proprietary Information and Inventions Agreement that you signed on October 25, 2006 (the “Proprietary Information Agreement”). These obligations continue after the termination of your employment. A copy of your Proprietary Information Agreement is enclosed for your reference.

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Return of Company Property

It is extremely important that you promptly review all of your computer files and documents in your possession or control to ensure that you have no information, materials or documents of the Company or that concern the Company’s business. You should also carefully review your home computer, if you have one, and all files that you keep at your home or elsewhere to identify any and all materials that contain any confidential or proprietary information of the Company. All such materials or property in your possession must be returned to the Company immediately. Failure to comply will render you ineligible for the Severance Benefits.

This letter sets forth the complete understanding and agreement between you and the Company with regard to your employment transition, and it is entered into without reliance on any promise or representation, written or oral, other than those expressly contained herein. This letter supersedes any other discussions or representations relating to your transition terms, and the terms set forth in this letter may not be changed except in a writing signed by both you and a duly authorized officer of the Company.

If you have any questions or concerns regarding the Severance Benefits or any other contents of this letter, please contact Mary Ann Rafferty.

Please acknowledge your receipt of this letter and the described enclosures, and your agreement to the above, by signing in the space provided below. Both the enclosed Release Agreement and Consulting Agreement should not be signed until the Termination Date.

We wish you success in your future endeavors.

Best regards,

KOSAN BIOSCIENCES INCORPORATED

/s/ Robert G. Johnson

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

President and Chief Executive Officer

Acknowledged, Understood and Accepted:

/s/ Robert De Jager M.D.

Robert De Jager, M.D.

8/1/2007

Date

Enclosures:

• Release Agreement

• Consulting Agreement

• Employee Proprietary Information and Inventions Agreement

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 ROBERT DE JAGER, M.D., an individual, having an address at [address], (“Consultant”), effective as of August 8, 2007 (the “Effective Date”).

RECITALS

WHEREAS, 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).

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

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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 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. 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 November 8, 2007 unless the parties agree in writing to extend the term of the Agreement.

9. 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.

10. 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.

11. 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.

12. 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

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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).

13. 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.

14. 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: General Counsel

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

KOSAN BIOSCIENCES INCORPORATED	ROBERT DE JAGER, M.D.
/s/ Robert G. Johnson, Jr.	/s/ Robert De Jager
PRINTED NAME: Robert G. Johnson, Jr.	PRINT NAME: Robert De Jager, M.D.
TITLE: President & CEO	SOCIAL SECURITY NUMBER:

8

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 November 8, 2007 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 “Plan”) and Consultant’s grant agreement(s), Consultant’s service to the Company under the Consulting Agreement shall constitute “Continuous Service” (as defined in the Plan) and vesting of the Options 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 within ninety (90) days thereafter pursuant to the terms and conditions of the Plan and Consultant’s option agreement(s).

EX-10.50

Exhibit 10.50

Non-Employee Director Compensation Arrangements

Effective January 1, 2008, non-employee directors of Kosan Biosciences Incorporated receive the following compensation for their service on the Board of Directors (the “Board”) and its committees. Except as otherwise noted, the stock option grants referenced below are made under the Company’s 2000 Non-Employee Directors’ Stock Option Plan, as amended (the “Directors’ Plan”):

A. Non-Employee Chairman of the Board:

1) Annual Cash Retainer of $40,000

2) Annual Stock Option Grant to purchase 15,000 shares ¹ of Common Stock (to be automatically granted one day following each year’s annual meeting of stockholders) that will vest one day before the annual meeting of stockholders subsequent to the date of grant.

3) Meeting fees: $1,500 for each Board meeting attended in person and $750 for each Board meeting attended by phone.

B. Non-Employee Directors:

1) Annual Cash Retainer of $20,000

2) Annual Stock Option Grant to purchase 10,000 ¹ shares of Common Stock (to be automatically granted one day following each year’s annual meeting of stockholders) that will vest one day before the annual meeting of stockholders subsequent to the date of grant.

3) Meeting fees: $1,500 for each Board meeting attended in person and $750 for each Board meeting attended by phone.

New Non-Employee Directors- One Time Grant:

Upon each non-employee director becoming a director, he or she will be automatically granted on the date on which such person first becomes a director, a stock option to purchase 20,000 shares of common stock that vests over four years.

C. Non-Employee Chairman of the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee:

1) Annual Committee Chairman Cash Retainer of $5,000

2) Annual Committee Chairman Stock Option Grant to purchase 2,000 shares of Common stock (to be automatically granted one day following each year’s annual meeting of stockholders) that will vest one day before the annual meeting of stockholders subsequent to the date of grant.

3) Meeting fees: $1,500 for each Committee meeting attended in person and $750 for each Committee meeting attended by phone.

D. Non-Employee Director serving on the Audit Committee, Compensation Committee and Corporate Governance and Nominating Committee:

1) Annual Committee Member Stock Option Grant to purchase 1,000 shares of Common stock (to be automatically granted one day following each year’s annual meeting of stockholders) that will vest one day before the annual meeting of stockholders subsequent to the date of grant.

¹ The annual option grants are comprised of a stock option to purchase 5,000 shares of Common Stock granted under the Directors’ Plan for so long as a balance remains under such plan and a stock option to purchase the balance of the shares of Common Stock under the Company’s 2006 Equity Incentive Plan.

2) Meeting fees: $1,000 for each Committee meeting attended in person and $500 for each Committee meeting attended by phone.

E. Non-Employee Chairman of the Strategic Advisory Committee:

1) Annual Chairman Cash Retainer of $15,000

2) Meeting Fees:

a. $2,500 for each Strategic Advisory Committee meeting attended in person and lasting ³ 4 hours and $1,250 for each Strategic Advisory Committee meeting attended by phone and lasting ³ 4 hours;

b. Pro-rata (based on $2,500/day) for each Strategic Advisory Committee meeting attended and lasting < 4 hours whether attended in person or by phone

F. Non-Employee Director serving on the Strategic Advisory Committee:

1) Meeting Fees:

a. $2,000 for each Strategic Advisory Committee meeting attended in person and lasting ³ 4 hours and $1,000 for each Strategic Advisory Committee meeting attended by phone and lasting ³ 4 hours;

b. Pro-rata (based on $2,000/day) for each Strategic Advisory Committee meeting attended and lasting < 4 hours whether attended in person or by phone

G. Non-Employee Director serving on the Financing Committee:

There shall be no stock or cash compensation paid to members of the Financing Committee.

EX-10.51

Exhibit 10.51

KOSAN Biosciences, Inc.

1450 Rollins Rd.

Burlingame, CA 94010

(650) 343 8673

July 10, 1998

Peter Licari, Ph.D.

[Address]

Dear Peter:

On behalf of Kosan Biosciences, Inc., I am pleased to offer you the position of Director, Process Sciences, reporting to the Vice President of Discovery Research, Daniel Chu.

Your primary responsibilities will involve development of Kosan’s capabilities to produce novel polyketides for therapeutic applications. In this capacity we expect that you will (i) establish and manage Kosan’s fermentation and pre-clinical production functions, (ii) design and implement Kosan’s production facilities, and (iii) ensure that Kosan’s needs for research and pre-clinical production are anticipated and met, and other responsibilities of the position.

You will receive a monthly salary of $ 9,583.33 paid semi-monthly, less federal and state payroll withholding taxes. You will also be eligible to receive annual performance bonuses in amounts at the sole discretion of the Board of Directors of Kosan. Within two months of your starting date, we will agree on performance objectives for the first year of your employment. In addition, you will be eligible for employee benefit programs as per the policy of Kosan Biosciences, Inc. Should you and your family not be eligible for health insurance benefits under the Kosan plan during your first three months of employment, Kosan would reimburse you for such expenses.

Kosan will reimburse you for the reasonable expenses of moving you and your family to California, up to a maximum of $20,000, including travel expenses for you and your wife. Kosan will also reimburse you for a house-hunting trip, including coach class round trip airfare for you and your wife, up to five days stay in a motel and associated meals and rental of a compact car. Kosan will reimburse the direct costs of the sale of your current house, including realtor commissions and the ancillary costs of purchasing a home in the Bay Area, including mortgage points and financing fees, up to a maximum of $30,000 of such sale and purchase costs. We also propose to provide you with an additional payment of $1,300 per month for the first three years of your employment to help defray the higher cost of housing in the Bay Area. Finally, Kosan will loan to you $40,000, to be secured by a second mortgage on a home in the Bay Area and bearing interest at the lowest rate necessary to avoid imputed interest assessments. One-half of the loan will be forgiven if the other half is repaid by the fourth anniversary of the loan.

I will recommend to the Board of Directors that you be granted an option to purchase 20,000 shares of stock. This option will vest over four years and is subject to the terms and conditions of the Company’s 1997 Stock Option Plan; 25% will vest after the first anniversary, and the remainder will vest monthly over the next three years. The exercise price of the option will be the fair market value of the stock as determined by the Board of Directors at the first regular board meeting after you start work.

This offer does not constitute a guarantee of employment for any specific period of time, and either you or Kosan may terminate the employment relationship at any time, with or without cause, by written notice. However, in the event that Kosan terminates this letter agreement without cause during the three and one-half year period after your start of employment, then Kosan will pay you an amount equal to six times your monthly base salary, and will accelerate the vesting of the lesser of (a) 12.5% (six months) of your original stock option grant, and (b) the remainder of your original grant. As used in this letter agreement, “cause” shall mean (i) any breach of this agreement by you which is not cured within 30 days after notice of breach is provided to you by the Company, (ii) your conviction of a felony, or (iii) any action by you prior to or during your employment which in the reasonable judgment of Kosan constitutes dishonesty, larceny, fraud, deceit or gross negligence by you in the performance of your duties to Kosan, or willful misrepresentation to shareholders, directors or officers of Kosan.

As a condition of your employment with Kosan, you will be required to sign the Company’s Employee Confidentiality Agreement and Proprietary Information and Inventions Agreement, two originals of each, which are attached. Please sign both sets of originals and return one of each to me with your acceptance of this offer.

For purposes of Federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.

This offer is valid through July 15, 1998, and is contingent on your starting employment by September 1, 1998. We look forward to your early acceptance and would be pleased to have you start as soon as your present commitments allow. Enclosed are two originals of this letter. Please sign and return one to me, to indicate your acceptance.

The entire Kosan staff, our directors, and I, are very enthusiastic about your joining the Kosan team. We believe that our relationship will be mutually rewarding at the business, professional, and personal levels. Together we hope to build a highly significant business enterprise that will substantially improve the process of drug discovery and development.

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Sincerely,

/s/ Daniel V. Santi

Daniel V. Santi, M.D., Ph.D.

Chairman

I accept employment with Kosan Biosciences, Inc. subject to the terms and conditions hereof. I understand that the terms set forth in this letter supersede all oral discussions I may have had with anyone in the Company.

/s/ Peter Licari

Peter Licari, Ph. D.

Date July 15, 1998

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EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-3 Nos. 333-108909, 333-121597, 333-136617 and 333-145485) of Kosan Biosciences Incorporated,

(2) Registration Statement (Form S-8 No. 333-63534, 333-96669, 333-115766 and 333-123578) pertaining to the 1996 Stock Option Plan of Kosan Biosciences Incorporated,

(3) Registration Statement (Form S-8 No. 333-108502) pertaining to the 1996 Stock Option Plan and 2000 Employee Stock Purchase Plan of Kosan Biosciences Incorporated,

(4) Registration Statement (Form S-8 Nos. 333-47758 and 333-132859) pertaining to the 1996 Stock Option Plan, 2000 Employee Stock Purchase Plan and the 2000 Non-Employee Directors’ Stock Option Plan of Kosan Biosciences Incorporated,

(5) Registration Statement (Form S-8 No. 333-136067) pertaining to the 2006 Equity Incentive Plan of Kosan Biosciences Incorporated,

(6) Registration Statement (Form S-8 No. 333-141437) pertaining to the 2000 Employee Stock Purchase Plan of Kosan Biosciences Incorporated;

of our report dated March 13, 2008, with respect to the financial statements of Kosan Biosciences Incorporated, our report dated March 13, 2008, with respect to the effectiveness of internal control over financial reporting of Kosan Biosciences Incorporated, included in the Annual Report (Form 10-K) for the year ended December 31, 2007.

/s/ Ernst & Young LLP

San Francisco, California

March 13, 2008

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Helen S. Kim certify that:

1. I have reviewed this annual report on Form 10-K 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 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: March 14, 2008	/s/ Helen Kim
	Helen S. Kim
	President and Chief Business Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Gary S. Titus, certify that:

1. I have reviewed this annual report on Form 10-K 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 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: March 14, 2008	/s/ Gary S. Titus
	Gary S. Titus
	Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

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), Helen S. Kim, President and Chief Business 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 or her knowledge:

1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2007, to which this Certification is attached as Exhibit 32.1 (the “Annual 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 Annual 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 the 17th day of March, 2008.

/s/ Helen Kim	/s/ Gary S. Titus
Helen S. Kim	Gary S. Titus
President and Chief Business Officer	Senior Vice President and Chief Financial Officer

This certification accompanies the Form 10-K 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-K), irrespective of any general incorporation language contained in such filing.