e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

(Mark One)


þ		Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008, or


o		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 0-12943

CYPRESS BIOSCIENCE, INC.

(Exact Name of Registrant as specified in its charter)


DELAWARE		22-2389839
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)

(858) 452-2323
(Registrant’s telephone number including area code)

Indicate by check (ü) 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 þ No o

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


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

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

At May 5, 2008, 37,536,326 shares of Common Stock, par value $.001, of the registrant were issued and outstanding.

ITEM 1 — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CYPRESS BIOSCIENCE, INC.

CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2008			2007
	(Unaudited)			(Note)
ASSETS
Current assets:
Cash and cash equivalents	$	83,392,000		$	70,093,425
Short-term investments		70,731,185			111,713,149
Receivable from Forest Laboratories		283,710			142,750
Prepaid expenses and other current assets		556,105			651,144

Total current assets		154,963,000			182,600,468
Property and equipment, net		145,647			79,382
Goodwill		26,465,627			—
Other assets		29,000			20,000

Total assets	$	181,603,274		$	182,699,850


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	678,300		$	443,734
Accrued compensation		145,794			307,164
Accrued liabilities		523,276			522,637
Current portion of deferred revenue		3,351,416			3,351,416

Total current liabilities		4,698,786			4,624,951

Deferred rent		9,077			5,673
Deferred revenue, net of current portion		9,216,394			10,054,248

Stockholders’ equity:
Preferred stock, $.001 par value; 15,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.001 par value; 60,000,000 shares of common stock authorized; 37,536,326 and 37,423,584 shares issued and outstanding at March 31, 2008 (unaudited) and December 31, 2007, respectively		37,536			37,424
Additional paid-in capital		320,279,472			317,891,137
Accumulated other comprehensive income		216,406			59,833
Accumulated deficit		(152,854,397	)		(149,973,416	)

Total stockholders’ equity		167,679,017			168,014,978

Total liabilities and stockholders’ equity	$	181,603,274		$	182,699,850

See accompanying notes to financial statements.

Note: The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by U.S. generally accepted accounting principles.

CYPRESS BIOSCIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2008			2007
Operating Activities
Net loss	$	(2,880,981	)	$	(1,221,123	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		11,120			8,325
In-process research and development		12,590,000			—
Accretion of debt discount on short-term investments		(685,317	)		(929,791	)
Share-based compensation for options issued to non-employees		7,750			44,002
Share-based compensation for stock and options issued to employees		1,980,805			1,369,963
Changes in operating assets and liabilities, net of effects from purchase of Proprius		(806,536	)		(968,242	)

Net cash provided by (used in) operating activities		10,216,841			(1,696,866	)

Investing Activities
Cash paid to acquire Proprius, net of cash acquired		(39,084,627	)		—
Purchases of short-term investments		(28,832,146	)		(40,443,090	)
Proceeds from sale of short-term investments		70,656,000			23,100,000
Purchases of property and equipment		(57,385	)		(5,552	)

Net cash provided by (used in) investing activities		2,681,842			(17,348,642	)

Financing Activities
Proceeds from exercise of stock options		399,892			243,999

Net cash provided by financing activities		399,892			243,999


Increase (decrease) in cash and cash equivalents		13,298,575			(18,801,509	)
Cash and cash equivalents at beginning of period		70,093,425			32,692,411

Cash and cash equivalents at end of period	$	83,392,000		$	13,890,902

See accompanying notes to financial statements.

CYPRESS BIOSCIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business

2. Basis of Presentation

The accompanying financial statements have been prepared by our management without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and U.S. generally accepted accounting principles for interim financial statements. Certain information and disclosures normally included in complete audited year end financial statements have been condensed or omitted. In the opinion of our management, all adjustments necessary for a fair presentation of the accompanying unaudited consolidated financial statements are reflected herein. All such adjustments are normal and recurring in nature. Interim results are not necessarily indicative of results for the full year. For more information, these financial statements should be read in conjunction with the audited financial statements and the related disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the SEC on March 17, 2008.

The condensed consolidated financial statements include the accounts of Cypress Bioscience, Inc. and its wholly-owned subsidiary, Proprius, as of March 4, 2008, the date of acquisition, collectively referred to as Cypress Bioscience, Inc. All significant intercompany accounts and transactions have been eliminated.

3. Short-Term Investments

Our short-term investments consist of securities of the U.S. government or its agencies, commercial paper and certificates of deposit. We have classified our short-term investments as available-for-sale and carry them at fair value with unrealized gains and losses, if any, reported as a separate component of stockholders’ equity and included in comprehensive income or loss. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific-identification method. Interest on securities classified as available-for-sale is included in interest income.

At March 31, 2008 and December 31, 2007, short-term investments consisted of the following:


	March 31, 2008
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government and agency debt	$	64,414,385	$	200,896	$	(435	)	$	64,614,846
Certificates of deposit		6,100,000		22,717		(6,378	)		6,116,339

	$	70,514,385	$	223,613	$	(6,813	)	$	70,731,185


	December 31, 2007
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
U.S. government and agency debt	$	98,037,775	$	112,030	$	(10,489	)	$	98,139,316
Commercial paper		5,989,083		—		(4,949	)		5,984,134
Certificates of deposit		7,600,000		936		(11,237	)		7,589,699

	$	111,626,858	$	112,966	$	(26,675	)	$	111,713,149

Cash and cash equivalents at March 31, 2008 and December 31, 2007 include an unrealized loss of $394 and $26,458, respectively.

4. Revenue Recognition

In accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force (“EITF”) No. 00-21, Revenue Arrangements with Multiple Deliverables, revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. Amounts received for upfront license fees under multiple-element arrangements are deferred and recognized over the period such arrangements require on-going services or performance. Amounts received for sponsored development activities, including funding received for certain of our employees, are recognized as research costs are incurred over the period specified in the related agreement or as the services are performed. Amounts received for milestones are recognized upon achievement of the milestone, which requires substantive effort and was not readily assured at the inception of the agreement. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.

5. Research and Development Expenses

Research and development expenses consist primarily of salaries and related personnel expenses for our research and development personnel, fees paid to external service providers to conduct clinical trials, patient enrollment costs, fees and milestone payments under our license and development agreements and costs for facilities (including our laboratory), supplies, materials and equipment. All such costs are charged to research and development expenses as incurred. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We accrue clinical trial expenses based on work performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known.

Research and development expenses also include costs incurred in connection with the third Phase III clinical trial, for which such costs are reimbursed by Forest Laboratories pursuant to the collaboration agreement.

6. Net Loss Per Share

Net loss per share is computed using the weighted average number of shares of common stock outstanding and is presented for basic and diluted net loss per share. Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the potential common shares had been issued. The dilutive effect of outstanding stock options and warrants is reflected in diluted net loss per share by application of the treasury stock method. We have excluded all outstanding stock options and warrants from the calculation of diluted loss per share for the three months ended March 31, 2008 and 2007 because such securities are antidilutive for these periods. The total number of potential common shares excluded from the calculation of diluted loss per common share was 906,596 and 1,049,324 for the three months ended March 31, 2008 and 2007, respectively.

7. Comprehensive Loss

The components of comprehensive loss are as follows:


	Three Months Ended
	March 31,
	2008			2007
Net loss	$	(2,880,981	)	$	(1,221,123	)
Unrealized gain on short-term investments		156,573			6,147

Comprehensive loss	$	(2,724,408	)	$	(1,214,976	)

8. Share-Based Compensation

We have one stock option plan, the 2000 Equity Incentive Plan, which provides for the grant to employees, directors and consultants of incentive and non-qualified stock options to purchase our common stock, as well as the granting of stock bonuses and rights to purchase restricted stock. We also have options outstanding that were previously granted under the 1996 Equity Incentive Plan, which expired in 2006.

Effective January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment, using the modified prospective transition method. For the three months ended March 31, 2008, share-based compensation expense related to employee stock options was $1,980,805, consisting of $283,276 related to research and development expenses and $1,697,529 related to general and administrative expenses. For the three months ended March 31, 2007, share-based compensation expense related to employee stock options was $1,369,963, consisting of $198,550 related to research and development expenses and $1,171,413 related to general and administrative expenses. As of March 31, 2008, there was $16.6 million of unamortized compensation cost related to unvested stock option awards, which is expected to be recognized over a remaining weighted average vesting period of 2.9 years.

The exercise price of all options granted during the three months ended March 31, 2008 and 2007 was equal to the market value on the date of grant (as defined under the applicable option plan). The estimated fair value of each option award granted was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for option grants during the three months ended March 31, 2008 and 2007:


	Three Months Ended
	March 31,
	2008			2007
Risk-free interest rate		2.7	%		4.5	%
Expected volatility		74.0	%		76.0	%
Expected option term (in years)		5.99			5.94
Dividend yield		0.0	%		0.0	%

The matching contribution in common stock to our 401(k) Plan is included as a component of our share-based compensation to employees. Such matching contribution is made on the last day of June and the last day of December of each plan year. As of March 31, 2008 and 2007, such matching contribution had not been made.

For the three months ended March 31, 2008 and 2007, share-based compensation related to options granted to non-employees, accounted for in accordance with EITF No. 96-18, Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services, was $7,750 and $44,002, respectively.

9. Collaboration Agreement

License and Collaboration Agreement with Forest Laboratories

In January 2004, we entered into a collaboration agreement with Forest Laboratories for the development and marketing of milnacipran. Under our agreement with Forest Laboratories, we sublicensed our exclusive rights to develop and commercialize milnacipran to Forest Laboratories for the United States. In addition, Forest Laboratories exercised its option to extend the territory to include Canada. In conjunction with the option exercise, Forest Laboratories paid us a non-refundable $1.0 million license payment in July 2007, which is being recognized on a straight-line basis over the remainder of the 8 year amortization period related to the original upfront license payment received in January 2004. Forest Laboratories also has an option for a specified time period to acquire an exclusive license from us in the United States and Canada to any compounds developed under our agreement with Collegium Pharmaceutical, Inc. Forest Laboratories assumed responsibility for funding all continuing development of milnacipran, including the funding of clinical trials and regulatory approvals, as well as a certain number of our employees. However, we agreed upon an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial only. In connection with this arrangement, the amount of funding that we receive from Forest Laboratories for certain of our employees was eliminated as of the fourth quarter in 2004 for the second Phase III trial only, and we paid for a majority of the external costs of the second Phase III trial only, which were approximately $9.7 million. Forest reimbursed us for one-third of the costs, or $3.2 million in February 2008 in connection with the New Drug Application (“NDA”) acceptance for milnacipran by the U.S. Food and Drug Administration (“FDA”). Forest will reimburse us for two-thirds of the amount, or $6.5 million, if the NDA is approved. Forest Laboratories is also funding the third Phase III clinical trial, including a specified number of our employees that are assisting with the conduct of that clinical trial. Forest Laboratories will also be responsible for sales and marketing activities related to any product developed under the agreement, while we have the option to co-promote up to 25% of the total physician details using our own sales force and would be reimbursed by Forest Laboratories in an amount equal to Forest’s cost of providing the equivalent detailing calls. We exercised our option to co-promote milnacipran and will detail to rheumatologists, pain centers and physical medicine and rehabilitation specialists in the U.S. when and if milnacipran is approved by the FDA. We are still determining the percentage of total physician details that our sales force will complete.

Under the agreement with Forest Laboratories, we received an upfront, non-refundable payment of $25.0 million, of which $1.25 million, classified as research and development expenses, was paid to

Pierre Fabre as a sublicense fee. Additionally, we received a $5.0 million milestone payment in June 2007 from Forest Laboratories for the successful second Phase III trial for milnacipran, of which $250,000 was paid to Pierre Fabre as a sublicense fee; a $1.0 million license payment in July 2007 to extend the territory to include Canada, of which $50,000 was paid to Pierre Fabre as a sublicense fee; a $5.0 million milestone payment from Forest Laboratories in December 2007 upon NDA filing, of which $250,000 was paid to Pierre Fabre as a sublicense fee; and a $10.0 million milestone payment from Forest Laboratories in February 2008 upon NDA acceptance, of which $500,000 was paid to Pierre Fabre as a sublicense fee. The total upfront and milestone payments to the Company under the agreement could total approximately $205.0 million, of which $46.0 million has been received to date, related to the development of milnacipran for the treatment of fibromyalgia. A large portion of the remaining balance of the potential $205 million will depend upon achieving certain sales of milnacipran. Up to an additional $45.0 million in milestone payments are payable in the event that we and Forest Laboratories develop milnacipran for other indications. In addition, we have the potential to receive royalty payments based on sales of licensed product under this agreement. Forest Laboratories also assumed the future royalty payments due to Pierre Fabre and the transfer price for the active ingredient used in milnacipran.

10. Acquisition of Proprius

On March 4, 2008, we acquired all of the outstanding stock of Proprius, a privately-held specialty pharmaceutical company. We acquired Proprius to expand our strategy to include providing personalized medicine laboratory services to rheumatologists, as well as to expand our product pipeline with the addition of two early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis. Personalized medicine laboratory services are tests which are validated analytically and clinically to provide physicians with actionable information to help manage their patients’ care, including predicting the likelihood of developing disease or optimizing therapy. We also intend to build a sales force to launch the personalized medicine laboratory services around late 2008. We have exercised the right granted by our partner, Forest Laboratories, to co-promote our leading product for fibromyalgia, milnacipran, and intend to detail it to rheumatologists, pain centers, and physical medicine and rehabilitation specialists when and if the product is approved by the FDA. Offering integrated diagnostic and therapeutic services through the same sales organization could facilitate physician access and improve the quality of the sales call, as well as help establish Cypress as a leader targeting these specific specialists. We expect to benefit from the acquisition by expanding our current product offerings and increasing our revenues. These are among the factors that contributed to a purchase price for the Proprius acquisition that resulted in the recognition of goodwill of $26.5 million. Proprius’ operations were assumed as of the date of the acquisition and are included in our results of operations beginning on March 5, 2008 and, as a result, are not reflected in our results of operations for the three months ended March 31, 2007.

Pursuant to the terms of the agreement, entered into on February 23, 2008, we acquired all of Proprius’ outstanding capital stock for $37.6 million in cash (including the payment and assumption of net indebtedness), funded with existing cash resources, as well as up to an additional $37.5 million in potential milestone-related payments associated with the development of Proprius’ therapeutic candidates. Such payments, if any, would be paid in cash and up to 50% of such payments in shares of our common stock or a combination of both, as determined at our sole discretion. The purchase price includes $3.8 million which is held in an escrow account and will be available to satisfy any claims for indemnification from the former stockholders of Proprius until the escrow is released. In addition, in connection with the acquisition of Proprius, we assumed certain agreements entered into by Proprius. We assumed Proprius’ license agreement with AlphaRx, Inc. for the in-license of a topical non-steroidal anti-inflammatory drug therapy and other successor topical non-steroidal anti-inflammatory drug therapies. Future consideration under the AlphaRx agreement includes up to $116.0 million for the successful development and commercialization of a product and potential royalty payments. In addition, we assumed the licenses obtained from third parties for certain personalized medicine laboratory services. Under the terms of these

agreements, we will be obligated to pay approximately $4.2 million in the aggregate in sales milestones and a royalty based on net sales, if any. The total purchase price, including transaction expenses of approximately $1.5 million, has been allocated to tangible and intangible assets acquired based on estimated fair market values, with the remainder classified as goodwill.

The total purchase price of the acquisition was as follows:


Cash paid for Proprius business	$	37,633,247
Estimated transaction costs		1,451,380

Total estimated purchase price	$	39,084,627

The transaction costs incurred by us primarily consist of fees for attorneys, financial advisors, accountants and other advisors directly related to the transaction.

The total purchase price has been allocated as follows based on the assets and liabilities acquired as of March 4, 2008:


Fair value of net tangible assets acquired and liabilities assumed:
Other assets	$	29,000

				29,000
In-process research and development				12,590,000
Goodwill				26,465,627

Total purchase price			$	39,084,627

The amount allocated to in-process technology represents the fair value of acquired, to-be-completed research projects, including those related to personalized medicine laboratory services and therapeutic candidates. The estimated value of approximately $12.6 million of the research projects was determined by estimating the costs to develop the acquired technology into a commercially viable product, estimating the future net cash flows from the project once commercially viable, and discounting the net cash flows to their present value. As of the acquisition date, these projects were not expected to have reached technological feasibility and will have no alternative future use. Accordingly, the amount allocated to in-process technology was charged to our consolidated statement of operations for the three months ended March 31, 2008.

Additionally, pursuant to SFAS No. 141, Business Combinations, the contingent consideration in the form of the potential milestone-related payments associated with the development of Proprius’ therapeutic candidates will be recorded upon the achievement of the related milestone at the fair value of the consideration issued as an additional cost of the acquired entity.

The accompanying statements of operations reflect the operating results of the Proprius business since March 4, 2008. Assuming the acquisition of Proprius had occurred on January 1, 2008 and 2007 and excluding any pro forma charge for in-process research and development costs and transaction costs, the pro forma unaudited results of operations would have been as follows:


	Three Months Ended
	March 31,
	2008		2007
Revenue	$	14,215,700	$	960,851
Net income (loss)	$	9,154,457	$	(2,529,700)

Net income (loss) per share:
Basic	$	0.24	$	(0.08	)
Diluted	$	0.24	$	(0.08	)

The pro forma information is not necessarily indicative of the actual results that would have been achieved had the acquisition occurred as of January 1, 2008 and 2007, or the results that may be achieved in the future.

11. Goodwill

As of March 31, 2008, our goodwill balance of $26.5 million solely relates to our acquisition of Proprius on March 4, 2008. We did not have any goodwill at March 31, 2007.

We account for acquired businesses using the purchase method of accounting in accordance with SFAS No. 141 which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. Any excess of the purchase price over the estimated fair values of net assets acquired is recorded as goodwill. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we review goodwill that has an indefinite useful life for impairment at least annually in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. We measure impairment losses for goodwill when conditions exist whereby the carrying amount of goodwill exceeds its implied fair value. Our measurement of fair value is generally based on the present value of estimated future discounted cash flows. Our analysis is based on available information and on assumptions and projections that we consider to be reasonable and supportable. The discounted cash flow analysis considers the likelihood of possible outcomes and is based on our best estimate of projected future cash flows. To date, we have not identified any indicators of impairment or recorded any impairment losses.

12. Fair Value Disclosures

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS No. 157 defines fair value based upon an exit price model.

We adopted SFAS No. 157 on January 1, 2008, with the exception of the application of the statement to non-recurring nonfinancial assets and nonfinancial liabilities. Non-recurring nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS No. 157 include those initially measured at fair value in a business combination.

SFAS No. 157 establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other

than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2008:


			Fair Value Measurements at March 31, 2008
			Quoted Prices in		Significant Other		Significant
	Balance as of		Active Markets		Observable Inputs		Unobservable
Description	March 31, 2008		(Level 1)		(Level 2)		Inputs (Level 3)
Financial instruments owned:
Money market funds	$	62,389,986	$	62,389,986	$	—	$	—
Certificates of deposit		6,116,339		6,116,339		—		—
U.S. government and agency debt		70,606,646		—		70,606,646		—
Commercial paper		14,981,239		—		14,981,239		—

Total financial instruments owned	$	154,094,210	$	68,506,325	$	85,587,885	$	—

13. Recent Accounting Pronouncements

On January 1, 2008, we adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows certain financial assets and liabilities to be recognized, at our election, at fair market value, with any gains or losses for the period recorded in the statement of income. SFAS No. 159 includes available-for-sales securities in the assets eligible for this treatment. Currently, we record the gains or losses for the period in comprehensive income and in the equity section of the balance sheet. At this time, we have not elected to account for any available-for-sale securities using the provisions of SFAS No. 159.

On January 1, 2008, we adopted EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. As our current collaborative agreements do not incorporate such revenue- and cost-sharing arrangements, the adoption of EITF Issue No. 07-1 did not have an impact on our financial statements.

On January 1, 2008, we adopted the provisions of EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods and Services to Be Used in Future Research and Development Activities. The consensus requires companies to defer and capitalize prepaid, nonrefundable

research and development payments to third parties and recognize the expense over the period that the research and development activities are performed or the services are provided, subject to an assessment of recoverability. The adoption of EITF Issue No. 07-3 did not have an impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition related costs as incurred. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008 and will apply prospectively to business combinations completed on or after that date. The impact of the adoption of SFAS No. 141(R) on our results of operations and cash flows will depend on the terms and timing of future acquisitions, if any.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, the information contained herein contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, in particular, statements about our plans, strategies and prospects. These statements, which may include words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “anticipate,” “estimate,” or similar words, are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Although we believe that our beliefs, expectations and assumptions reflected in these statements are reasonable, our actual results and financial performance may prove to be very different from what we might have predicted on the date of this Form 10-Q. Factors that could cause or contribute to differences include, but are not specifically limited to, our ability to develop milnacipran for Fibromyalgia Syndrome, our ability to commercialize our personalized medicine laboratory services and to launch our sales force around late 2008, our ability to acquire and develop any compounds or products to treat any other indications we may pursue in a timely manner, or at all, as well as the other risks detailed in this Form 10-Q and in our other SEC filings.

We undertake no obligation to publicly release revisions in such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events or circumstances, except as required by securities and other applicable laws.

Company Overview

We are committed to developing and commercializing pharmaceutical products and personalized medicine laboratory services that allow physicians to serve unmet medical needs. We are developing milnacipran for fibromyalgia (FM) and with our acquisition in March 2008 of Proprius Pharmaceuticals, Inc., or Proprius, a formerly privately held company, we have expanded our strategy to include providing personalized medicine laboratory services to rheumatologists. Personalized medicine laboratory services are tests which are validated analytically and clinically to provide physicians with actionable information to help manage their patients’ care, including predicting the likelihood of developing disease or optimizing therapy. We also intend to build a sales force to launch the personalized medicine laboratory services around late 2008. We have exercised the right granted by our partner, Forest Laboratories, Inc., or Forest Laboratories, to co-promote our leading product for FM, milnacipran, and intend to detail it to rheumatologists, pain centers, and physical medicine and rehabilitation specialists when and if the product

is approved by the U.S. Food and Drug Administration (FDA). Offering integrated diagnostic and therapeutic services through the same sales organization could facilitate physician access and improve the quality of the sales call, as well as help establish Cypress as a leader targeting these specific specialists. We also have a number of Proof of Concept (POC) stage opportunities in development, including two pharmaceutical candidates acquired from Proprius, and intend to pursue these opportunities on an ongoing basis. We continue to evaluate various other potential strategic transactions, including the acquisition of products, product candidates, technologies and companies, and other alternatives.

One of our goals is to be one of the leading companies to commercialize a product approved in the United States for the treatment of FM. Milnacipran has been approved for a non-pain condition in over 50 countries, with commercial experience outside the U.S. since 1997. We obtained an exclusive license for milnacipran from Pierre Fabre Medicament, or Pierre Fabre, in 2001.

In December 2002, we completed a Phase II trial evaluating milnacipran for the treatment of FM. In our Phase II trial, milnacipran was shown to improve pain and fatigue symptoms among patients with FM.

In January 2004, we entered into a collaboration agreement with Forest Laboratories, a leading marketer of central nervous system, or CNS, drugs with a strong franchise in the primary care and psychiatric markets. As part of this collaboration with Forest Laboratories, we sublicensed our rights to milnacipran to Forest Laboratories for the United States, with an option to extend the territory to include Canada, which was exercised in July 2007. As part of our agreements with both Forest Laboratories and Pierre Fabre, we have licensed any patents that may issue from our patent applications related to FM and milnacipran to Forest Laboratories and Pierre Fabre.

In September 2005, we announced the top-line results from the first Phase III trial with milnacipran, an 888 patient randomized, six month, double-blind, placebo-controlled pivotal study. Although our pre-specified primary endpoint did not achieve statistical significance at the p<0.05 level, we believed that the preliminary results supported continuation of the development program.

In May 2007, we announced top-line results from our second Phase III trial for milnacipran, which was a 1,196 patient randomized, three month, double-blind, placebo-controlled pivotal Phase III study. The results demonstrated statistically significant therapeutic effects of milnacipran as a treatment for FM. In this study, patients were randomized to receive either 200 mg per day of milnacipran, 100 mg per day of milnacipran or placebo. The pre-defined primary endpoints of this trial were composite responder assessments, which had previously been agreed to with the FDA. This composite responder analysis approach, which requires a clinically meaningful improvement in multiple domains, captures in one endpoint improvement in numerous symptoms which comprise FM.

In December 2007, Cypress and Forest announced that we had submitted the milnacipran New Drug Application (NDA) to the FDA. In February 2008, the FDA accepted for review the NDA for milnacipran for the treatment of FM. With a standard 10-month review timeline, the FDA Prescription Drug User Fee Act (PDUFA) target action date is the end of October 2008.

Additional information on our ongoing clinical development program for milnacipran can be found at www.clinicaltrials.gov.

In March 2008, we announced the closing of the acquisition of Proprius that included an upfront payment of approximately $37.6 million in cash (including the payment and assumption of net indebtedness), as well as an additional $37.5 million in potential milestone related payments associated with the development of Proprius’ early clinical-stage therapeutic candidates, which include a product to treat pain and a product to treat rheumatoid arthritis.

Results of Operations

The following discussion should be read in conjunction with the financial statements and the related notes contained elsewhere in this quarterly report.

Comparison of Three Months Ended March 31, 2008 and 2007

Revenue

We recognized revenues under our collaborative agreement with Forest Laboratories of $14.2 million for the three months ended March 31, 2008 compared to $1.0 million for the three months ended March 31, 2007. The increase in revenues under our collaborative agreement is due to a $10.0 million milestone payment received from Forest Laboratories in February 2008 upon NDA acceptance and a $3.2 million payment received from Forest Laboratories also upon NDA acceptance in February 2008 as reimbursement for one-third of the costs paid in connection with the second Phase III trial for milnacipran, with the remaining two-thirds payable if the NDA is approved. The revenues recorded during 2008 and 2007 consist solely of amounts earned or reimbursed to us pursuant to our collaboration agreement with Forest Laboratories, entered into in January 2004, for the development and marketing of milnacipran. Such revenues include the recognition of the upfront payment of $25.0 million from Forest Laboratories on a straight-line basis over a period of 8 years, an additional $1.0 million license payment received from Forest Laboratories in July 2007 to extend the territory to include Canada recognized on a straight-line basis over the remainder of the 8 year amortization period, sponsored development reimbursements, funding received from Forest Laboratories for certain of our employees devoted to the development of milnacipran and the $10.0 million milestone payment and $3.2 million payment for reimbursement of certain costs received during the first quarter of 2008.

We currently are not generating any revenues from milnacipran product sales. Unless and until we generate revenues from product or service sales, we expect our revenues to consist of the continued recognition on a straight-line basis of the upfront payment of $25.0 million and $1.0 million license payment to extend the territory to include Canada, sponsored development reimbursements and funding for certain of our employees devoted to the development of milnacipran. We may also recognize future milestone payments under our agreement with Forest Laboratories, which are contingent upon the achievement of agreed upon objectives and which are not guaranteed payments. In connection with our arrangement with Forest Laboratories regarding cost sharing arrangements for the second Phase III trial only, the amount of funding that we received from Forest Laboratories for certain of our employees was eliminated as of the fourth quarter in 2004 and resumed with the initiation of the third Phase III trial in the first quarter of 2006. Additionally, the amount of sponsored development reimbursements from Forest Laboratories may change periodically based on the level of development activity. Our collaboration agreement is subject to early termination by Forest Laboratories upon specified events, including breach of the agreement.

Research and Development

Research and development expenses for the three months ended March 31, 2008 were $2.7 million compared to $1.0 million for the three months ended March 31, 2007. The increase in research and development expenses is primarily attributable to a $1.0 million milestone payment and $0.5 million sublicense fee owed to Pierre Fabre upon NDA acceptance in connection with our collaboration agreement with Forest Laboratories, as well as costs incurred during the first quarter of 2008 in connection with our proof of concept studies for new compounds. This increase in research and

development expenses was partially offset by a decrease in costs incurred in connection with the second Phase III trial, which was completed in the second quarter of 2007. During the first quarter of 2008, we incurred total costs of $1.6 million, including milestone payments and sublicense fees, in connection with our Phase III programs compared to a total of $0.3 million during the first quarter of 2007. The costs for the third Phase III clinical trial are being reimbursed by Forest Laboratories as noted below.

Effective January 9, 2004, pursuant to our collaboration agreement with Forest Laboratories, Forest Laboratories assumed responsibility for funding all continuing development of milnacipran, including the funding of clinical trials and regulatory approvals. This funding received from Forest Laboratories for sponsored development reimbursements is included as a component of our revenue under collaborative agreement on the consolidated statement of operations. We agreed upon an alternative cost sharing arrangement with Forest Laboratories for the second Phase III trial only. In connection with this arrangement, we paid for a majority of the external costs of the second Phase III trial only, with Forest reimbursing us under specific scenarios, as discussed above, where the second Phase III trial is used as one of the two required pivotal trials in the NDA submission to the FDA.

General and Administrative

General and administrative expenses for the three months ended March 31, 2008 were $3.5 million compared to $2.5 million for the three months ended March 31, 2007. The increase in general and administrative expenses is primarily due to increased wages expense associated with an increase in headcount, higher legal fees incurred during the first quarter of 2008 due to increased patent filing activity, higher accounting fees incurred during the first quarter of 2008 related to tax compliance services and increased share-based compensation expense related to options granted during 2008.

In-Process Research and Development

In-process research and development represents the fair value of acquired, to-be-completed research projects, including those related to personalized medicine laboratory services and therapeutic candidates, obtained in connection with the Proprius acquisition that had not reached technological feasibility at the acquisition date and are not expected to have an alternative future use. Accordingly, the $12.6 million of in-process research and development was charged to our consolidated statement of operations during the three months ended March 31, 2008.

Interest Income

Interest income for the three months ended March 31, 2008 was $1.7 million compared to $1.3 million for the three months ended March 31, 2007. The increase in interest income for the three months ended March 31, 2008 compared to the corresponding period in 2007 is primarily due to an increase in our cash and investment balances during 2008 due to proceeds received from our secondary offering completed in June 2007.

Liquidity and Capital Resources

At March 31, 2008, we had cash, cash equivalents and short-term investments of $154.1 million compared to cash, cash equivalents and short-term investments of $181.8 million at December 31, 2007. Working capital at March 31, 2008 totaled $150.3 million compared to $178.0 million at December 31, 2007. We have invested a substantial portion of our available cash in high quality marketable debt instruments of governmental agencies, commercial paper and certificates of deposit, which are within federally insured limits. We have established guidelines relating to our investments to preserve principal and maintain liquidity.

Net cash provided by operating activities as disclosed in our Statement of Cash Flows was $10.2 million for the three months ended March 31, 2008, compared to net cash used in operating activities of $1.7 million for the three months ended March 31, 2007. The primary source of cash from operations during the three months ended March 31, 2008 was the $10.0 million milestone payment and the $3.2 million reimbursement of expenses received from Forest Laboratories, offset by cash used in operations including $0.8 million for changes in operating assets and liabilities and non-cash charges of $13.9 million that includes $12.6 million of the write-off of in-process research and development related to the acquisition of Proprius. The primary use of cash during the three months ended March 31, 2007 were actual expenditures to fund our operating activities during the period.

Net cash provided by investing activities as disclosed in our Statement of Cash Flows was $2.7 million for the three months ended March 31, 2008, compared to net cash used in investing activities of $17.3 million for the three months ended March 31, 2007. The fluctuation in net cash from investing activities during the three months ended March 31, 2008 compared to the corresponding prior year period was primarily a result of a net increase in the proceeds from the sale of short-term securities during the three months ended March 31, 2008 offset by $39.1 million in cash paid for the acquisition of Proprius.

Net cash provided by financing activities as disclosed in our Statement of Cash Flows was $0.4 million for the three months ended March 31, 2008, compared to $0.2 million for the three months ended March 31, 2007. The increase in net cash provided by financing activities during the three months ended March 31, 2008 compared to the corresponding prior year period was primarily the result of proceeds of approximately $0.4 million from the exercise of stock options during 2008 compared to proceeds of approximately $0.2 million from the exercise of stock options during 2007.

The following table summaries our long-term contractual obligations as of March 31, 2008:


			Less than
			1 year		1 - 3 years		3 - 5 years		More than 5
	Total		(2008)		(2009- 2011)		(2012-2014)		years (2015 +)
Operating leases	$	879,315	$	143,243	$	610,982	$	125,090	$	—
Purchase obligations (1)		1,647,526		1,647,526		—		—	$	—

Total	$	2,526,841	$	1,790,769	$	610,982	$	125,090	$	—


(1)		Purchase obligations include agreements to purchase goods or services, including consulting services, that are enforceable and legally binding on us and that specify all significant terms. This includes contracts that are cancelable with notice and the payment of an early termination penalty. Purchase obligations exclude agreements that are cancelable without penalty and also exclude accrued liabilities to the extent presented on the balance sheet as of March 31, 2008.

Other commercial and contractual commitments include potential milestone payments of up to $3.5 million to Pierre Fabre and sublicense payments to Pierre Fabre based on 5% of any upfront and milestone payments received from Forest Laboratories, milestone payments up to $37.5 million associated with the development of Proprius’ therapeutic candidates, milestone payments of up to $116.0 million to AlphaRx, milestone payments of up to $4.3 million to Collegium Pharmaceutical, Inc. in connection with the reformulation and new product agreement entered into with Collegium, milestone payments up to approximately $45.0 million in connection with license agreements related to our POC programs and milestone payments up to $4.2 million in connection with license agreements related to certain personalized medicine laboratory services. In the event we move forward with development of a product or service under any of these arrangements, in most instances, we would also be obligated to make royalty payments. Contractual obligations for which we will be reimbursed by Forest Laboratories are not included in the table above. Additionally, our current lease agreement for our executive and

administrative offices was extended to July 2012 and is reflected in the table above, and we are currently searching for new office space due to the recent acquisition of Proprius.

Unless and until we can consistently generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities, from revenue under our collaboration agreement with Forest Laboratories and, if available to us, cash from financings. In June 2007, we completed a public offering of 4,700,000 shares of our common stock at $15.50 per share resulting in proceeds of approximately $69.9 million, net of underwriting and offering costs.

Our current expected primary cash needs on both a short term and long-term basis are for the development of products under our POC trials and certain personalized medicine laboratory services, including the Early Rheumatoid Arthritis Prediction Algorithm and Methotrexate Polyglutamates Test, establishment of a commercial infrastructure, general research, working capital and other general corporate purposes and the identification, acquisition or license, and development of potential future products and services. In addition to the amounts payable under our merger agreement with Proprius and our agreements with Pierre Fabre, AlphaRx, Collegium and various licensors under our POC trials and personalized medicine laboratory services business and the costs of in-licensing or acquiring additional compounds or companies and funding clinical development for any product (other than our FM product and our ongoing POC trials) that we may in-license or acquire, we estimate that based on our current business plan, we will require approximately $25 million to fund our operations for the remainder of 2008, which includes funding of operations related to Proprius. In addition, one of our ongoing goals is to continue to identify and in-license new products and product candidates. In the event we acquire, license or develop any new products or product candidates, or begin any new POC program, the amount to fund our operations for 2008 would increase, possibly materially. Even though we intend to launch our personalized medicine laboratory services around late 2008, our net losses will continue for at least the next several years as we seek to acquire, license or develop additional products, product candidates and services. Such losses may fluctuate, and the fluctuations may be substantial.

Based on our current business plan, we believe our cash and cash equivalents and short-term investments balances at March 31, 2008 are sufficient to fund operations through at least 2009. However, we are actively continuing to evaluate various potential strategic transactions, including the potential acquisitions of products, product candidates and companies, and other alternatives. In order to acquire or develop additional products and product candidates, we will require additional capital. The amount of capital we require is dependent upon many forward-looking factors that could significantly increase our capital requirements, including the following:

	•		the costs and timing of development and regulatory approvals for milnacipran and the products and services we acquired in connection with the Proprius acquisition;

	•		the costs of establishing a commercial infrastructure;

	•		the extent to which we acquire or invest in other products, product candidates and businesses;

	•		the costs of in-licensing drug candidates;

	•		the ability of Forest Laboratories and us to reach milestones, and other events or developments under our collaboration agreement; and

	•		the costs of commercialization of any future products and services.

Because we are unable to predict the outcome of the foregoing factors, some of which are beyond our control, we are unable to estimate with certainty our mid to long-term capital needs. Unless and until

we can generate a sufficient amount of product and service revenue, if ever, we expect to finance future capital needs through public or private debt or equity offerings or collaboration and licensing arrangements, as well as interest income earned on cash balances. We do not currently have any commitments or specific plans for future external funding. We may not be able to raise additional capital and the funds we raise, if any, may not allow us to maintain our current and planned operations. If we are unable to obtain additional capital, we may be required to delay, scale back or eliminate some or all of our development of existing or future product candidates and personalized medicine laboratory services.

To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies

There were no significant changes in critical accounting policies or estimates from those at December 31, 2007 other than as follows:

Goodwill

We record goodwill when the purchase price of net tangible and intangible assets acquired exceeds their fair value. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we review goodwill that has an infinite useful life for impairment at least annually in our fourth fiscal quarter, or more frequently if an event occurs indicating the potential for impairment. We measure impairment losses for goodwill when conditions exist whereby the carrying amount of goodwill exceeds its implied fair value. Our measurement of fair value is generally based on the present value of estimated future discounted cash flows. Our analysis is based on available information and on assumptions and projections that we consider to be reasonable and supportable. The discounted cash flow analysis considers the likelihood of possible outcomes and is based on our best estimate of projected future cash flows.

Fair Value of Financial Assets and Liabilities

In September 2006, the FASB issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Effective January 1, 2008, we adopted the provisions of SFAS No. 157.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We classify money market funds and certificates of deposits as Level 1 assets. At March 31, 2008, our Level 1-classified investments totaled $68.5 million. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. We classify U. S. government and agency debt and commercial paper holdings as Level 2 assets. At March 31, 2008, our Level 2-classified investments totaled $85.6 million. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. At March 31, 2008, we did not hold any Level 3-classified financial assets. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the

significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

For additional information regarding the adoption of SFAS No. 157, see Note 12, Fair Value Disclosures.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We have invested our excess cash in United States government securities, commercial paper, certificates of deposit and money market funds with strong credit ratings. As a result, our interest income is most sensitive to changes in the general level of United States interest rates. We do not use derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the investment-grade securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve over a three month period would not materially affect the fair value of our financial instruments that are exposed to changes in interest rates.

ITEM 4 — CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the timelines specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

In connection with the preparation of our year end financial statements, management identified a material weakness in our internal control over financial reporting related to the classification of our cash and cash equivalents and short-term investments. It was determined that our policies and procedures did not provide for effective oversight and review of our investments in marketable securities as it relates to the appropriate classification of such securities. See “Item 9A - Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2007 for a more complete description of this material weakness. Management concluded that our internal control over financial reporting was not effective as of December 31, 2007. We remediated this material weakness in the first quarter of 2008 by implementing additional review procedures surrounding our investments in marketable securities.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

PART II OTHER INFORMATION

Item 1 — Legal Proceedings

From time to time we are involved in certain litigation arising out of our operations. We are not currently engaged in any legal proceedings that we expect would materially harm our business or financial condition.

Item 1A — Risk Factors

We have marked with an asterisk those risk factors that reflect substantive changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2007.

Risks related to our business

* The FDA approval of milnacipran or any future product candidate is uncertain and will involve the commitment of substantial time and resources.

The FDA has accepted the NDA application for milnacipran for review, but we may not receive regulatory approval from the FDA or any other regulatory body required for the commercial sale of milnacipran, or any future products in the United States for any number of reasons. In addition, even if we do obtain approval to market milnacipran, the approval process by the FDA may extend beyond the target PDUFA action date at the end of October 2008 due to additional data or analyses that the FDA may request. A PDUFA action date is simply a goal and the FDA has missed its stated PDUFA dates in the past.

There are limited data supporting the use of milnacipran for the treatment of FM and such data have been generated by us. Although milnacipran is currently being sold by Pierre Fabre outside North America for a non-pain indication, it has only completed testing as a treatment for FM in our Phase II trial and our two Phase III trials. We must conduct and obtain favorable results in at least two pivotal Phase III trials to support an application for FDA approval of the product candidate. In September 2005, we reported top line results from our first Phase III clinical trial for patients with FM and our trial did not achieve statistical significance on our prospectively specified primary endpoint. Although we submitted the NDA using our first and second Phase III clinical trials around the end of 2007, based in part on an FDA recommended re-analysis of the first Phase III trial, and the NDA has been accepted, the FDA may not ultimately accept the first trial as one of the registration quality studies necessary to support NDA approval and may find that the conditions of the Special Protocol Assessment have not been met. It is also possible that our ongoing third Phase III trial for milnacipran will not achieve statistical significance or will otherwise generate data that is unfavorable. In addition, we do not anticipate obtaining results from our third Phase III trial until the second half of 2008. Although we believe based on our analysis of the data, that the effect of milnacipran has been durable in clinical trial patients studied to date, further studies may prove that any positive effects from patients taking milnacipran may not be durable. Further, all or any of our clinical trials may reveal that milnacipran is not safe. If milnacipran is not demonstrated to be a safe and effective treatment for FM to the satisfaction of the FDA or other regulatory agencies we will not receive regulatory approval and our business would be materially harmed. Furthermore, the overall adverse events profile in our combined pivotal studies has included palpitations (7% vs. 2% placebo), heart rate increase (6% vs. 1% placebo) and hypertension (5% vs. 2% placebo), and recent publicity related to drug safety issues in the market, as well as enhanced statutory authority of the FDA in the area of drug safety, may make approval of any drug by the FDA more difficult.

The regulatory approval of a new drug typically takes many years and the outcome is uncertain. Despite the time and resources expended, regulatory approval is never guaranteed. If we fail to obtain regulatory approval for milnacipran, or any future therapeutic product candidates, we will be unable to market and sell any therapeutic products and therefore may never generate any revenues from therapeutic

product sales or become profitable. In addition, our collaborators, or our third-party manufacturers’ failure to comply with the FDA and other applicable United States or foreign regulations may subject us to administrative or judicially imposed sanctions, including warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production and refusal to approve new drug approval applications.

As part of the regulatory approval process, we must conduct, at our own expense, preclinical research and clinical trials for each product candidate sufficient to demonstrate its safety and efficacy to the satisfaction of the FDA and other regulatory agencies in the United States and other countries where the product candidate will be marketed if approved. The number of preclinical studies and clinical trials that will be required varies depending on the product, the disease or condition that the product is in development for and the regulations applicable to any particular product. The regulatory process typically also includes a review of the manufacturing process to ensure compliance with applicable regulations and standards, including the cGMP requirements. The FDA can delay, limit or decline to grant approval for many reasons, including:

	•		a product candidate may not be safe or effective;

	•		we may not achieve statistical significance for the primary endpoint;

	•		FDA officials may interpret data from preclinical testing, clinical trials, and/or pharmacovigilance data from use of milnacipran outside of the United States in different ways than we interpret such data;

	•		the FDA might not approve our manufacturing processes or facilities, or the processes or facilities of any future collaborators or contract manufacturers, including Pierre Fabre’s facility for the manufacture of the active ingredient in milnacipran;

	•		the FDA may change its approval policies or adopt new regulations; and

	•		the FDA may request additional data.

* We may not successfully integrate the business or personnel we recently acquired in connection with our acquisition of Proprius.

As part of our strategy, we are actively evaluating potential strategic transactions, including the acquisitions of products, product candidates, technologies and companies, in order to expand our product pipeline and service offerings. In March 2008, we acquired Proprius, a formerly private San Diego-based personalized medicine laboratory services and specialty pharmaceutical company and now one of our subsidiaries. We do not have any experience in the personalized medicine laboratory services business and face many challenges with respect to the integration of the two companies. Our acquisition of Proprius will expose us to operational and financial risks, including:

	•		higher development or commercialization costs than we anticipate for the personalized medicine laboratory services and therapeutic products;

	•		challenges with running a services business;

	•		higher than expected licensing and integration costs;

	•		exposure to liabilities of licensed and acquired intellectual property, compounds, products and services;

	•		disruption of our business and diversion of our management’s time and attention as part of integrating Proprius’ business with our operations; and

	•		potential significant impairement charges related to goodwill.

We will devote significant resources to our new business and we may fail to realize the anticipated benefit of this strategic transaction with Proprius.

We may not be successful in creating a commercial infrastructure.

We intend to create a commercial infrastructure in order to launch our diagnostic business but may not be successful in so doing by the end of 2008, or at all, especially in light of the fact that we currently do not have a sales force. We also have exercised our co-promotion right which will also allow us to co-promote milnacipran under our agreement with Forest Laboratories and be paid by Forest for the milnacipran portion of the sales details. The co-promotion right is subject to our building our own marketing and sales capabilities, and we currently do not have the ability to directly sell, market or distribute any product. Many of our competitors have significantly greater experience than we do in selling, marketing and distributing products and services, and we may not be able to compete successfully with them with the sales force we develop. Although we intend to build a sales force to launch our personalized medicine laboratory services business, this may not occur in a timely fashion, or at all. If it does not occur in a timely fashion, we may lose our co-promotion right with respect to milnacipran. Also, because we may begin creating our sales force prior to the date on which we will obtain information with respect to the FDA’s decision whether or not to approve milnacipran for FM, and because milnacipran may never be approved, we may never realize the strategic synergies that would have been obtained if a portion of our sales force was funded by Forest Laboratories, and we may consequently incur greater commercial costs to promote the personalized medicine laboratory services. Even though we intend to offer, over time, integrated diagnostic and therapeutic services through the same sales organization, this may not facilitate greater physician access or improve the quality of the sales call, and it may not help establish Cypress as a leader targeting these specific specialists.

In the event that our agreement with Forest Laboratories is terminated, or with respect to any other product we may develop which is not covered by our collaboration with Forest Laboratories, we would have to obtain the assistance of a pharmaceutical company or other entity with a large distribution system and a large direct sales force, or build a substantial marketing and sales force with appropriate technical expertise and supporting distribution capabilities. We may not be able to enter into such arrangements with third parties in a timely manner or on acceptable terms to establish sales, marketing and distribution capabilities of our own. To the extent that we enter into co-promotion or other licensing arrangements, our product revenues are likely to be lower than if we directly marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, and these efforts may not be successful.

We are dependent on our collaboration with Forest Laboratories to develop and commercialize milnacipran and to obtain regulatory approval. Events or circumstances may occur that delay or prevent the development and commercialization of milnacipran.

Pursuant to the terms of our collaboration agreement with Forest Laboratories, we granted Forest Laboratories an exclusive sublicense for the development and marketing of milnacipran, for all indications in the United States. Forest exercised its option to extend the territory to include Canada. In addition, Forest Laboratories has the option to acquire an exclusive license from us in the United States and Canada, to any compounds developed under our agreement with Collegium Pharmaceutical, Inc. Forest Laboratories is responsible for funding the development of milnacipran, including clinical trials and regulatory approval, other than the external costs of the second Phase III trial, which we have funded, and the remainder of such funded costs are reimbursable to us in the event the NDA is approved by the

FDA. If the FDA approves milnacipran, Forest Laboratories will also have primary responsibility for the marketing and sale of the approved product and will share responsibility for compliance with regulatory requirements. We have limited control over the amount and timing of resources that Forest Laboratories will dedicate to the development, approval and marketing of milnacipran. Further, it is possible that they may terminate development and our license agreement with them. Even if they continue to develop milnacipran, they may do so on a slower timeline than originally predicted. We are conducting a third Phase III clinical trial for which target enrollment is 1,000 patients and our development timeline could be extended beyond our current expectation, which is that we will have results from this clinical trial in the second half of 2008. Our ability to generate milestone and royalty payments from Forest Laboratories depends on Forest Laboratories’ ability to establish the safety and efficacy of milnacipran, obtain regulatory approvals and achieve market acceptance of milnacipran for the treatment of FM.

We are subject to a number of additional risks associated with our dependence on our collaboration with Forest Laboratories, including:

	•		Forest Laboratories could fail to devote sufficient resources to the development, approval, commercialization, or marketing and distribution of any products developed under our collaboration agreement, including by failing to develop specialty sales forces if such sales forces are necessary for the most effective distribution of any approved product;

	•		We and Forest Laboratories could disagree as to development plans, including the number and timing of clinical trials or regulatory approval strategy, or as to which additional indications for milnacipran should be pursued, if any, and therefore milnacipran may never be developed for any indications other than FM;

	•		Forest Laboratories could independently develop, develop with third parties or acquire products that could compete with milnacipran, including drugs approved for other indications used by physicians off-label for the treatment of FM;

	•		Forest Laboratories could stop the ongoing third Phase III clinical trial of milnacipran for the treatment of FM or any other clinical trials for milnacipran or abandon or underfund the development of milnacipran, repeat or conduct additional clinical trials or require a new formulation of milnacipran for clinical testing, or delay the commencement of any additional clinical trials for milnacipran for the treatment of FM; and

	•		Disputes regarding the collaboration agreement that delay or terminate the development, commercialization or receipt of regulatory approvals of milnacipran, may delay or prevent the achievement of clinical or regulatory objectives that would result in the payment of milestone payments or result in significant litigation or arbitration.

Furthermore, Forest Laboratories may terminate our collaboration agreement upon our material breach or our bankruptcy and may also terminate our agreement upon 120 days’ notice in the event Forest Laboratories reasonably determines that the development program indicates issues of safety or efficacy that are likely to prevent or significantly delay the filing or approval of an NDA or to result in labeling or indications that would significantly adversely affect the marketing of any product developed under the agreement. If any of these events occur, we may not be able to find another collaborator for development or commercialization, and even if we elected to pursue further development and commercialization of milnacipran, we would experience substantially increased capital requirements that we might not be able to fund.

* All of our personalized medicine laboratory services are going to be performed at a single laboratory and, in the event this facility was to be affected by man-made or natural disasters, our operations could be severely impaired.

We intend to perform all our diagnostic testing services in our laboratory located in San Diego, California. Despite precautions taken by us, any future natural or man-made disaster at this laboratory, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In addition, we intend to use temporary lab space and anytime a lab is moved, it could also cause substantial delay in our operations, damage or destroy our equipment and biological samples or cause us to incur additional expenses. In the event of an extended shutdown of our laboratory, we may be unable to perform our diagnostic testing services in a timely manner or at all and therefore would be unable to operate our business in a commercially competitive manner. We cannot assure you that we could recover quickly from a serious natural or man-made disaster or that we would not permanently lose customers as a result of any such business interruption. This could harm our operating results and financial condition.

In order to rely on a third party to perform our diagnostic testing services, we could only use another facility with established state licensure and accreditation under CLIA. We may not be able to find another CLIA-certified facility and comply with applicable procedures, or find any such laboratory that would be willing to perform the tests for us on commercially reasonable terms. Additionally, any new laboratory opened by us would be subject to certification under CLIA and licensure by various states, which would take a significant amount of time and result in delays in our ability to begin operations.

* Failure to timely or accurately bill for our personalized medicine laboratory services could have a material adverse effect on our net revenues and bad debt expense.

Billing for diagnostic testing can be extremely complicated and we have no experience performing such billing. Depending on the billing arrangement and applicable law, we must bill various payors, such as insurance companies, Medicare, Medicaid, physicians, hospitals, employer groups and patients, all of which have different billing requirements. Additionally, compliance with applicable laws and regulations as well as internal compliance policies and procedures adds further complexity to the billing process. Changes in laws and regulations could negatively impact our ability to bill our clients or increase our costs. CMS also establishes procedures and continuously evaluates and implements changes to the reimbursement process for billing government programs.

Missing or incorrect information on test requisitions adds complexity to and slows the billing process, creates backlogs of unbilled tests, and generally increases the aging of accounts receivable and bad debt expense. Failure to timely or correctly bill may lead to our not being reimbursed for our services or an increase in the aging of our accounts receivable, which could adversely affect our results of operations and cash flows. Failure to comply with applicable laws relating to billing federal healthcare programs could also lead to various penalties, including:

	•		exclusion from participation in Medicare/Medicaid programs;

	•		asset forfeitures;

	•		civil and criminal fines and penalties; and

	•		the loss of various licenses, certificates and authorizations necessary to operate our business.

Any of these penalties or sanctions could have a material adverse effect on our results of operations or cash flows.

We rely upon an exclusive license from Pierre Fabre in order to develop and sell our milnacipran product candidate, and our ability to pursue the development and commercialization of milnacipran for the treatment of FM depends upon the continuation of our license from Pierre Fabre.

Our license agreement with Pierre Fabre provides us with an exclusive license to develop and sell any products with the compound milnacipran as an active ingredient for any indication in the United States and Canada, with a right to sublicense certain rights to Forest Laboratories under our collaboration with Forest Laboratories. Either we or Pierre Fabre may terminate the license agreement for cause upon 90 days’ prior written notice to the other party upon the bankruptcy or dissolution of the other party, or upon a breach of any material provision of the agreement if the breach is not cured within 90 days following the written notice. Furthermore, Pierre Fabre has the right to terminate the agreement upon 90 days’ prior notice to us if we and Forest terminate our development and marketing activities with respect to milnacipran, if we challenge certain patent rights of Pierre Fabre and under specified other circumstances. If our license agreement with Pierre Fabre were terminated, we would lose our rights to develop and commercialize products using the compound milnacipran as an active ingredient, as the compound is manufactured under Pierre Fabre patents and using Pierre Fabre know-how and trade secrets, and it would be unlikely that we could obtain the active ingredient in milnacipran from any other source.

We rely upon Pierre Fabre as our exclusive supplier of the compound used as the active ingredient in our milnacipran product candidate and if Pierre Fabre fails to supply us sufficient quantities of the active ingredient it may delay or prevent us from developing and commercializing milnacipran.

Pursuant to our purchase and supply agreement with Pierre Fabre, Pierre Fabre is the exclusive supplier to us and Forest Laboratories of the compound used as the active pharmaceutical ingredient in our milnacipran product candidate. Neither we nor Forest Laboratories have facilities for the manufacture of milnacipran. Currently, Pierre Fabre manufactures the active ingredient of milnacipran in its facility in Gaillac, France. Pierre Fabre is the only worldwide supplier of the active ingredient of milnacipran that is currently approved for sale for a non-pain indication outside the United States, but is not approved for sale in the United States. If any product is commercialized under the agreement, Pierre Fabre or its sublicensee will have the exclusive right to manufacture the active ingredient used in our commercial product. If milnacipran is commercialized for use in the United States, Pierre Fabre’s facility or its sublicensee will need to be inspected by the FDA for compliance with current good manufacturing practices, or cGMP, requirements. Due to the projected commercial quantities of milnacipran that we may require and to provide a second manufacturing site, Pierre Fabre has agreed that within a certain time period after commercial launch of milnacipran, it will qualify an additional manufacturing facility. We do not have control over Pierre Fabre’s compliance with cGMP requirements or Pierre Fabre’s compliance with its obligation to qualify a second manufacturing facility. If Pierre Fabre fails or is unable to provide, in a timely and economic manner, required quantities of the active ingredient that Forest Laboratories or we request for clinical purposes, our development program could be delayed. In addition, if Pierre Fabre fails to timely and economically supply us sufficient quantities for commercial sale, if milnacipran is ever commercialized, our product sales and market acceptance of the product could be adversely affected.

Furthermore, our purchase and supply agreement may be terminated for cause either by us or by Pierre Fabre upon 90 days’ prior written notice to the other party upon a material breach of the agreement if the breach is not cured within 90 days following the written notice. We have the right to manufacture milnacipran if Pierre Fabre does not have a required buffer stock or in the event that we terminate our license agreement with Pierre Fabre under certain circumstances. If our purchase and supply agreement with Pierre Fabre is terminated, we are unlikely to be able to qualify another supplier of the active ingredient within a reasonable time period, and our ability to develop and commercialize milnacipran will be significantly impaired.

Our agreements with Pierre Fabre and Forest Laboratories restrict our ability to develop specified compounds, which limits how we can expand our product candidates.

Under our agreements with Pierre Fabre and Forest Laboratories, Forest Laboratories has agreed to pay Pierre Fabre and us a royalty, in the event that Forest Laboratories sells a product other than milnacipran for FM for a specified period of time, which shall not be less than three years. We are, in turn, obligated to pay a portion of the royalty we receive from Forest Laboratories to Pierre Fabre. In addition, each of us is subject to limitations related to each party’s development of any serotonin norephinephrine reuptake inhibitor, or SNRI, products other than milnacipran. These limitations include: (i) a prohibition on developing an SNRI product for specified indications for which milnacipran is being developed; and (ii) a prohibition on developing an SNRI product for any indication for a specified time period, and after such specified time period, a requirement that if one of the parties launches and sells an SNRI product that is prescribed off-label for any indication for which milnacipran is being developed, the selling party must reimburse the other parties for lost sales due to the off-label use.

Provisions in our collaboration agreement with Forest Laboratories and our license agreement with Pierre Fabre may prevent or delay a change in control.

Our collaboration agreement with Forest Laboratories provides that Forest Laboratories may elect to terminate our co-promotion rights for milnacipran or any other product developed under the collaboration agreement and we may lose our decision-making authority with respect to the development of milnacipran if we engage in a merger, consolidation or sale of all or substantially all of our assets, or if another person or entity acquires at least 50% of our voting capital stock. Our license agreement with Pierre Fabre provides that Pierre Fabre may elect to terminate the agreement upon a change in control transaction in which a third party acquirer of us controls an SNRI product, and the acquirer does not take certain actions (e.g., divestiture of such SNRI product) within a specified time period to cure the breach of certain restrictions in the agreement that results from such SNRI product. These provisions may have the effect of delaying or preventing a change in control or a sale of all or substantially all of our assets, or may reduce the number of companies interested in acquiring us.

We are at an early stage of development and we do not have and may never develop any commercial services or products that generate revenues.

We are at an early stage of development as a biotechnology company and do not have any commercial services or products. Our current product and services candidates, as well as any future products and services that we may acquire or develop, will require significant additional development, appropriate regulatory approval, and additional investments before they can be commercialized, if ever. Our product development and product acquisition efforts may not lead to commercial services or drugs, either because the service and product candidates are not shown to be safe and effective, or because we have inadequate financial or other resources to pursue clinical development of the service and product candidate or because the FDA, CMS or state authorities do not grant or otherwise withdraw or revoke a regulatory approval. For example, in mid-2006, we discontinued our obstructive sleep apnea program because our Phase IIa trials did not support continued development. In addition, we may not achieve our internal timelines, including reporting results from our third Phase III clinical trial for milnacipran in the second half of 2008.

Rheumatologists do not currently use personalized medicine laboratory services to predict which of their patients with undifferentiated arthritis will go on to develop RA, or to determine the level of methotrexate (MTX) polyglutamates among their patients on MTX. We may be unable to drive awareness of, and to establish the clinical need for, these personalized medicine laboratory services, and therefore may be unable to successfully commercialize these products and services.

Further, if we are unable to commercialize the MTX Polyglutamates Test and the Early RA Prediction algorithm, or any of the other personalized medicine laboratory services under development as part of the Proprius acquisition, are unable to develop the topical NSAID and RA treatment under development as part of the Proprius acquisition, and Forest Laboratories and Cypress are unable to develop milnacipran as a commercial drug in the United States, or if such development is delayed, we will be unable to generate revenues, may be unsuccessful in raising additional capital and may cease our operations. Even if we do commercialize any product or personalized medicine laboratory service, we still may not ever achieve profitability.

If we receive regulatory approval for milnacipran or any other future product candidate, and secure and maintain regulatory approvals related to our personalized medicine laboratory services, we will be subject to ongoing FDA, CLIA and state regulatory obligations and continuing regulatory review by applicable regulatory authorities.

Any regulatory approvals that we or our collaborators receive for milnacipran or any future product candidates will be limited to the indications, dosages and restrictions on the product label. We currently are seeking approval for milnacipran in the treatment of FM. The FDA may not approve milnacipran for our preferred indication at all, may approve milnacipran for a more limited indication, or may impose additional limitations on the indicated uses or require post-marketing surveillance or the performance of potentially costly post-marketing studies. Even if we receive FDA and other regulatory approvals, as we have seen with other products on the market for pain, milnacipran or any of our other future product candidates may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those product candidates from the market. The most common treatment emergent adverse events during the placebo-controlled clinical trials of milnacipran for FM included nausea (37% vs. 20% placebo), headache (18% vs. 14% placebo), constipation (16% vs. 4% placebo), hot flashes (12% vs. 2% placebo), hyperhidrosis (9% vs. 2% placebo), vomiting (7% vs. 2% placebo), palpitations (7% vs. 2% placebo), heart rate increase (6% vs. 1% placebo), dry mouth (5% vs. 2% placebo) and hypertension (5% vs. 2% placebo). Any marketed product and its manufacturer continue to be subject to strict FDA regulation after approval, including regulation of product labeling and packaging, adverse event reporting, manufacture, storage, advertising, promotion and recordkeeping. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its withdrawal from the market. Federal and state regulatory approvals we may receive related to planned or future personalized medicine laboratory services will mandate specific clinical laboratory approval standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality and inspections, and our failure to meet and maintain those approvals could adversely affect our ability to offer personalized medicine laboratory products and services. In addition, the FDA has in the past and may in the future claim regulatory authority over laboratory-developed tests, in which event our personalized medicine laboratory services may directly or indirectly become subject to FDA approval.

If advances in technology allow others to perform diagnostic tests which are similar to or better than ours or to perform such services in a more efficient or cost-effective manner than is currently possible, our personalized medicine laboratory services may not meet with demand in the marketplace or the demand for these services may decrease.

The diagnostic industry is characterized by rapidly advancing technology that may enable clinical laboratories, hospitals, physicians or other medical providers to perform personalized medicine laboratory services similar to or better than ours in a more efficient or cost-effective manner than is currently possible. In the event that we launch our personalized medicine laboratory services, and then other advances in technology result in a decreased demand for our personalized medicine laboratory services, our financial condition and results of operations would be harmed. In addition, in order for our business to be successful, we may need to develop new diagnostic tests or improve existing diagnostic tests. There is no assurance, however, that we will be able to develop or improve these personalized medicine laboratory

services in the future. Even if we successfully develop such services in a timely manner, these new tests may not be utilized by our customers. If we fail to develop new services or release new or improved tests on a timely basis, or if such tests do not obtain market acceptance, our financial condition and results of operations could also be harmed.

* We rely on third parties to conduct all of our clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize milnacipran or any of our other future product candidates.

As of April 30, 2008, we had only 23 full-time employees. We have in the past and expect to continue to rely on third parties to conduct all of our clinical trials. Because we do not conduct our own clinical trials, we must rely on the efforts of others and cannot always control or predict accurately the timing of such trials, the costs associated with such trials or the procedures that are followed for such trials. We expect to continue to rely on third parties to conduct all of our future clinical trials. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, or if they fail to maintain compliance with applicable government regulations and standards, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval for or successfully commercialize milnacipran, or any of our other future product candidates.

Even if our product candidates are approved or our personalized medicine laboratory service candidates are commercialized, the market may not accept these products or services.

Even if our service and product development efforts are successful and even if the requisite regulatory approvals are obtained, the MTX Polyglutamates Test, the Early RA Prediction Algorithm, milnacipran, or any future product candidates that we may develop may not gain market acceptance among physicians, patients, healthcare payors and the medical community. The FDA has only approved the first drug recently for the management of FM, and we cannot predict whether milnacipran, if approved, will gain market acceptance. A number of additional factors may limit the market acceptance of our services and products including the following:

	•		timing of market entry relative to competitive services and products;

	•		extent of marketing efforts by us and third-party distributors or agents retained by us;

	•		rate of adoption by healthcare practitioners;

	•		rate of a product’s acceptance by the target community;

	•		availability of alternative therapies;

	•		price of our services and products relative to alternative therapies;

	•		availability of third-party reimbursement; and

	•		the prevalence or severity of side effects or unfavorable publicity concerning our products or similar products.

If the MTX Polyglutamates Test, the Early RA Prediction Algorithm, milnacipran, or any future product candidates that we may develop do not achieve market acceptance, we may lose our investment in that product candidate, which may cause our stock price to decline.

Our competitors may develop and market products and services that are less expensive, more effective or safer, which may diminish or eliminate the commercial success of any products or services we may commercialize.

The pharmaceutical and diagnostic industries are highly competitive and require an ongoing, extensive search for technological innovation. They also require, among other things, the ability to effectively discover, develop, test, commercialize, market and promote products, including communicating the effectiveness, safety and value of products to actual and prospective customers, including medical professionals. Many of our competitors have greater resources than we have. This enables them, among other things, to spread their marketing and promotion costs over a broader revenue base. Other competitive factors in the pharmaceutical and diagnostic industries include quality and price, product technology, reputation, customer service and access to technical information.

It is possible that developments by our competitors could make our products, personalized medicine laboratory services or technologies less competitive or obsolete. Our future growth depends, in part, on our ability to provide products and services which are more effective than those of our competitors and to keep pace with rapid medical and scientific change. Sales of our existing product candidates, if initiated, may decline rapidly if a new product is introduced by a competitor, particularly if a new product represents a substantial improvement over any of our existing products. In addition, the high level of competition in our industry could force us to reduce the price at which we sell our products or require us to spend more to market our products.

With respect to our FM program, in June 2007, the FDA approved Pfizer Inc.’s drug pregabalin (Lyrica^®) for the management of FM. In addition, Eli Lilly and Company conducted a Phase III program for duloxetine (Cymbalta^®) as a treatment for FM and announced in August 2007 that they filed the sNDA for FM. Duloxetine is a serotonin norepinephrine reuptake inhibitor, and as a dual reuptake inhibitor is therefore similar in pharmacology to milnacipran, which is a norepinephrine serotonin reuptake inhibitor. Based on the similar pharmacology, it is anticipated that duloxetine, which is currently approved for the treatment of depression and neuropathic pain, is receiving some off-label use for the treatment of FM. Tricyclic antidepressants, or TCAs, which are available as inexpensive generic formulations, are also used to treat FM and will likely be less expensive than milnacipran if milnacipran receives FDA approval.

The market potential for FM is considerable and a number of pharmaceutical companies focused on therapies for alleviating pain or antidepressant therapies could decide to evaluate their current product candidates for the treatment of FM at any time. Due to the high prevalence and incidence of FM, we anticipate that most, if not all, of the major pharmaceutical companies will have significant research and product development programs in FM. We expect to encounter significant competition both in the United States and in foreign markets for each of the drugs that we seek to develop.

With respect to our personalized medicine laboratory services, we compete with several large, national laboratories including Quest Diagnostics Incorporated, or Quest, and Laboratory Corporation of America Holdings, and also compete with regional and hospital laboratories. The larger competitors have substantially greater financial and human resources, existing access to the medical community, as well as a much larger infrastructure than we do. Other companies may develop personalized medicine laboratory services that are more sensitive, specific, easy to use, or cost-effective than our personalized medicine laboratory services, and we may therefore be unable to compete with them in the marketplace.

Our competition for pharmaceutical products will be partially determined by the potential indications that are ultimately cleared for marketing by regulatory authorities, the timing of any clearances and market introductions and whether any currently available drugs, or drugs under development by others, are effective in the same indications. Accordingly, the relative speed with which we can develop milnacipran, complete the clinical trials, receive regulatory clearance and supply

commercial quantities of the product to the market is expected to be an important competitive factor. We expect that competition among products approved for sale will be based, among other things, on product efficacy, safety, reliability, availability and patent protection.

We have agreed to pay certain external expenses associated with our second Phase III clinical trial evaluating milnacipran for FM and may never receive the second payment of approximately $6.5 million.

We paid for the majority of the external costs of the second Phase III clinical trial evaluating milnacipran for FM, which were approximately $9.7 million. Forest has repaid us $3.2 million and will repay the additional two-thirds of the amount, or approximately $6.5 million, only if the NDA is approved. It is possible that the NDA may not be approved by the FDA, in which event we would not be reimbursed by Forest Laboratories for the $6.5 million in expenses we funded in connection with the second Phase III clinical trial.

We are subject to uncertainty relating to health care reform measures and reimbursement policies which, if not favorable to our product candidates or personalized medicine laboratory services, could hinder or prevent our product candidate’s or personalized medicine laboratory services’ commercialization success.

The continuing efforts of the government, insurance and managed care organizations and other health care payors to contain or reduce prescription drug costs may adversely affect:

	•		our ability to set a price we believe is fair for our products and services;

	•		our ability to generate revenues and achieve or maintain profitability;

	•		the future revenues and profitability of our potential customers, suppliers and collaborators; and

	•		the availability of capital.

Successful commercialization of milnacipran in the United States will depend in part on the extent to which government, insurance and managed care organizations and other health care payors establish appropriate coverage and reimbursement levels for the cost of our products and related treatments. Third-party payors are increasingly challenging the prices charged for prescription drugs. Third-party payors are also encouraging the use of generic drugs. These trends could influence health care purchases, as well as legislative proposals to reform health care or reduce government insurance programs and result in the exclusion of our product candidates from coverage and reimbursement programs or lower the prices of our product candidates. Our revenues from the sale of any approved products could be significantly reduced as a result of these cost containment measures and reforms.

Market acceptance of our personalized medicine laboratory services and the majority of our anticipated diagnostics sales will likely depend, in large part, on the availability of adequate payment or reimbursement from insurance plans, including government plans such as Medicare, managed care organizations, private insurance plans and other third-party payors. Reimbursement by a third-party payor may depend on a number of factors, including a payor’s determination that a service is not experimental or investigational, and that it is medically necessary, appropriate for a specific patient, cost effective or supported by peer-reviewed publications. Because each third-party payor individually approves payment or reimbursement, obtaining these approvals can be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of these services to each third-party payor separately with no assurance that approval will be obtained. This individualized process or any action by the government negatively affecting payment for or reimbursement of our services can delay the market acceptance of new services and may have a negative effect on our revenues and operating results.

We believe third-party payors are increasingly limiting coverage for personalized medicine laboratory services, and in many instances are exerting pressure on service suppliers to reduce their prices. Consequently, third-party payment or reimbursement may not be consistently available or adequate to cover the cost of our services. Additionally, third-party payors who have previously approved a specific level of payment or reimbursement may reduce that level. Under prospective payment systems, in which healthcare providers may be paid or reimbursed a set amount based on the type of diagnostic procedure performed, such as those utilized by Medicare and in many private managed care systems, the cost of our personalized medicine laboratory services may not be justified and reimbursed. Any limitations on payment or reimbursement for our services could limit our ability to commercialize and sell new services or to continue to sell our existing services, or may cause the selling prices of our existing services to be reduced, which would adversely affect our revenues and operating results.

* We rely on our employees and consultants for their scientific and technical expertise in connection with our business operations.

We rely significantly on the scientific and technical expertise of our employees and consultants to conduct our business. As of April 30, 2008, we had only 23 full-time employees and therefore, we rely heavily on each of our employees. In addition, because we have a small number of employees, we rely much more on consultants than do other companies. If any of our relationships with our employees or consultants are terminated, we may lose access to scientific knowledge and expertise necessary for the research, development and commercialization of milnacipran or any future product candidates. We expect to continue to rely on consultants and our current employees for scientific and technical knowledge and expertise essential to our business.

Our employment agreement with our chief executive officer provides for “at will” employment, which means that he may terminate his services to us at any time. In addition, although we have employment agreements with the four employees that joined us in connection with the acquisition of Proprius, they may choose to terminate services to us at any time. Were these employees to terminate their services with us, our ability to integrate Proprius’ operations with our own and effectively direct Proprius’ business would be diminished, at least temporarily. There is no guarantee that these employees will remain with Cypress. In addition, our scientific advisors may terminate their services to us at any time.

We may be subject to product liability claims that could cause us to incur liabilities beyond our insurance coverage.

We plan to continue conducting clinical trials on humans using milnacipran and our other Proof of Concept stage development candidates and the use of milnacipran and these other development candidates may result in adverse effects. Although we are aware that there are side effects associated with milnacipran and these other development candidates, we cannot predict all possible harm or side effects that may result from the treatment of patients with milnacipran or any of our future product candidates, and the amount of insurance coverage we currently hold may not be adequate to protect us from any liabilities. We currently maintain $10,000,000 in insurance for product liability claims. We may not have sufficient resources to pay any liability resulting from such a claim beyond our insurance coverage.

* We have a history of operating losses and we may never be profitable.

We have incurred substantial losses during our history. For the years ended December 2006 and 2005, we incurred net losses of $8.3 million and $7.7 million, respectively. As of March 31, 2008, we had an accumulated deficit of $152.9 million. Our ability to become profitable will depend upon our and Forest Laboratories’ ability to develop, market and commercialize milnacipran, and our ability to develop, market and commercialize our personalized medicine laboratory services and any other products we may

develop. We may not generate revenue from the sale of products for the next few years or become profitable in the foreseeable future and may never achieve profitability.

We will need substantial additional funding and may be unable to raise capital when needed, which could force us to scale back or discontinue the completion of any proposed acquisitions or adversely affect our ability to realize the expected benefits of any completed acquisitions.

We will incur certain non-reimbursable expenses in connection with the development of milnacipran, and will also incur costs in the development of the personalized medicine laboratory services and therapeutic products that we acquired in connection with the acquisition of Proprius, and in building our sales force and the exercise of our co-promotion right for milnacipran. We are also incurring expenses in connection with our proof of concept trials, the evaluation of potential acquisitions or other strategic transactions and will incur additional expenses in the event we close any such transactions or enter into any co-promotion, in-licensing or collaboration agreements in connection with any such transactions. We may also be required to pay up to $37.5 million in potential milestone-related payments associated with the development of certain therapeutic candidates acquired in our merger with Proprius. We do not have any committed external sources of funding and we will likely need to raise additional capital through the sale of equity or debt. The amount of capital we will require will depend upon many factors, including but not limited to, the size and timing of our proposed sale force, how much is ultimately required to develop the products and personalized medicine laboratory services we acquired in connection with our acquisition of Proprius, the evaluation and potential closing of any strategic transactions and the development strategy for milnacipran. If we are unable to raise capital when we need it, we may have to scale back or discontinue the evaluation or completion of any proposed acquisitions or strategic transaction(s).

Raising additional funds by issuing securities, or through collaboration and licensing arrangements, may cause dilution to existing stockholders, restrict our operations, or require us to relinquish propriety rights.

We may attempt to raise additional funds through public or private equity offerings, as we did in June 2007 with a public equity offering, or through debt financings or corporate collaborations and licensing arrangements. For example, under our reformulation and new product agreement with Collegium Pharmaceutical, Inc., or Collegium, Collegium may require that any milestone payments we are required to make to Collegium be paid with shares of our common stock. In addition, the potential milestone payments due to the stockholders of Proprius may be paid in up to 50% stock of Cypress, at our election. To the extent that we raise additional capital by issuing equity securities, our existing stockholders’ ownership percentage will be diluted. In addition, if we raise additional funds through collaborations and licensing arrangements, it may be necessary to relinquish potential valuable rights to our potential products on terms that are not favorable to us.

We may lose our net operating loss carryforwards, which could prevent us from offsetting future taxable income.

We have incurred substantial losses during our history and do not expect to become profitable in the foreseeable future and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. All unused federal net operating losses will expire 15 or 20 years after any year in which they were generated. The carryforward period is 15 years for losses incurred prior to 1996 and 20 years for losses incurred subsequent to 1997. Our federal net operating losses will begin to expire this year, in 2008, and our California tax loss carryforwards will begin to expire in 2012. Additionally, the future utilization of our net operating loss carryforwards to offset future taxable income is subject to annual limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have occurred in prior years, which could prevent us from fully utilizing our net operating loss carryforwards.

* Our stock price has been very volatile and will likely continue to be volatile.

The market prices of the stock of technology companies, particularly biotechnology companies, have been highly volatile. For the period from January 1, 2005 through December 31, 2007, the low and high sales prices for our common stock ranged from $4.31 to $18.20. For the three months ended March 31, 2008, our low and high sales prices were $6.66 and $11.09, respectively. As of March 31, 2008, the last reported sale price of our common stock was $7.16. Our stock price has been and will likely continue to be affected by market volatility, as well as by our own performance. We expect our stock price to be volatile in the near future. The following factors, among other risk factors, may have a significant effect on the market price of our common stock:

	•		the results of the FDA’s review of the NDA that we submitted for milnacipran for the treatment of FM;

	•		the results of any clinical trials for milnacipran;

	•		development of our personalized medicine laboratory services and other product candidates;

	•		our ability to integrate the Proprius business and its employees;

	•		developments in our relationship with Forest Laboratories, including the termination of our agreement;

	•		developments in our relationship with Pierre Fabre, including the termination of our agreement;

	•		our entering into, or failing to enter into, an agreement for the acquisition of any products, product candidates or companies, or an agreement with any corporate collaborator;

	•		our available cash;

	•		announcements of technological innovations or new products by us or our competitors;

	•		developments in our patent or other proprietary rights;

	•		fluctuations in our operating results;

	•		litigation initiated by or against us;

	•		developments in domestic and international governmental policy or regulation; and

	•		economic and other external factors or other disaster or crisis.

* The concentration of ownership among our existing officers, directors and principal stockholders may result in the entrenchment of management, prevent other stockholders from influencing significant corporate decisions and depress our stock price.

As of March 31, 2008, our executive officers, directors and stockholders who hold at least 5% of our stock beneficially owned and controlled approximately 34% of our outstanding common stock. If these officers, directors and principal stockholders act together, they will be able to help entrench management and to influence matters requiring approval by our stockholders, including a financing in which we sell more than 20% of our voting stock at a discount to the market price, the removal of any directors up for election, the election of the members of our board of directors, mergers, a sale of all or

substantially all of our assets, going private transactions and other fundamental transactions. This concentration of ownership could also depress our stock price.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our second amended and restated certificate of incorporation and our third amended and restated bylaws may delay, impede or prevent an acquisition or change in control of us. 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, who are responsible for appointing the members of our management team. These provisions include, among others, a requirement that our board of directors be divided into three classes with directors serving three year terms and with only one class of directors being elected in any given year, a requirement that special meetings of our stockholders may only be called by the chairman of the board, our chief executive officer or a majority of our board of directors and a prohibition on actions by our stockholders by written consent. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advanced notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders.

We expect to continue incurring significant costs as a result of enacted and proposed changes in laws and regulations relating to corporate governance matters.

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by the NASDAQ Stock Market LLC, have and we expect will continue to result in significant costs to us. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our independent registered public accounting firm’s audit of internal control over financial reporting has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant financial resources and management time related to compliance activities. Additionally, these laws and regulations could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and investors view of us.

In connection with the completion of the audit of our financial statements for the year ended December 31, 2007 by our independent registered public accountants, we noted material weaknesses in our internal control over financial reporting related to our cash and cash equivalents and short-term investments and the appropriate classification of such securities. We have implemented measures to remedy the deficiencies in the first quarter of 2008. We believe these new controls adequately address these material weaknesses. We plan to continue to monitor the effectiveness of our controls and procedures on an ongoing basis and will take further action, as appropriate.

Risks related to our intellectual property

* We rely primarily on method of use patents to protect our proprietary technology for the development of milnacipran, and our ability to compete may decrease or be eliminated if we are not able to protect our proprietary technology.

Our ability to compete may decrease or be eliminated if we are not able to protect our proprietary technology. The composition of matter patent for milnacipran (U.S. Patent 4,478,836) expired in June 2002. Accordingly, we rely on the patent for the method of synthesis of milnacipran (U.S. Patent 5,034,541), which expires on December 27, 2009 and was assigned to Pierre Fabre and licensed to us and on patents on the method of use of milnacipran to treat symptoms of FM (U.S. Patent 6,602,911, which we refer to as the ‘911 patent), the method of use of milnacipran to treat pain (U.S. Patent 6,992,110) and the method of use of milnacipran to treat symptoms of chronic fatigue syndrome (U.S. Patent 6,635,675) issued to us, to protect our proprietary technology with respect to the development of milnacipran. The method of use patent directly relevant to our current milnacipran product candidate is the ‘911 patent; the other two method of use patents may have future applicability. We have also filed additional patent applications related to milnacipran and to the use of milnacipran for FM (and other related pain syndromes and disorders), although no patents have issued on these patent applications. Because there is no patent protection for the composition of matter of milnacipran, other companies may be able to sell milnacipran in competition with us and Forest Laboratories for indications for which we do not have use patent protection unless we and Forest Laboratories are able to obtain additional protection through milnacipran-related patents or additional use patents that may issue from our pending patent applications or other regulatory exclusivity. It may be more difficult to establish infringement of methods of synthesis, formulation or use patents as compared to a patent on a compound. If we or Forest Laboratories are not able to obtain and enforce these patents, a competitor could use milnacipran for a treatment or use not covered by any of our patents.

In connection with our acquisition of Proprius, we acquired an issued patent (U.S. patent 6,921,667, which terminates in 2023) and several patents in prosecution with respect to the MTX Polyglutamates Test and a number of patents in prosecution on the Early RA Prediction Algorithm. Although we have one issued patent covering the MTX Polyglutamates Test we may not be able to secure any additional patent protection and the existing patent may not ensure exclusivity through the patent term. In addition, as part of our acquisition of Proprius we have acquired a family of pending U.S. and international patent applications directed to PRO-515 (the oral DMARD therapy for the treatment of RA). We have also acquired a patent family directed to PRO-406 (the topical non-steroidal anti-inflammatory drug [NSAID] therapy for the symptomatic treatment of osteoarthritis) including one issued patent (U.S. patent No. 7,138,394, which expires in 2023) and several pending U.S. and foreign patent applications. It is uncertain whether we will be able to obtain any claim with reasonable coverage for PRO-406 or PRO-515.

The validity of a United States patent depends, in part, on the novelty of the invention it discloses. The pharmaceutical industry is characterized by constant investment in new drug discovery and development, and this results in a steady stream of publications regarding the product of this investment, any of which would act to defeat the novelty of later-discovered inventions. Issued United States patents enjoy a presumption of validity that can only be overcome by clear and convincing evidence. However, patents are nonetheless subject to challenge and can be invalidated if a court determines, retrospectively, that despite the action of the Patent and Trademark Office in issuing the patent, the corresponding patent application did not meet the statutory requirements. If a competitor or other third party were to successfully challenge our patents, and claims in these patents are narrowed or invalidated, our ability to protect the related product from competition would be compromised.

We also expect to rely on the United States Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman Amendments, for protection of milnacipran and our other future products. The Hatch-Waxman Amendments provide data exclusivity for new molecular entities, such as that in milnacipran. Once a drug containing a new molecule is approved by the FDA, the FDA cannot accept an abbreviated NDA for a generic drug containing that molecule for five years, although the FDA may accept and approve a drug containing the molecule pursuant to an NDA supported by independent clinical data. Amendments have been proposed that would narrow the scope of Hatch-Waxman exclusivity and permit generic drugs to compete with our drug. After the Hatch-Waxman exclusivity period expires, assuming our patents are valid, we still expect to rely on our method of use patents to protect our proprietary technology with respect to the development of milnacipran. The patent positions of pharmaceutical companies are uncertain and may involve complex legal and factual questions. We may incur significant expense in protecting our intellectual property and defending or assessing claims with respect to intellectual property owned by others. Any patent or other infringement litigation by or against us could result in significant expense to us, including diversion of the resources of management.

Others may file patent applications or obtain patents on similar technology or compounds that compete with milnacipran for the treatment of FM, for any of our personalized medicine laboratory services or any of the products that may be developed under our POC trials. We cannot predict the breadth of claims that will be allowed and issued in patent applications. Once patents have issued, we cannot predict how the claims will be construed or enforced. We may infringe on intellectual property rights of others without being aware of the infringement. If another party claims we are infringing their technology, we could have to defend an expensive and time consuming lawsuit, pay a large sum if we are found to be infringing, or be prohibited from selling or licensing our products unless we obtain a license or redesign our product, which may not be possible.

We also rely on trade secrets and proprietary know-how to develop and maintain our competitive position. Some of our current or former employees, consultants or scientific advisors, or current or prospective corporate collaborators, may unintentionally or willfully disclose our confidential information to competitors or use our proprietary technology for their own benefit. Furthermore, enforcing a claim alleging the infringement of our trade secrets would be expensive and difficult to prove, making the outcome uncertain. Our competitors may also independently develop similar knowledge, methods and know-how or gain access to our proprietary information through some other means.

Our ability to compete may decline if we do not adequately protect our proprietary rights.

Our commercial success depends on obtaining and maintaining proprietary rights to our product and service candidates and technologies and their uses as well as successfully defending these rights against third party challenges. We will only be able to protect our product and service candidates, proprietary technologies and their uses from unauthorized use by third parties to the extent that valid and enforceable patents or effectively-protected trade secrets cover them.


	Our ability to obtain patent protection for our product and service candidates and technologies is uncertain due to a number of factors,
including:

	•	we may not have been the first to make the inventions covered by our pending patent applications or issued patents;

	•	we may not have been the first to file patent applications for our product and service candidates or the technologies we rely upon;

	•	others may independently develop similar or alternative technologies or duplicate any of our technologies;

	•		our disclosures in patent applications may not be sufficient to meet the statutory requirements for patentability;

	•		any or all of our pending patent applications may not result in issued patents;

	•		we may not seek or obtain patent protection in all countries that will eventually provide a significant business opportunity;

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

	•		some of our technologies may not be patentable;

	•		others may design around our patent claims to produce competitive products which fall outside of the scope of our patents; or

	•		others may identify prior art which could invalidate our patents.

Even if we obtain patents covering our product and service candidates or technologies, we may still be barred from making, using and selling our product candidates or technologies because of the patent rights of others. Others may have filed and in the future are likely to file patent applications covering compounds, assays, genes, gene products or therapeutic or diagnostic products that are similar or identical to ours. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the area of the fields in which we are developing products and services. These could materially affect our ability to develop our product and service candidates or sell our products and services. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product and service candidates or technologies may infringe. These patent applications may have priority over patent applications filed by us. Disputes may arise regarding the ownership or inventorship of our inventions. It is difficult to determine how such disputes will be resolved. Others may challenge the validity of our patents. If our patents are found to be invalid we will lose the ability to exclude others from making, using or selling the inventions claimed therein.

Some of our research collaborators and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborations, then our ability to receive patent protection or protect our proprietary information will be impaired. In addition, in-licensed technology is important to our business. We generally will not control the patent prosecution, maintenance or enforcement of in-licensed technology.

A dispute concerning the infringement or misappropriation of our proprietary rights or the proprietary rights of others could be time consuming and costly and an unfavorable outcome could harm our business.

There is significant litigation in the industry regarding patent and other intellectual property rights. We may be exposed to future litigation by third parties based on claims that our product and service candidates, technologies or activities infringe the intellectual property rights of others. If our drug development activities are found to infringe any such patents, we may have to pay significant damages. There are many patents relating to chemical compounds and the uses thereof. If our compounds are found to infringe any such patents, we may have to pay significant damages. A patentee could prevent us from making, using or selling the patented compounds. We may need to resort to litigation to enforce a patent

issued to us, protect our trade secrets or determine the scope and validity of third party proprietary rights. From time to time, we may hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities conducted by us. Either we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, whether we win or lose. We may not be able to afford the costs of litigation. Any legal action against our company or our collaborators could lead to:

	•		payment of damages, potentially treble damages, if we are found to have willfully infringed such parties’ patent rights;

	•		injunctive or other equitable relief that may effectively block our ability to further develop, commercialize and sell products and product candidates; or

	•		we or our collaborators having to enter into license arrangements that may not be available on commercially acceptable terms, if at all. As a result, we could be prevented from commercializing current or future products and product candidates.

The patent applications of pharmaceutical and biotechnology and diagnostic companies involve highly complex legal and factual questions, which could negatively impact our patent position.

The patent positions of pharmaceutical and biotechnology and diagnostic companies can be highly uncertain and involve complex legal and factual questions. The United States Patent and Trademark Office’s standards are uncertain and could change in the future. Consequently, the issuance and scope of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. United States patents and patent applications may also be subject to interference proceedings and United States patents may be subject to reexamination proceedings in the United States Patent and Trademark Office (and foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such interference, reexamination and opposition proceedings may be costly. Accordingly, rights under any issued patents may not provide us with sufficient protection against competitive products or processes.

In addition, changes in or different interpretations of patent laws in the United States and foreign countries may permit others to use our discoveries or to develop and commercialize our technology and products without providing any compensation to us. The laws of some countries do not protect intellectual property rights to the same extent as United States laws and those countries may lack adequate rules and procedures for defending our intellectual property rights. For example, some countries, including many in Europe, do not grant patent claims directed to methods of treating humans, and in these countries patent protection may not be available at all to protect our product candidates.

If we fail to obtain and maintain patent protection and trade secret protection of our product candidates, proprietary technologies and their uses, we could lose our competitive advantage and competition we face would increase, reducing our potential revenues and adversely affecting our ability to attain or maintain profitability.

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

Not applicable

Item 3 — Defaults Upon Senior Securities

Not applicable

Item 4 — Submission of Matters to a Vote of Security Holders

Not applicable

Item 5 — Other Information

Not applicable

Item 6 — Exhibits

3.1		Second Amended and Restated Certificate of Incorporation. (1)

3.3		Third Amended and Restated By-Laws. (2)

4.1		Form of Stock Certificate. (3)

31.1		Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) or Rule 15d — 14(a) of the Securities Exchange Act of 1934, as amended.

31.2		Certification of Chief Financial Officer pursuant to to Rule 13a - 14(a) or Rule 15d — 14(a) of the Securities Exchange Act of 1934, as amended.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a — 14(b) or Rule 15d — 14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Incorporated by reference to Appendix C of our Definitive Proxy Statement filed with the SEC on August 11, 2003

(2)		Incorporated by reference to Form 8-K filed with the SEC on July 27, 2007

(3)		Incorporated by reference to Exhibit 4.1 to Form S-1 Registration Statement No. 33-41225


PART I — FINANCIAL INFORMATION

Item 1 — Condensed Consolidated Financial Statements

Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007

Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007 (unaudited)

Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)

Notes to Consolidated Financial Statements (unaudited)

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

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Item 4 — Controls and Procedures

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

Item 1A — Risk Factors

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

Item 3 — Defaults Upon Senior Securities

Item 4 — Submission of Matters to a Vote of Security Holders

Item 5 — Other Information

Item 6 — Exhibits

Signatures
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


	Three Months Ended
	March 31,
	2008			2007
Revenues under collaborative agreement	$	14,215,700		$	960,851

Costs and expenses:
Research and development		2,669,624			994,386
General and administrative		3,538,062			2,470,468
In-process research and development		12,590,000			—

Total costs and expenses		18,797,686			3,464,854

Loss from operations		(4,581,986	)		(2,504,003	)

Interest income		1,701,005			1,282,880


Net loss	$	(2,880,981	)	$	(1,221,123	)


Net loss per share — basic	$	(0.08	)	$	(0.04	)


Shares used in computing net loss per share -basic		37,523,645			32,262,555


		Cypress Bioscience, Inc.

Date: May 12, 2008	By:	/s/ JAY D. KRANZLER

		Chief Executive Officer and Chairman of the
		Board (Principal Executive Officer)

Date: May 12, 2008	By:	/s/ SABRINA MARTUCCI JOHNSON

		Chief Financial Officer, Chief Operating
		Officer and Executive Vice President
		(Principal Financial Officer)