Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 	 	 	
þ	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended June 30, 2008
or
 	 	 	
o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
Commission file number: 000-50633
CYTOKINETICS, INCORPORATED
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware	 	94-3291317	
(State or other jurisdiction of	 	(I.R.S. Employer	
incorporation or organization)	 	Identification Number)	
 	 	 	
280 East Grand Avenue	 	 	
South San Francisco, California	 	94080	
(Address of principal executive offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (650) 624-3000
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 	 	 	 	 	 	 	
Large accelerated filer o	 	Accelerated filer þ	 	Non-accelerated filer o
(Do not check if a smaller reporting company)	 	Smaller reporting company  o	
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  þ
     Number of shares of common stock, $0.001 par value, outstanding as of July 31, 2008: 49,412,922.

 

 
CYTOKINETICS, INCORPORATED
TABLE OF CONTENTS FOR FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2008
 	 	 	 	 	 	 	 	 	
 	 	Page	 	 	 	 	
PART I. FINANCIAL INFORMATION	 	 	3	 	 	 	 	 	
Item 1. Financial Statements	 	 	3	 	 	 	 	 	
Unaudited Condensed Balance Sheets as of June 30, 2008 and December 31, 2007	 	 	3	 	 	 	 	 	
Unaudited Condensed Statements of Operations for the three months and six months ended June 30, 2008 and 2007, and the period from August 5, 1997 (date of inception) to June 30, 2008	 	 	4	 	 	 	 	 	
Unaudited Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007, and the period from August 5, 1997 (date of inception) to June 30, 2008	 	 	5	 	 	 	 	 	
Notes to Unaudited Condensed Financial Statements	 	 	6	 	 	 	 	 	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	14	 	 	 	 	 	
Item 3. Quantitative and Qualitative Disclosures About Market Risk	 	 	33	 	 	 	 	 	
Item 4. Controls and Procedures	 	 	33	 	 	 	 	 	
PART II. OTHER INFORMATION	 	 	33	 	 	 	 	 	
Item 1. Legal Proceedings	 	 	33	 	 	 	 	 	
Item 1A. Risk Factors	 	 	33	 	 	 	 	 	
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	 	 	52	 	 	 	 	 	
Item 3. Defaults Upon Senior Securities	 	 	53	 	 	 	 	 	
Item 4. Submission of Matters to a Vote of Security Holders	 	 	53	 	 	 	 	 	
Item 5. Other Information	 	 	53	 	 	 	 	 	
Item 6. Exhibits	 	 	53	 	 	 	 	 	
SIGNATURES	 	 	56	 	 	 	 	 	
EXHIBIT INDEX	 	 	57	 	 	 	 	 	
 EXHIBIT 10.1	
 EXHIBIT 10.3	
 EXHIBIT 10.68	
 EXHIBIT 10.69	
 EXHIBIT 31.1	
 EXHIBIT 31.2	
 EXHIBIT 32.1	
2

Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 	 	 	 	 	 	 	 	 	
 	 	June 30,	 	 	December 31,	 	
 	 	2008	 	 	2007 (1)	 	
ASSETS	 	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	86,861	 	 	$	116,564	 	
Short-term investments	 	 	—	 	 	 	3,175	 	
Related party accounts receivable	 	 	60	 	 	 	87	 	
Related party notes receivable — short-term portion	 	 	77	 	 	 	127	 	
Prepaid and other current assets	 	 	2,337	 	 	 	2,063	 	
 	 	 	 	 	 	 	
Total current assets	 	 	89,335	 	 	 	122,016	 	
Long-term investments	 	 	18,749	 	 	 	20,025	 	
Property and equipment, net	 	 	6,728	 	 	 	7,728	 	
Related party notes receivable — long-term portion	 	 	39	 	 	 	99	 	
Restricted cash	 	 	4,147	 	 	 	5,167	 	
Other assets	 	 	368	 	 	 	335	 	
 	 	 	 	 	 	 	
Total assets	 	$	119,366	 	 	$	155,370	 	
 	 	 	 	 	 	 	
LIABILITIES and STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	1,659	 	 	$	1,584	 	
Accrued liabilities	 	 	8,024	 	 	 	8,558	 	
Related party payables and accrued liabilities	 	 	6	 	 	 	22	 	
Short-term portion of equipment financing lines	 	 	3,029	 	 	 	4,050	 	
Short-term portion of deferred revenue	 	 	12,234	 	 	 	12,234	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	24,952	 	 	 	26,448	 	
Long-term portion of equipment financing lines	 	 	3,576	 	 	 	4,639	 	
Long-term portion of deferred revenue	 	 	18,250	 	 	 	24,367	 	
 	 	 	 	 	 	 	
Total liabilities	 	 	46,778	 	 	 	55,454	 	
 	 	 	 	 	 	 	
Stockholders’ equity:	 	 	 	 	 	 	 	 	
Common stock, $0.001 par value: Authorized: 170,000,000 shares; Issued and outstanding: 49,399,620 shares at June 30, 2008 and 49,282,362 shares at December 31, 2007	 	 	49	 	 	 	49	 	
Additional paid-in capital	 	 	382,730	 	 	 	379,730	 	
Deferred stock-based compensation	 	 	(124	)	 	 	(329	)	
Accumulated other comprehensive loss	 	 	(1,276	)	 	 	(1	)	
Deficit accumulated during the development stage	 	 	(308,791	)	 	 	(279,533	)	
 	 	 	 	 	 	 	
Total stockholders’ equity	 	 	72,588	 	 	 	99,916	 	
 	 	 	 	 	 	 	
Total liabilities and stockholders’ equity	 	$	119,366	 	 	$	155,370	 	

 	 	 	
(1)	 	The condensed 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 footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.	
The accompanying notes are an integral part of these financial statements.
3

Table of Contents
CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Period from	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	August 5, 1997	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	 	(date of inception)	 	
 	 	June 30,	 	 	June 30,	 	 	June 30,	 	 	June 30,	 	 	to June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	 	2008	 	
Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development revenues from related party	 	$	16	 	 	$	119	 	 	$	27	 	 	$	265	 	 	$	40,279	 	
Research and development, grant and other revenues	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2,955	 	
License revenues from related parties	 	 	3,058	 	 	 	3,058	 	 	 	6,117	 	 	 	6,117	 	 	 	32,451	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	 	 	3,074	 	 	 	3,177	 	 	 	6,144	 	 	 	6,382	 	 	 	75,685	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development (1)	 	 	14,859	 	 	 	13,726	 	 	 	28,961	 	 	 	26,213	 	 	 	312,449	 	
General and administrative (1)	 	 	4,252	 	 	 	4,015	 	 	 	8,409	 	 	 	8,497	 	 	 	93,869	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	19,111	 	 	 	17,741	 	 	 	37,370	 	 	 	34,710	 	 	 	406,318	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating loss	 	 	(16,037	)	 	 	(14,564	)	 	 	(31,226	)	 	 	(28,328	)	 	 	(330,633	)	
Interest and other income	 	 	808	 	 	 	2,122	 	 	 	2,249	 	 	 	4,363	 	 	 	26,992	 	
Interest and other expense	 	 	(135	)	 	 	(186	)	 	 	(281	)	 	 	(356	)	 	 	(5,150	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(15,364	)	 	$	(12,628	)	 	$	(29,258	)	 	$	(24,321	)	 	$	(308,791	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss per common share — basic and diluted	 	$	(0.31	)	 	$	(0.27	)	 	$	(0.59	)	 	$	(0.52	)	 	 	 	 	
Weighted-average number of shares used in computing net loss per common share — basic and diluted	 	 	49,366	 	 	 	46,890	 	 	 	49,330	 	 	 	46,826	 	 	 	 	 	
 	 	 	 	 	 	 	
(1)    Includes the following stock-based compensation charges:	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	$	652	 	 	$	684	 	 	$	1,517	 	 	$	1,328	 	 	$	9,829	 	
General and administrative	 	 	695	 	 	 	792	 	 	 	1,356	 	 	 	1,308	 	 	 	7,792	 	
The accompanying notes are an integral part of these financial statements.
4

Table of Contents
CYTOKINETICS, INCORPORATED
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Period from	 	
 	 	 	 	 	 	 	 	 	 	August 5, 1997	 	
 	 	Six Months Ended	 	 	(date of inception)	 	
 	 	June 30,	 	 	June 30,	 	 	to June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	
Cash flows from operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Net loss	 	$	(29,258	)	 	$	(24,321	)	 	$	(308,791	)	
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization of property and equipment	 	 	1,274	 	 	 	1,500	 	 	 	22,263	 	
Loss on disposal of property and equipment	 	 	—	 	 	 	4	 	 	 	348	 	
Gain on sale of investments	 	 	—	 	 	 	—	 	 	 	(84	)	
Allowance for doubtful accounts	 	 	—	 	 	 	—	 	 	 	191	 	
Non-cash expense related to warrants issued for equipment financing lines and facility lease	 	 	—	 	 	 	—	 	 	 	41	 	
Non-cash interest expense	 	 	46	 	 	 	46	 	 	 	473	 	
Non-cash forgiveness of loan to officer	 	 	11	 	 	 	12	 	 	 	375	 	
Stock-based compensation	 	 	2,873	 	 	 	2,636	 	 	 	17,621	 	
Other non-cash expenses	 	 	—	 	 	 	—	 	 	 	27	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Related party accounts receivable	 	 	25	 	 	 	42,006	 	 	 	(402	)	
Prepaid and other assets	 	 	(351	)	 	 	(505	)	 	 	(2,702	)	
Accounts payable	 	 	384	 	 	 	(47	)	 	 	1,778	 	
Accrued liabilities	 	 	(549	)	 	 	(780	)	 	 	7,972	 	
Related party payables and accrued liabilities	 	 	(16	)	 	 	(88	)	 	 	7	 	
Deferred revenue	 	 	(6,117	)	 	 	817	 	 	 	30,484	 	
 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) operating activities	 	 	(31,678	)	 	 	21,280	 	 	 	(230,399	)	
 	 	 	 	 	 	 	 	 	 	
Cash flows from investing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of investments	 	 	(9,400	)	 	 	(39,800	)	 	 	(654,303	)	
Proceeds from sales and maturities of investments	 	 	12,576	 	 	 	65,720	 	 	 	634,362	 	
Purchases of property and equipment	 	 	(567	)	 	 	(1,947	)	 	 	(29,459	)	
Proceeds from sale of property and equipment	 	 	—	 	 	 	—	 	 	 	50	 	
(Increase) decrease in restricted cash	 	 	1,020	 	 	 	(91	)	 	 	(4,147	)	
Issuance of related party notes receivable	 	 	—	 	 	 	—	 	 	 	(1,146	)	
Proceeds from payments of related party notes receivable	 	 	100	 	 	 	99	 	 	 	799	 	
 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) investing activities	 	 	3,729	 	 	 	23,981	 	 	 	(53,844	)	
 	 	 	 	 	 	 	 	 	 	
Cash flows from financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Proceeds from initial public offering, sale of common stock to related party and public offerings, net of issuance costs	 	 	—	 	 	 	26,002	 	 	 	193,934	 	
Proceeds from draw down of Committed Equity Financing Facility, net of issuance costs	 	 	—	 	 	 	—	 	 	 	32,046	 	
Proceeds from other issuances of common stock	 	 	331	 	 	 	686	 	 	 	5,889	 	
Proceeds from issuance of preferred stock, net of issuance costs	 	 	—	 	 	 	—	 	 	 	133,172	 	
Repurchase of common stock	 	 	—	 	 	 	—	 	 	 	(68	)	
Proceeds from equipment financing lines	 	 	—	 	 	 	1,743	 	 	 	23,696	 	
Repayment of equipment financing lines	 	 	(2,085	)	 	 	(1,856	)	 	 	(17,565	)	
 	 	 	 	 	 	 	 	 	 	
Net cash provided by (used in) financing activities	 	 	(1,754	)	 	 	26,575	 	 	 	371,104	 	
 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	 	 	(29,703	)	 	 	71,836	 	 	 	86,861	 	
Cash and cash equivalents, beginning of period	 	 	116,564	 	 	 	39,387	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents, end of period	 	$	86,861	 	 	$	111,223	 	 	$	86,861	 	
 	 	 	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these financial statements.
5

Table of Contents
CYTOKINETICS, INCORPORATED
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Overview
     Cytokinetics, Incorporated (the “Company,” “we” or “our”) was incorporated under the laws of the state of Delaware on August 5, 1997. The Company is focused on developing small molecule therapeutics for the treatment of cardiovascular disease, cancer and other diseases. The Company is a development stage enterprise and has been primarily engaged in conducting research, developing drug candidates and technologies, and raising capital.
     The Company has funded its operations primarily through sales of common stock and convertible preferred stock, contract payments under its collaboration agreements, debt financing arrangements, government grants and interest income.
     The Company’s registration statement for its initial public offering (“IPO”) was declared effective by the Securities and Exchange Commission (“SEC”) on April 29, 2004. The Company’s common stock commenced trading on the NASDAQ National Market, now the NASDAQ Global Market, on April 29, 2004 under the trading symbol “CYTK.”
     Until it achieves profitable operations, the Company intends to continue to fund operations through the additional sale of equity securities, payments from strategic collaborations, government grant awards and debt financing.
Basis of Presentation
     The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements include all adjustments (consisting only of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These interim financial statement results are not necessarily indicative of results to be expected for the full fiscal year or any future interim period.
     The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial statements have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Form 10-K for the year ended December 31, 2007.
Comprehensive Income (Loss)
     Comprehensive loss consists of the net loss and other comprehensive income (loss). Other comprehensive income (loss) (“OCI”) includes certain changes in stockholder’s equity that are excluded from net loss. Comprehensive loss and its components for the three-and six-month periods ended June 30, 2008 and 2007 are as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Net loss	 	$	(15,364	)	 	$	(12,628	)	 	$	(29,258	)	 	$	(24,321	)	
Change in unrealized gain (loss) on investments	 	 	(328	)	 	 	(6	)	 	 	(1,275	)	 	 	15	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive loss	 	$	(15,692	)	 	$	(12,634	)	 	$	(30,533	)	 	$	(24,306	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
6

Table of Contents
Restricted Cash
     In accordance with the terms of the Company’s line of credit agreements with General Electric Capital Corporation (“GE Capital”) to fund certain equipment, the Company is obligated to maintain a certificate of deposit with the lender. The balance of the certificate of deposit, which is classified as restricted cash, was $4.1 million at June 30, 2008 and $5.2 million at December 31, 2007. At July 1, 2008, the restricted cash balance was $2.7 million.
Fair Value of Financial Instruments
     In September 2006, the Financial Statement Standard Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 established a common definition for fair value, which is to be applied to U.S. generally accepted accounting principles (“GAAP”) requiring use of fair value, and a framework for measuring fair value, and expanded disclosure about such fair value measurements. This pronouncement applies under the other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. SFAS No. 157 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. In February 2008, the FASB released a FASB Staff Position (“FSP”) 157-1, “Application of FASB Statement No. 157 to FASB Statement 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13.” FSP 157-1 removed leasing transactions accounted for under FASB Statement 13 and related guidance from the scope of SFAS No. 157. FSP 157-2, “Partial Deferral of the Effective Date of Statement 157,” deferred the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008.
     SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” became effective for the Company on January 1, 2008. SFAS No. 159 includes an amendment of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which permits an entity to measure certain financial assets and financial liabilities at fair value. The objective of SFAS No. 159 is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. Under SFAS No. 159, entities that elect the fair value option (by instrument) will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option election is irrevocable, unless a new election date occurs. SFAS No. 159 establishes presentation and disclosure requirements to help financial statement users understand the effect of the entity’s election on its earnings, but does not eliminate disclosure requirements of other accounting standards. Assets and liabilities that are measured at fair value must be displayed on the face of the balance sheet. The Company did not elect the fair value option for its financial assets and liabilities existing at January 1, 2008, nor for its financial assets and liabilities transacted in the six months ended June 30, 2008.
Stock-Based Compensation
     Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R, “Share-Based Payment,” which establishes accounting for share-based payment awards made to employees and directors, including employee stock options and employee stock purchases. Under the provisions of SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the calculated fair value of the award, and is recognized as an expense on a straight-line basis over the employee’s requisite service period, generally the vesting period of the award.
     The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan (“ESPP”) shares, consistent with the provisions of SFAS No. 123R. The key input assumptions used to estimate fair value of these awards include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term and the Company’s expected dividend yield, if any.
7

Table of Contents
     For employee stock options, the fair value of share-based payments was estimated on the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30, 2008	 	June 30, 2007	 	June 30, 2008	 	June 30, 2007	
Risk-free interest rate	 	 	3.50	%	 	 	4.74	%	 	 	2.97	%	 	 	4.52	%	
Volatility	 	 	67	%	 	 	74	%	 	 	63	%	 	 	73	%	
Expected life (in years)	 	 	6.11	 	 	 	5.73	 	 	 	6.08	 	 	 	5.99	 	
Expected dividend yield	 	 	0.00	%	 	 	0.00	%	 	 	0.00	%	 	 	0.00	%	
     For the ESPP, the fair value of share-based payments was estimated on the date of grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Six Months Ended	
 	 	June 30, 2008	 	June 30, 2007	 	June 30, 2008	 	June 30, 2007	
Risk-free interest rate	 	 	2.23	%	 	 	4.84	%	 	 	2.23	%	 	 	4.84	%	
Volatility	 	 	67	%	 	 	74	%	 	 	67	%	 	 	74	%	
Expected life (in years)	 	 	1.25	 	 	 	1.25	 	 	 	1.25	 	 	 	1.25	 	
Expected dividend yield	 	 	0.00	%	 	 	0.00	%	 	 	0.00	%	 	 	0.00	%	
     The risk-free interest rate that the Company uses in the option pricing model is based on the U.S. Treasury zero-coupon issues with remaining terms similar to the expected terms of the options. The Company does not anticipate paying dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option pricing model. The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data is used to estimate pre-vesting option forfeitures and record stock-based compensation expense only on those awards that are expected to vest.
     Under Staff Accounting Bulletin (“SAB”) No. 107, the Company used the simplified method of estimating the expected term for stock-based compensation from January 1, 2006, the date it adopted SFAS No. 123R, through December 31, 2007. Starting January 1, 2008, the Company ceased to use the simplified method, and now uses its own historical exercise activity and extrapolates the life cycle of options outstanding to arrive at its estimated expected term for new option grants.
     From January 1, 2006, the date of adopting SFAS No. 123R, through December 31, 2007, the Company estimated the volatility of its common stock by using an average of historical stock price volatility of comparable companies due to the limited length of trading history. Starting January 1, 2008, the Company has used its own volatility history based on its stock’s trading history of approximately four years. Because its outstanding options have an expected term of approximately six years, the Company supplemented its own volatility history by using comparable companies’ volatility history for approximately two years preceding the Company’s IPO.
Note 2. Net Loss Per Share
     Basic net loss per common share is computed by dividing the net loss by the weighted-average number of vested common shares outstanding during the period. Diluted net loss per common share is computed by giving effect to all potentially dilutive common shares, including outstanding options, common stock subject to repurchase, warrants and shares issuable under the ESPP. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per common share (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Numerator — net loss	 	$	(15,364	)	 	$	(12,628	)	 	$	(29,258	)	 	$	(24,321	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted-average common shares outstanding	 	 	49,366	 	 	 	46,890	 	 	 	49,330	 	 	 	46,827	 	
Less: Weighted-average shares subject to repurchase	 	 	(—	)	 	 	(—	)	 	 	(—	)	 	 	(1	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted-average shares used in computing basic and diluted net loss per common share	 	 	49,366	 	 	 	46,890	 	 	 	49,330	 	 	 	46,826	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
8

Table of Contents
     The following outstanding instruments were excluded from the computation of diluted net loss per common share for the periods presented, because their effect would have been antidilutive (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	As of June 30,	
 	 	2008	 	2007	
Options to purchase common stock	 	 	6,590	 	 	 	5,250	 	
Warrants to purchase common stock	 	 	474	 	 	 	244	 	
Shares issuable related to the ESPP	 	 	46	 	 	 	38	 	
 	 	 	 	 	 	 	 	 	
Total shares	 	 	7,110	 	 	 	5,532	 	
 	 	 	 	 	 	 	 	 	
Note 3. Supplemental Cash Flow Data
     Supplemental cash flow data was as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Period from	
 	 	 	 	 	 	 	 	 	 	August 5, 1997	
 	 	Six Months Ended	 	(date of inception)	
 	 	June 30,	 	June 30,	 	June 30,	
 	 	2008	 	2007	 	2008	
Significant non-cash investing and financing activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred stock-based compensation	 	$	—	 	 	$	—	 	 	$	6,940	 	
Purchases of property and equipment through accounts payable	 	 	65	 	 	 	42	 	 	 	65	 	
Purchases of property and equipment through trade in value of disposed property and equipment	 	 	—	 	 	 	—	 	 	 	258	 	
Penalty on restructuring of equipment financing lines	 	 	—	 	 	 	—	 	 	 	475	 	
Conversion of convertible preferred stock to common stock	 	 	—	 	 	 	—	 	 	 	133,172	 	
Unrealized loss on auction rate securities	 	 	1,276	 	 	 	—	 	 	 	1,276	 	
Note 4. Related Party Agreements
Research and Development Arrangements
     GlaxoSmithKline (“GSK”). Pursuant to the collaboration and license agreement between the Company and GSK (the “GSK Agreement”), the Company received and recorded as research and development revenues from related party, patent expense reimbursements from GSK of $16,000 and $119,000 in the three months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008 and 2007, the Company received and recorded as research and development revenues from related party, patent expense reimbursements from GSK of $27,000 and $265,000, respectively. Related party accounts payable and accrued liabilities payable to GSK for outsourced services under the GSK Agreement were zero and $20,000 at June 30, 2008 and December 31, 2007, respectively.
     Amgen Inc. (“Amgen”). Pursuant to the collaboration and option agreement between the Company and Amgen (the “Amgen Agreement”), the Company recognized license revenue of $3.1 million and $6.1 million in both the three and six months ended June 30, 2008 and June 30, 2007. At June 30, 2008, deferred revenue related to the Amgen Agreement and its related common stock purchase agreement was $30.5 million.
Other
     Board member. Charles J. Homcy, M.D. was a member of the Company’s Board of Directors through June 30, 2008 and continues as a consultant to the Company. The Company incurred consulting fees earned by Dr. Homcy of $8,000 and $13,000 in the six months ended June 30, 2008 and 2007, respectively. Related party accounts payable and accrued liabilities payable to Dr. Homcy for his consulting services were $6,300 and $2,500 as of June 30, 2008 and December 31, 2007, respectively.
     Related Party Notes Receivable. Effective March 31, 2008, James Sabry voluntarily resigned from his position as Executive Chairman of the Board of Directors of the Company, and on April 1, 2008, assumed his new role as the non-employee Chairman of the Board of Directors, as well as Chairman of the Company’s Scientific Advisory Board and a consultant to the Company. In accordance with the terms of Dr. Sabry’s promissory note payable to the Company, the outstanding balance of the note of $100,000 became due, and was repaid in full, on April 30, 2008.
     In May 2007, $11,000 of principal and interest on a loan receivable from an officer of the Company was forgiven in accordance with the terms of the loan agreement.
9

Table of Contents
Note 5. Cash, cash equivalents, and investments
     The amortized cost and fair value of cash, cash equivalents and short- and long-term investments at June 30, 2008 and December 31, 2007 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	June 30, 2008	 	
 	 	 	 	 	 	 	 	 	 	Unrealized	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Losses in	 	 	 	 	 	 	 	
 	 	Amortized	 	 	Unrealized	 	 	accumulated	 	 	Fair	 	 	Investment Maturity	 	
 	 	Cost	 	 	Gains	 	 	OCI	 	 	Value	 	 	Dates	 	
Cash and cash equivalents	 	$	86,861	 	 	 	—	 	 	 	—	 	 	$	86,861	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term investments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan auction rate securities (taxable)	 	$	20,025	 	 	 	—	 	 	 	(1,276	)	 	$	18,749	 	 	 	6/2036—8/2045	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term investments	 	$	20,025	 	 	$	—	 	 	$	(1,276	)	 	$	18,749	 	 	 	 	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2007	 	
 	 	 	 	 	 	 	 	 	 	Unrealized	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Losses in	 	 	 	 	 	 	 	
 	 	Amortized	 	 	Unrealized	 	 	accumulated	 	 	Fair	 	 	Investment Maturity	 	
 	 	Cost	 	 	Gains	 	 	OCI	 	 	Value	 	 	Dates	 	
Cash and cash equivalents	 	$	116,565	 	 	 	—	 	 	$	(1	)	 	$	116,564	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Short-term investments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan auction rate securities (taxable)	 	$	3,175	 	 	 	—	 	 	 	—	 	 	$	3,175	 	 	 	1/2008	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total short-term investments	 	$	3,175	 	 	$	—	 	 	$	—	 	 	$	3,175	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term investments:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Student loan auction rate securities (taxable)	 	$	20,025	 	 	 	—	 	 	 	—	 	 	$	20,025	 	 	 	6/2036—8/2045	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term investments	 	$	20,025	 	 	$	—	 	 	$	—	 	 	$	20,025	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The Company’s student loan auction rate securities (“ARS”), which had a fair value of $18.7 million as of June 30, 2008 and $23.2 million as of December 31, 2007, are securities that are structured with short-term interest reset dates of less than 30 days, but with maturities generally greater than 20 years. The Company classified $18.7 million and $20.0 million of these ARS as long-term investments as of June 30, 2008 and December 31, 2007, respectively, due to their illiquidity and the Company’s inability to use them in its current operations.
     These ARS are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. As of December 31, 2007, there were no ARS in an unrealized loss position, and there were no failed auctions associated with the Company’s ARS through that date. The Company’s ARS with auction reset dates prior to February 13, 2008 had successful auctions at which their interest rates were reset. In February 2008, the Company liquidated $3.2 million of its ARS at par, which were classified as short-term investments as of December 31, 2007. The recent uncertainties in the credit markets have affected all of the Company’s holdings in ARS investments and auctions for the Company’s investments in these securities have failed to settle on their respective settlement dates since February 2008. Consequently, the investments are not currently liquid, and the Company will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the outstanding securities, the securities mature or a buyer is found outside of the auction process. Maturity dates for these ARS range from 2036 to 2045. All of the ARS are AAA/Aaa rated and were in compliance with the Company’s investment policy at the time of acquisition. As of June 30, 2008, the Company held ARS with a par value of $20.0 million, which were classified as long-term investments because of the Company’s inability to determine when its investments in these ARS would settle. Typically the fair value of ARS investments approximates par value due to the frequent resets through the auction process. The Company earns interest on its ARS at the contractual rates, however, these investments are not currently trading and accordingly, the estimated fair value of these ARS no longer approximates par value.
     The Company used a discounted cash flow (“DCF”) model to assess the estimated fair value of its investment in ARS as of June 30, 2008. See Footnote 8 for the assumptions used in preparing the DCF model. As of June 30, 2008, the Company determined there was a decline in the fair value of its ARS of $1.3 million and deemed the entire decline temporary. As a result, the Company recorded an unrealized loss of $1.3 million associated with its ARS as a component of stockholders’ equity as of June 30, 2008. The Company reviews its impairments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities, ”  and FSP Nos. FASB 115-1 and FASB 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” in order to determine the classification of the impairment as “temporary” or “other-than-temporary.” A temporary decline in value results
10

Table of Contents
in an unrealized loss being recorded in the Other Comprehensive Income (Loss) component of stockholders’ equity. Such an unrealized loss does not affect net income (loss) for the applicable accounting period. An other-than-temporary decline in value is recorded as a realized loss in the condensed statement of operations and reduces net income (loss) for the applicable accounting period. In evaluating the impairment of any individual ARS, the Company classifies such impairment as temporary or other-than-temporary. The differentiating factors between temporary and other-than-temporary impairment are primarily the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the Company’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. As of June 30, 2008 and December 31, 2007, the Company had not incurred any losses that were other-than-temporary. The Company continues to monitor the ARS market and to consider the impact, if any, on the fair value of its ARS.
Note 6. Equipment Financing Lines
     In August 2007, the Company secured a new line of credit with GE Capital of up to $3.0 million to finance certain equipment until September 30, 2008. The line of credit is subject to the Master Security Agreement between the Company and GE Capital, dated February 2001 and amended on March 24, 2005. As of June 30, 2008, the Company has not borrowed any funds under this line.
Note 7. Stockholders’ Equity
Stock Option Plans
     In January 2004, the Board of Directors adopted the 2004 Equity Incentive Plan (the “2004 Plan”) which was approved by the stockholders in February 2004. The 2004 Plan provides for the granting of incentive stock options, nonstatutory stock options, restricted stock purchase rights and stock bonuses to employees, directors and consultants. Under the 2004 Plan, the number of authorized shares automatically increases on an annual basis by a number of shares equal to the lesser of (i) 1,500,000 shares, (ii) 3.5% of the outstanding shares on such date, or (iii) an amount determined by the Board of Directors. Accordingly, on January 1, 2008, the number of shares of common stock authorized for issuance under the 2004 Plan was increased by 1,500,000 shares to a total of 2,997,296 shares. At the May 2008 Annual Stockholder Meeting, the number of shares of common stock authorized for issuance under the 2004 Plan was increased by 2,000,000, and approved an amended and restated 2004 Plan which eliminated the automatic increase provision.
     Stock option activity for the six months ended June 30, 2008 under the 2004 Plan and the 1997 Stock Option/Stock Issuance Plan was as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Options	 	 	 	 	 	Weighted	
 	 	Available for	 	Options	 	Average Exercise	
 	 	Grant	 	Outstanding	 	Price per Share	
Balance at December 31, 2007	 	 	1,497,296	 	 	 	5,060,294	 	 	$	5.80	 	
Increase in authorized shares	 	 	3,500,000	 	 	 	—	 	 	 	—	 	
Options granted	 	 	(1,708,137	)	 	 	1,708,137	 	 	$	3.41	 	
Options exercised	 	 	—	 	 	 	(22,400	)	 	$	1.19	 	
Options cancelled	 	 	156,019	 	 	 	(156,019	)	 	$	4.73	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30, 2008	 	 	3,445,178	 	 	 	6,590,012	 	 	$	5.22	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The weighted average fair value of options granted in the six months ended June 30, 2008 was $2.06 per share.
Note 8 – Fair Value Measurements
     As stated in “—Note 1. Organization and Summary of Significant Accounting Policies,” on January 1, 2008, the Company adopted the methods of fair value described in SFAS No. 157 to value its financial assets and liabilities. As defined in SFAS No. 157, fair value is the price that would be received for asset when sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable.
11

Table of Contents
     The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best information available to it. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and considers the security issuers’ and the third-party insurers’ credit risk in its assessment of fair value.
     The Company classifies the determined fair value based on the observability of those inputs. SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:
 	 	 	
Level 1	 	Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide the most reliable pricing information and evidence of fair value on an ongoing basis.	
 	 	 	
Level 2	 	Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.	
 	 	 	
Level 3	 	Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant. Instruments subject to Level 3 measurements include those that may be more structured or otherwise tailored to customers’ needs. At each balance sheet date, the Company performs an analysis of all instruments subject to SFAS No. 157 and includes in Level 3 all of those whose fair value is based on significant unobservable inputs.	
     Financial assets carried at fair value as of June 30, 2008 are classified in the table below in one of the three categories described above (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Fair Value Measurements Using	 	Assets	
 	 	Level 1	 	Level 2	 	Level 3	 	At Fair Value	
Cash equivalents	 	 	$85,923	 	 	—	 	 	—	 	 	 	$	85,923	 	
Long-term investments — ARS	 	 	—	 	 	—	 	 	$18,749	 	 	 	$	18,749	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	$85,923	 	 	—	 	 	$18,749	 	 	 	$	104,672	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The Company chose not to elect the fair value option as prescribed by SFAS No. 159 for its financial assets and liabilities that had not been previously reported at fair value. Therefore, financial assets and liabilities not reported at fair value, such as the Company’s accounts receivable, notes receivable, short- and long-term equipment financing lines and accounts payable are still reported at their carrying values.
     As of June 30, 2008, the Company applied Level 1 measurements to its holdings of money market funds, which it classified as cash equivalents.
Temporary Impairment of Long-Term Student Loan Auction Rate Securities
     The Company’s financial assets measured at fair value on a recurring basis using significant Level 3 inputs as of June 30, 2008 consisted solely of ARS. The following table summarizes the Company’s fair value measurements using Level 3 inputs, and changes therein, for the six-months period ended June 30, 2008 (in thousands):
 	 	 	 	 	
 	 	Long-term Investment	 	
Beginning balance as of December 31, 2007	 	$	—	 	
Transfer-in of Level 3 hierarchy measurement from Level 1	 	 	20,025	 	
Unrealized losses included in other comprehensive income	 	 	(1,276	)	
 	 	 	 	
Ending balance as of June 30, 2008	 	$	18,749	 	
 	 	 	 	
12

Table of Contents
     The Company’s ARS holdings as of June 30, 2008 and December 31, 2007 consisted entirely of student loan ARS. The unrealized loss of these ARS for the six months ended June 30, 2008 reflected a decrease of fair value of the Company’s long-term investments and was reported in its OCI. Due to the lack of observable market quotes on the Company’s ARS portfolio, the Company utilized DCF valuation models that relied exclusively on Level 3 inputs including estimates for interest rates, timing and amount of cash flows, credit quality, expected holding periods of the ARS, net loan rate provision and percentage of portfolio guaranteed by the Federal Family and Education Loan Program. The valuation used estimates of observable market data including yields or spreads of trading instruments that the Company believed to be similar or comparable and assumptions that it believed to be reasonable non-observable inputs such as illiquidity premium and likelihood of redemption. The valuation of the Company’s ARS is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities and to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity. The Company’s ARS, valued using Level 3 inputs, represent 18 percent of assets measured at fair value under the provisions of SFAS 157.
     Based on this assessment of fair value, as of June 30, 2008, the Company determined there was a decline in the fair value of its ARS investment of $1,276,000, and deemed the entire decline temporary. The unrealized losses are reported as a component of stockholders’ equity, except for unrealized losses determined to be other than temporary which are recorded in the Statement of Operations, in accordance with the Company’s policy and FSP No. FASB 115-1 and FASB 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” As of June 30, 2008 and December 31, 2007, the Company had not incurred any losses that it deemed other-than-temporary. The Company continues to monitor the ARS market and consider its impact, if any, on the fair value of its ARS.
     If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, the Company may be required to record additional unrealized losses in other comprehensive income (loss) or impairment charges in future quarters.
Note 9. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
     The Company adopted certain requirements of SFAS No. 157 effective January 1, 2008. See Note 1, “Organization and Summary of Significant Accounting Policies —  Fair Value of Financial Instruments. ”
     Effective January 1, 2008, the Company adopted SFAS No. 159. The Company did not elect the fair value option for its financial assets and liabilities existing at January 1, 2008, nor for its financial assets and liabilities transacted in the six months ended June 30, 2008. Therefore, the adoption of SFAS No. 159 had no impact on the Company’s financial position or results of operations. See Note 1, “Organization and Summary of Significant Accounting Policies —  Fair Value of Financial Instruments. ”
     The Company adopted Emerging Issues Task Force (“EITF”) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” on a prospective basis for new contracts entered into on or after effective January 1, 2008. EITF Issue No. 07-3 states that nonrefundable advance payments for future research and development activities should be deferred and recognized as an expense as the goods are delivered or the related services are performed. Entities should then continue to evaluate whether they expect the goods to be delivered or services to be rendered and, if an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The adoption of EITF Issue No. 07-3 did not have a material effect on the Company’s financial position or results of operations.
     In December 2007, the SEC issued SAB No. 110, which addresses the continued use of the simplified method for estimating the expected term for stock based compensation. Previously, under SAB No. 107, the use of the simplified method was intended to be discontinued after December 31, 2007. Under SAB No. 110, companies may continue to use the simplified method in certain circumstances. The Company used the simplified method of estimating the expected term for stock based compensation from January 1, 2006,
13

Table of Contents
the date it adopted SFAS No. 123R, through December 31, 2007. Starting January 1, 2008, the Company ceased to use the simplified method under SAB No. 107. Instead, the Company uses its own historical exercise activity and extrapolates the life cycle of options outstanding to arrive at its estimated expected term for new option grants.
Accounting Pronouncements Not Yet Adopted
     In November 2007, the EITF issued a consensus on EITF Issue No. 07-01, “Accounting for Collaboration Arrangements Related to the Development and Commercialization of Intellectual Property,” which is focused on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure questions. EITF Issue No. 07-01 is to be applied retrospectively for collaboration arrangements in fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact on its financial statements of adopting EITF Issue No. 07-1.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires that the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company is currently evaluating the impact of adopting this pronouncement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report. Operating results are not necessarily indicative of results that may occur in future periods.
     This report contains forward-looking statements that are based upon current expectations within the meaning of the Private Securities Litigation Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Examples of such forward-looking statements include, but are not limited to, statements about or relating to:
 	•	 	the initiation, progress, timing and scope of clinical trials and development for our drug candidates and potential drug candidates by ourselves or GlaxoSmithKline (“GSK”), including the anticipated dates of data becoming available or being announced or presented from clinical trials;	
 	 	 	 	
 	•	 	guidance concerning revenues, research and development expenses and general and administrative expenses for 2008;	
 	 	 	 	
 	•	 	our and our partners’ plans or ability for continued research and development of drug candidates, such as CK-1827452, ispinesib, SB-743921 and GSK-923295, and other compounds, such as our skeletal muscle activators and our smooth muscle myosin inhibitors;	
 	 	 	 	
 	•	 	our ability to generate clinical data sufficient to result in Amgen Inc. (“Amgen”) exercising its option with respect to CK-1827452 or GSK exercising its option with respect to either or both of ispinesib or SB-743921, or to provide such data within our expected timeframes.	
 	 	 	 	
 	•	 	our expected roles in research, development or commercialization under our strategic alliances, such as with Amgen and GSK;	
 	 	 	 	
 	•	 	the potential benefits of our drug candidates and potential drug candidates;	
 	 	 	 	
 	•	 	the scope, conduct and results of our research and development activities and programs;	
 	 	 	 	
 	•	 	the utility of our clinical trials programs for our drug candidates in informing future development activities;	
14

Table of Contents

 	•	 	our plans or ability to commercialize drugs with or without a partner, including our intention to develop sales and marketing capabilities;	
 	 	 	 	
 	•	 	receipt of milestone payments, royalties and other funds from our partners under strategic alliances, such as with Amgen and GSK;	
 	 	 	 	
 	•	 	issuance of shares of our common stock under our committed equity financing facility entered into with Kingsbridge Capital Limited (“Kingsbridge”) in 2007;	
 	 	 	 	
 	•	 	losses, costs, expenses and expenditures;	
 	 	 	 	
 	•	 	the sufficiency of existing resources to fund our operations for at least the next 12 months;	
 	 	 	 	
 	•	 	capital requirements and our needs for additional financing;	
 	 	 	 	
 	•	 	future payments under lease obligations and equipment financing lines;	
 	 	 	 	
 	•	 	expected future sources of revenue and capital;	
 	 	 	 	
 	•	 	increasing the number of our employees and recruiting additional key personnel; and	
 	 	 	 	
 	•	 	expected future amortization of employee stock-based compensation.	
     Such forward-looking statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to:
 	•	 	difficulties or delays in development, testing, obtaining regulatory approval for, and undertaking production and marketing of our drug candidates, including decisions by the National Cancer Institute (“NCI”) to postpone or discontinue development activities for ispinesib, or by GSK to postpone or discontinue research or development activities relating to GSK-923295 or to centromere-associated protein E;	
 	 	 	 	
 	•	 	difficulties or delays in or slower than anticipated patient enrollment in our or our partners’ clinical trials;	
 	 	 	 	
 	•	 	unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval (including the risk that current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials);	
 	 	 	 	
 	•	 	the possibility that the U.S. Food and Drug Administration (“FDA”), or foreign regulatory agencies may delay or limit our or our partners’ ability to conduct clinical trials;	
 	 	 	 	
 	•	 	our receipt of funds under our strategic alliances, including those funds dependent upon Amgen’s exercise of its option with respect to CK-1827452 and GSK’s exercise of its option with respect to either or both of ispinesib and SB-743921;	
 	 	 	 	
 	•	 	activities and decisions of, and market conditions affecting, current and future strategic partners;	
 	 	 	 	
 	•	 	our ability to obtain additional financing if necessary;	
 	 	 	 	
 	•	 	our ability to maintain the effectiveness of our registration statement permitting resale of securities to be issued to Kingsbridge by us under, and in connection with, the 2007 committed equity financing facility;	
 	 	 	 	
 	•	 	changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target;	
15

Table of Contents
 	•	 	the uncertainty of our ability to obtain and maintain protection for our intellectual property, through patents, trade secrets or otherwise; and	
 	 	 	 	
 	•	 	our potential infringement or misappropriation of the intellectual property rights of third parties.	
     In addition such statements are subject to the risks and uncertainties discussed in the “Risk Factors” section and elsewhere in this document. Operating results are not necessarily indicative of results that may occur in future periods.
     When used in this report, unless otherwise indicated, “Cytokinetics,” “the Company,” “we,” “our” and “us” refers to Cytokinetics, Incorporated.
     CYTOKINETICS, and our logo used alone and with the mark CYTOKINETICS, and CYTOMETRIX are registered service marks and trademarks of Cytokinetics. PUMA is a trademark of Cytokinetics. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners.
Overview
     We are a biopharmaceutical company, incorporated in Delaware in 1997, focused on developing small molecule therapeutics for the treatment of cardiovascular diseases, cancer and other diseases. Our current clinical development activities are primarily directed to advancing multiple drug candidates through clinical trials with the objective of determining the intended pharmacodynamic effect or effects in two principal diseases: heart failure and cancer. Our drug development pipeline consists of a drug candidate, CK-1827452, being developed in both an intravenous and oral formulation for the potential treatment of heart failure; three drug candidates, ispinesib, SB-743921 and GSK-923295, each being developed in an intravenous formulation for the potential treatment of cancer; and a potential drug candidate for the potential treatment of skeletal muscle weakness associated with neuromuscular diseases or other conditions. Our drug candidates and potential drug candidate are all novel small molecules that arose from our research activities and are directed toward the cytoskeleton. We believe our understanding of the cytoskeleton enables us to discover novel and potentially safer and more effective therapeutics.
     Since our inception in August 1997, we have incurred significant net losses. As of June 30, 2008, we had an accumulated deficit of $308.8 million. We expect to incur substantial and increasing losses for the next several years if and to the extent:
 	•	 	we advance CK-1827452 through clinical development for the treatment of heart failure and Amgen does not exercise its option to conduct later-stage development and commercialization;	
 	 	 	 	
 	•	 	Amgen exercises its option to conduct later-stage development and commercialization of CK-1827452 and we then exercise our option to co-fund the development of CK-1827452;	
 	 	 	 	
 	•	 	we conduct continued Phase I, Phase II and later-stage development and commercialization of ispinesib, SB-743921 or GSK-923295 under our collaboration and license agreement with GSK, as amended;	
 	 	 	 	
 	•	 	we advance ispinesib through clinical development for breast cancer and SB-743921 through clinical development for Hodgkin and non-Hodgkin lymphoma, and GSK does not exercise its option to conduct later-stage development and commercialization for either or both of these drug candidates;	
 	 	 	 	
 	•	 	we exercise our option to co-fund the development of GSK-923295 or of any other drug candidate being developed by GSK under our strategic alliance;	
 	 	 	 	
 	•	 	we exercise our option to co-promote any of the products for which we have elected co-fund development under our strategic alliance with GSK;	
 	 	 	 	
 	•	 	we advance potential drug candidates through preclinical studies and into clinical trials;	
16

Table of Contents
 	•	 	we expand our research programs and further develop our proprietary drug discovery technologies; or	
 	 	 	 	
 	•	 	we elect to fund development or commercialization of any drug candidate.	
     We intend to pursue selective strategic alliances to enable us to maintain financial and operational flexibility.
Cardiovascular
     We have focused our cardiovascular research and development activities on heart failure, a disease most often characterized by compromised contractile function of the heart that impacts its ability to effectively pump blood throughout the body. We have discovered and optimized small molecules that have the potential to improve cardiac systolic performance by specifically binding to and activating cardiac myosin, a cytoskeletal protein essential for cardiac muscle contraction. This work gave rise to our drug candidate CK-1827452, a novel small molecule cardiac myosin activator. CK-1827452 entered clinical trials in 2006. Based on data from our first-time-in-humans Phase I clinical trial with this drug candidate, in April 2007, we initiated a clinical trials program for CK-1827452, comprised of Phase I and Phase IIa clinical trials designed to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetic profile of both intravenous and oral formulations of this drug candidate in a diversity of patients, including patients with stable heart failure and patients with ischemic cardiomyopathy. Our goal is to develop CK-1827452 as a potential treatment across the continuum of care in heart failure, both in the hospital setting as an intravenous formulation for the treatment of acutely decompensated heart failure and in the outpatient setting as an oral formulation for the treatment of chronic heart failure.
     In the first-time-in-humans Phase I clinical trial of CK-1827452, evaluating a six-hour intravenous infusion of this drug candidate in healthy volunteers, CK-1827452 was well-tolerated and statistically significant and concentration-dependent increases in indices of left ventricular function were demonstrated. In addition, CK-1827452 exhibited generally linear, dose-proportional pharmacokinetics across the dose range studied. The adverse effects at intolerable doses in humans appeared similar to the adverse findings which occurred at similar plasma concentrations in the preclinical safety studies. These effects are believed to be related to an excess of the intended pharmacologic effect, resulting in excessive prolongation of the systolic ejection time, and resolved promptly with discontinuation of the infusions of CK-1827452. The activity of CK-1827452 in this trial was consistent with results from preclinical evaluations of CK-1827452 in normal dogs. Further clinical trials are necessary to determine whether similar results will also be seen in patients with heart failure.
     In December 2006, we entered into a collaboration and option agreement with Amgen to discover, develop and commercialize novel small-molecule therapeutics that activate cardiac muscle contractility for potential applications in the treatment of heart failure, including CK-1827452. The agreement provides Amgen with a non-exclusive license and access to certain technology, as well as an option to receive an exclusive license to develop and commercialize CK-1827452 and other drug candidates arising from the collaboration, subject to Cytokinetics’ development and commercial participation rights. The option is for worldwide license rights, excluding Japan. Amgen’s option is exercisable during a defined period, the ending of which is dependent upon the satisfaction of certain conditions, primarily the delivery of Phase I and Phase IIa clinical trials data for CK-1827452 in accordance with an agreed development plan, the results of which may reasonably support its progression into Phase IIb clinical development.
     Currently ongoing and recently completed clinical trials of CK-1827452 are as follows:
CK-1827452 (intravenous)
     Phase IIa stable heart failure (safety and tolerability): In June 2008, as part of the Late Breaking Trials Session at the 2008 Heart Failure Congress of the European Society of Cardiology in Milan, Italy, we announced results from an interim analysis of an ongoing Phase IIa, multi-center, double-blind, randomized, placebo-controlled, dose-escalation clinical trial of CK-1827452 administered intravenously to patients with stable heart failure. The trial’s primary objective is to evaluate the safety and tolerability of CK-1827452. Its secondary objectives are to establish a relationship between the plasma concentration and the pharmacodynamic effects of CK-1827452 and to determine its pharmacokinetics in stable heart failure patients. In addition to routine assessments of vital signs, blood samples and electrocardiographic monitoring, echocardiograms are being performed to evaluate cardiac function at various pre-defined
17

Table of Contents
time points. The clinical trial is planned to consist of at least five cohorts of eight patients with stable heart failure. In the first four cohorts, patients undergo four treatment periods, receiving three escalating active doses of CK-1827452 and one placebo treatment randomized into the dose escalation sequence to maintain blinding. Patients receive a loading infusion to rapidly achieve a target plasma concentration of CK-1827452 during the first hour, followed by a slower infusion intended to maintain that plasma concentration during the remainder of the infusion. The first two of these cohorts were designed to study a range of target CK-1827452 plasma concentrations, from 90 ng/ml in the lowest dose regimen in Cohort 1 to 650 ng/ml in the highest dose regimen in Cohort 2; Cohorts 3 and 4 were designed to gain experience across the same range plasma of concentrations, but with infusions of a longer duration. In Cohorts 1 and 2, the second, slower, maintenance infusion was continued for one hour; in Cohort 3, the maintenance infusion was continued for 23 hours. At the time of the interim analysis, 22 patients had been evaluated in this clinical trial (8 patients from each of the completed Cohorts 1 and 2, and 6 patients from the then-ongoing Cohort 3.) The safety data from this analysis suggest that CK-1827452 was well-tolerated with no serious adverse events reported in patients exposed to the intended range of doses and plasma concentrations. A pharmacodynamic-pharmacokinetic analysis of data from these 22 patients showed that when compared to placebo, CK-1827452 produced statistically significant and clinically relevant increases in Doppler-derived stroke volume and fractional shortening as a consequence of statistically significant prolongations of systolic ejection time. At the highest CK-1827452 concentrations studied, stroke volume, the volume of blood pumped during each heartbeat, increased versus placebo from its mean baseline value of 71 mL by 19 ± 4 mL (p < 0.0001). In addition, fractional shortening increased versus placebo by 4.0 ± 2% (p = 0.01), and systolic ejection time by 95 ± 9 msec (p < 0.0001). These promising data reflect what we believe is the clinically relevant activity of this novel drug candidate. Following review of safety data from this interim analysis, we opened enrollment in a fourth cohort in this trial. This cohort will also evaluate a one-hour loading infusion followed by 23 hours of maintenance infusion over the same range of target CK-1827452 plasma concentrations evaluated in Cohort 3. We anticipate that final data will be available from this trial during the second half of 2008.
     Phase IIa stable heart failure (cardiac catheterization): In the second quarter of 2008, we opened enrollment in an open-label, non-randomized Phase IIa clinical trial designed to evaluate an intravenous formulation of CK-1827452 administered to patients with stable heart failure undergoing clinically indicated coronary angiography in a cardiac catheterization laboratory. The primary objective of this trial is to evaluate the potential effects of CK-1827452 on myocardial efficiency, defined as the ratio of ventricular performance to myocardial oxygen consumption. The secondary objective of this trial is to measure the potential effects of CK-1827452 on ventricular performance, myocardial oxygen consumption, hemodynamics, pressure-volume relationships and systolic ejection time. We continue to screen patients for the potential initiation of this trial.
CK-1827452 (oral)
     Phase I drug-drug interaction: In April 2007, we announced the initiation of a single-center, open-label, sequential, parallel group, Phase I clinical trial of CK-1827452 designed to evaluate the potential for drug-drug interactions occurring via each of two drug-metabolizing enzymes, cytochrome P450 3A4 (“CYP3A4”) and cytochrome P450 2D6 (“CYP2D6”). In June 2008, we announced interim results which showed that, in CYP2D6 extensive metabolizers, the potent CYP3A4 inhibitor ketoconazole caused a modest reduction in the clearance of CK-1827452 and consequently, a modest but statistically significant increase in the elimination half-life of CK-1827452, from 22 to 27 hours (p < 0.01). This increase in the half-life of CK-1827452 with ketoconazole resulted in an approximate 50% increase in the area under the CK-1827452 plasma concentration versus time curve (“AUC”), which reflects the overall exposure to the study drug, and which was also statistically significant (p < 0.01). The maximum CK-1827452 plasma concentration (“Cmax”) was unaffected by ketoconazole (65 versus 67 ng/mL). Diltiazem, a moderate inhibitor of CYP3A4, had no effect on either the Cmax or AUC of CK-1827452 when the two were co-administered to CYP2D6 extensive metabolizer subjects, although the half-life increased slightly, from 18 to 20 hours (p < 0.01). We continue to screen and enroll subjects with the poor metabolizer genotype for CYP2D6, who comprise approximately 5% or less of the population. We anticipate that final data from this trial will be available in 2008.
     Phase I oral multi-dose: In June 2008, we announced final results from a Phase I clinical trial designed to evaluate the safety, tolerability, pharmacokinetics and dose-proportionality of an oral formulation of CK-1827452 administered both as a single oral dose and as multiple oral doses of 10 mg and 30 mg strength capsules. The primary objective of this study was to evaluate the safety and
18

Table of Contents
tolerability of CK-1827452 after a single oral dose and after multiple oral doses to steady-state in healthy men and women. The secondary objective of this study was to evaluate the pharmacokinetics of CK-1827452 after a single oral dose and after multiple oral doses to steady-state and to compare the pharmacokinetic parameters between healthy men and women. CK-1827452 was well-tolerated in the trial, with no drug-related serious adverse events. Dose-proportionality between the 10 mg and 30 mg dose levels was observed in both men and women, both after a single dose and after multiple doses to steady-state, with similar pharmacokinetics observed between men and women.
     Phase I modified release: In December 2007, we initiated a single-center, two-part, open-label, Phase I clinical trial of up to twelve healthy male volunteers. Since an immediate release formulation of CK-1827452 was found to be rapidly absorbed in a previous study in healthy subjects, the purpose of developing these modified release forms was to reduce the rate of drug absorption without significantly affecting the overall bioavailability. The primary objective of this study was to assess the pharmacokinetics and relative bioavailability of three different oral modified release prototypes of CK 1827452 as compared to the immediate release formulation in up to twelve healthy male subjects. The secondary objective of the trial was to determine whether there is an effect of food on the pharmacokinetics of one of these oral modified release prototypes of CK-1827452. The single-dose pharmacokinetics of one formulation, in both the fasted and fed states, demonstrated that it reduced Cmax and elevated the trough plasma concentration as compared to the immediate release formulation without a substantial effect on overall bioavailability, resulting in a smaller range of fluctuation in plasma concentrations as compared to oral dosing with the immediate release formulation. This prototype modified release oral formulation of CK-1827452 has been selected to proceed forward into further clinical testing.
CK-1827452 (intravenous to oral)
     In April 2008, we initiated a double-blind, randomized, placebo-controlled Phase IIa clinical trial designed to evaluate both an intravenous and an oral formulation of CK-1827452 in patients with ischemic cardiomyopathy and angina. The primary objective of this trial is to assess the effect of intravenous CK-1827452 on symptom-limited treadmill exercise tolerance. The secondary objectives of this trial are to assess the tolerability of CK-1827452 administered as an oral formulation, and to evaluate the resulting plasma concentrations. The target Cmax in Cohort 1 is 295 ng/mL; the target Cmax in Cohort 2 is 550 ng/mL. We recently completed enrollment of the first cohort of patients in this trial. We are conducting an interim safety analysis of clinical data arising from the first cohort in order to enable the initiation of the second and final cohort.
     CK-1827452 is at too early a stage of development for us to predict if or when we will be in a position to generate any revenues or material net cash flows from its commercialization. We currently fund all research and development costs associated with this program. We recorded research and development expenses for activities relating to our cardiovascular program of approximately $10.5 million for the six months ended June 30, 2008, and $11.5 million for the six months ended June 30, 2007. We anticipate that our expenditures relating to the research and development of compounds in our cardiovascular program will increase significantly as we advance CK-1827452 through clinical development. Our expenditures will also increase if Amgen does not exercise its option and we elect to develop CK-1827452 or related compounds independently, or if we elect to co-fund later-stage development of CK-1827452 or other compounds in our cardiovascular program under our collaboration and option agreement with Amgen following Amgen’s exercise of its option. If Amgen elects to exercise its option, it would be responsible for development and commercialization of CK-1827452 and related compounds, subject to our development and commercial participation rights. In addition, we may be eligible to receive precommercialization and commercialization milestone payments of up to $600 million on CK-1827452 and other products arising from the research under the collaboration, as well as escalating royalties based on increasing levels of annual net sales of products commercialized under the agreement. The agreement also provides for us to receive increased royalties by co-funding Phase III development costs of drug candidates under the collaboration. If we elect to co-fund such costs, we would be entitled to co-promote products in North America and participate in agreed commercial activities in institutional care settings, at Amgen’s expense.
19

Table of Contents
If Amgen elects not to exercise its option on CK-1827452, we may then independently proceed to develop CK-1827452 and the collaboration with Amgen would terminate.
Oncology
     In the six months ended June 30, 2008, we continued to advance our oncology development programs for our drug candidates ispinesib and SB-743921 as they progressed in Phase I of their respective Phase I/II clinical trials and GSK continued conducting the first-time-in-humans Phase I clinical trial of our drug candidate GSK-923295. These three drug candidates are being developed in connection with our collaboration and license agreement with GSK. This strategic alliance is focused on novel small molecule therapeutics targeting a family of cytoskeletal proteins known as mitotic kinesins for the treatment of cancer. Pursuant to a November 2006 amendment to the GSK collaboration and license agreement, we assumed responsibility, at our expense, for the continued research, development and commercialization of ispinesib and SB-743921, subject to GSK’s option to resume development and commercialization of either or both of ispinesib and SB-743921. This option is exercisable until the end of 2008. For those drug candidates that GSK develops under the strategic alliance, we can elect to co-fund certain later-stage development activities which would increase our potential royalty rates on sales of resulting drugs and provide us with the option to secure co-promotion rights in North America. If we elect to co-fund later-stage development of GSK-923295, the royalty rates to be paid to us for future sales of any resulting drugs would increase, and could result in increased payments to us based on increasing product sales and co-funding by us. If we elect to co-fund later-stage development of ispinesib or SB-743921, we believe that the royalty rates to be paid to us for future sales of any resulting drugs would increase to an even higher percentage rate,  and could result in increased payments to us, based on increasing product sales and co-funding by us. If we exercise our co-promotion option, then we are entitled to receive reimbursement from GSK for certain sales force costs we incur in support of our commercial activities. We are also researching other compounds for the potential treatment of cancer.
Ispinesib
     The clinical trials program sponsored by GSK and the NCI for ispinesib, an inhibitor of kinesin spindle protein, consisted of nine Phase II clinical trials and eight Phase I or Ib clinical trials evaluating the use of this drug candidate in a variety of both solid and hematologic cancers. We believe that the breadth of this clinical trials program took into consideration the potential and the complexity of developing a drug candidate such as ispinesib, and should help us to identify those tumor types and dosing regimens that are the most promising for the continued development of ispinesib. We have reported Phase II clinical trial data for ispinesib in metastatic breast, non-small cell lung, ovarian, colorectal, head and neck, hepatocellular, renal and prostate cancers and in melanoma. To date, we believe some clinical activity for ispinesib has been observed in non-small cell lung, ovarian and breast cancers, with the most clinical activity observed in a Phase II clinical trial evaluating ispinesib in the treatment of patients with locally advanced or metastatic breast cancer that had failed treatment with taxanes and anthracyclines. Under our strategic alliance with GSK, we have initiated a focused development program for ispinesib in the treatment of patients with locally advanced or metastatic breast cancer. This program is intended to build upon the previous data from the clinical trials conducted by GSK and the NCI, and is designed to further define the clinical activity profile of ispinesib in chemotherapy-naïve locally advanced or metastatic breast cancer patients in preparation for potentially initiating a later stage clinical trials program of ispinesib for the second-line treatment of advanced breast cancer.
     Currently ongoing and recently completed clinical trials of ispinesib are as follows:
     Breast Cancer: In December 2007, we initiated, at our expense, an open-label, non-randomized Phase I/II clinical trial designed to evaluate ispinesib as monotherapy administered as a first-line treatment in chemotherapy-naïve patients with locally advanced or metastatic breast cancer. This trial is designed to be a proof-of-concept study to potentially amplify the signals of clinical activity seen in GSK’s Phase II monotherapy trial of ispinesib in breast cancer that had failed to respond or progressed after treatment with an anthracycline and a taxane, and is intended to provide the data necessary to inform ispinesib’s further development, as well as to inform GSK’s potential exercise of its option to develop and commercialize ispinesib. The primary objectives of the Phase I portion of this clinical trial are to determine the dose limiting toxicities and maximum tolerated dose, and to assess the safety and tolerability of ispinesib administered as a 1-hour intravenous infusion on days 1 and 15 of a 28-day cycle. The secondary objectives are to characterize the pharmacokinetics of ispinesib on this schedule and to evaluate the effect of ispinesib on biomarkers of cell proliferation in patients with accessible tumors .
20

Table of Contents
In June 2008, a poster containing interim data from Phase I of this trial was presented at the 2008 Annual Meeting of the American Society of Clinical Oncology (“ASCO”) in Chicago, IL. At the interim analysis point, the authors concluded that preliminary data suggests that ispinesib is well-tolerated when dosed on days 1 and 15 every 28 days at doses up to 12 mg/m 2 . The most common toxicity in this clinical trial observed to date has been neutropenia. No neuropathy, alopecia or Grade 2 or higher gastrointestinal toxicity has been observed in this trial. We continue to enroll patients and dose-escalate in the Phase I portion of this Phase I/II clinical trial. We anticipate that data from the ongoing Phase I portion of this trial will be available in the third quarter of 2008.
     Ispinesib with capecitabine: In June 2008, we announced the results of a Phase Ib clinical trial sponsored by GSK designed to evaluate ispinesib in combination with capecitabine, an oral chemotherapy agent commonly used in the treatment of breast cancer. This trial was an open-label, dose-escalation study of ispinesib in combination with capecitabine on an every 21-day schedule in subjects with advanced solid tumors. Its primary objectives were to assess the safety and tolerability and to determine the optimally tolerated regimen of ispinesib when administered as a 1-hour infusion on day 1 in combination with daily administration of capecitabine given on days 1 through 14 of the 21-day cycle. The secondary objective was to assess the clinical activity of this combination in patients with advanced solid tumors. Although a single dose regimen was not formally confirmed as the optimally tolerated regimen, ispinesib administered at 18 mg/m 2 , its maximum tolerated dose as monotherapy, was well-tolerated in combination with therapeutic doses of capecitabine at daily doses of 2000 mg/m 2  and 2500 mg/m 2 . The investigators in this clinical trial concluded that the combination of ispinesib with capecitabine had an acceptable tolerability profile on the 21-day schedule investigated in the trial. The dose limiting toxicities in this combination regimen were consistent with the monotherapy toxicities of ispinesib (prolonged neutropenia) and capecitabine (rash). In this trial, the best response observed among the 24 patients treated was a partial response by Response Evaluation Criteria In Solid Tumors in a patient with advanced breast cancer. In addition, 11 patients had a response of stable disease by this criteria.
     Pediatric Solid Tumors: In June 2008, at the ASCO annual meeting, the NCI presented final data from a Phase I clinical trial designed to evaluate the safety, tolerability, pharmacodynamics and pharmacokinetic profile of ispinesib as monotherapy administered as a one-hour infusion on days 1, 8 and 15 of a 28-day schedule to pediatric patients with relapsed or refractory solid tumors. Of the 24 patients enrolled in this clinical trial, 18 were evaluable for toxicity and 23 were evaluable for a response. The authors concluded that the maximum tolerated dose on this schedule for this patient population was 9 mg/m 2 . In this clinical trial, the dose limiting toxicities observed were neutropenia (n=3), hyperbilirubinemia (n=1) and elevated ALT (n=1). The best response observed was stable disease at 7 courses in one patient. Three patients experienced stable disease for longer than 3 courses of therapy. The authors concluded that ispinesib was well-tolerated in pediatric patients, with neutropenia and hepatotoxicity representing the most commonly observed dose limiting toxicities.
     Acute Leukemias, Chronic Myelogenous Leukemia or Advanced Myelodysplastic Syndromes: The NCI has completed enrollment in a Phase I clinical trial designed to evaluate the safety, tolerability and pharmacokinetic profile of ispinesib as monotherapy administered as a one-hour infusion on days 1, 2 and 3 of a 21-day cycle in adult patients with relapsed or refractory acute leukemias, chronic myelogenous leukemia in blast crisis or advanced myelodysplastic syndromes.
     We expect that it will take several years before ispinesib can be commercialized, if at all. Ispinesib is at too early a stage of development for us to predict if and when we will be in a position to generate any revenues or material net cash flows from any resulting drugs. Accordingly, we cannot reasonably estimate when and to what extent ispinesib will generate revenues or material net cash flows, which may vary widely depending on numerous factors, including, but not limited to, the safety and efficacy profile of the drug, receipt of regulatory approvals, market acceptance, then-prevailing reimbursement policies, competition and other market conditions. We have assumed responsibility for funding the research and development costs associated with ispinesib pursuant to the November 2006 amendment to our collaboration and license agreement with GSK. We have initiated a focused development program for ispinesib in the treatment of patients with locally advanced or metastatic breast cancer designed to further define the clinical activity profile of ispinesib in advanced breast cancer patients. If GSK does not exercise its option to resume responsibility for some or all of the development and commercialization activities associated with this drug candidate, and we continue to advance the drug candidate on our own, our expenditures relating to research and development of this drug candidate will increase significantly.
21

Table of Contents
SB-743921
     SB-743921, our second anti-cancer drug candidate, also inhibits kinesin spindle protein but is structurally distinct from ispinesib. SB-743921 is also being developed in connection with our strategic alliance with GSK. Though we are aware of no clinical shortcomings of ispinesib that are addressed by SB-743921, we believe that having two kinesin spindle protein inhibitors in concurrent clinical development increases the likelihood that a commercial product will result from this research and development program.
     SB-743921 was studied by GSK in a dose-escalating Phase I clinical trial evaluating its safety, tolerability and pharmacokinetics in advanced cancer patients. The primary objectives of this clinical trial were to determine the dose limiting toxicities and to establish the maximum tolerated dose of SB-743921 administered intravenously on a once every 21-day schedule. Secondary objectives included assessment of the safety and tolerability of SB-743921, characterization of the pharmacokinetics of SB-743921 on this schedule and a preliminary assessment of its anti-tumor activity. The observed toxicities at the recommended Phase II dose were manageable. Dose limiting toxicities in this clinical trial consisted predominantly of neutropenia and elevations in hepatic enzymes and bilirubin. Disease stabilization, ranging from 9 to 45 weeks, was observed in seven patients. One patient with cholangiocarcinoma had a confirmed partial response at the maximum tolerated dose.
     Phase I/II Hodgkin and non-Hodgkin Lymphoma: In 2006, we initiated, at our expense, an additional clinical trial of SB-743921 in hematologic cancers. We continue to enroll and dose-escalate patients in Phase I of an open-label, non-randomized Phase I/II clinical trial to investigate the safety, tolerability, pharmacodynamics and pharmacokinetic profile of SB-743921 administered as a one-hour infusion on days 1 and 15 of a 28-day schedule in patients with Hodgkin or non-Hodgkin lymphoma, first without, and then with, the addition of granulocyte colony-stimulating factor (“G-CSF”). In June 2008, in association with proceedings at both the ASCO annual meeting and the 10th International Conference on Malignant Lymphoma in Lugano, Switzerland, interim data from the Phase I portion of this trial were presented. At the interim analysis point, 46 patients had been enrolled and 43 patients were treated. Of the treated patients, 43 were evaluable for safety and 28 were evaluable for efficacy. The authors concluded that the pattern of neutropenia onset and recovery support a dosing schedule for SB-743921 of days 1 and 15 of a 28-day cycle. The maximum tolerated dose of SB-743921 was 6 mg/m 2  when given days 1 and 15 every 28 days without G-CSF support. This represents a greater dose density (0.43 mg/m 2 /day) than on the previously studied schedule; i.e., 4 mg/m 2  once every 21 days (0.19 mg/m 2 /day). The only dose limiting toxicity observed without G-CSF was neutropenia; therefore further dose escalation with empiric, prophylactic G-CSF is ongoing. The trial is currently enrolling at 8 mg/m 2 . The declines from baseline seen in neutrophil counts on day 8 and 22 without G-CSF were not observed with 6 mg/m 2  plus G-CSF, suggesting further dose escalation with G-CSF may be possible. Grade 3 and 4 toxicities other than neutropenia were uncommon; in particular, no evidence of neuropathy or alopecia was observed. To date, one objective partial response has been observed at the maximum tolerated dose without G-CSF in a patient with Hodgkin lymphoma. We anticipate that final data will be available from the Phase I portion of this trial in 2008.
     The clinical trials program for SB-743921 may proceed for several years, and we will not be in a position to generate any revenues or material net cash flows from this drug candidate until and unless the program is successfully completed, regulatory approval is achieved and a drug is commercialized. SB-743921 is at too early a stage of development for us to predict when or if this may occur. The November 2006 amendment to our collaboration and license agreement with GSK provides for us to fund the future development of SB-743921 in all cancer indications subject to GSK’s option to resume responsibility for some or all development and commercialization activities. As a result of our conduct of our current Phase I/II clinical trial of SB-743921 in hematologic cancers, and any further development activities for SB-743921 we may conduct under this amendment, our expenditures relating to research and development of this drug candidate will increase significantly.
     If GSK exercises its option for either or both of ispinesib and SB-743921, it will pay us an option fee equal to the costs we independently incurred for the development of that drug candidate, plus a premium intended to compensate us for the cost of capital associated with such costs, subject to an agreed limit for such costs and premium. Upon GSK exercising its option for a drug candidate, we may receive additional precommercialization milestone payments with respect to such drug candidate and increased royalties on net sales of any resulting product, in each case, beyond those contemplated under the original agreement.
GSK-923295
     GSK-923295 is the third drug candidate to arise from our strategic alliance with GSK. GSK-923295 is an inhibitor of a second mitotic kinesin, centromere-associated protein E. Centromere-associated protein E is directly involved in coordinating the decision a cell makes to divide with the actual trigger of the mechanics of cell division. These processes are essential for cancer cells to grow. GSK-923295
22

Table of Contents
causes partial and complete shrinkages of human tumors in animal models and has exhibited properties in these studies that distinguish it from ispinesib and SB-743921.
     Phase I First-Time-in-Humans: During the quarter, GSK continued to enroll patients and dose-escalate in a first-time-in-humans Phase I clinical trial of GSK-923295. This trial is an open-label, non-randomized, dose-finding trial designed to investigate the safety, tolerability, pharmacodynamics and pharmacokinetic profile of GSK-923295 in patients with advanced solid tumors. The initiation of this clinical trial in August 2007 triggered a milestone payment of $1.0 million from GSK to Cytokinetics under our collaboration and license agreement with GSK. An oral presentation at the April 2008 American Association of Cancer Research Annual Meeting highlighted interim clinical data from this trial. The authors concluded that the pharmacokinetics of GSK-923295 were generally dose-proportional over the dose range of 10 to 80 mg/m2 and that intrapatient pharmacokinetics on days 1 and 15 were similar. We anticipate that data from this trial will be available in the third quarter of 2008.
     In June 2008, we amended our collaboration and license agreement with GSK to extend the research term for an additional year through June 19, 2009 to facilitate continued research activities under an updated research plan focused on centromere-associated protein E. Under the June 2008 amendment, GSK will have no obligation to reimburse us for full-time employee equivalents (“FTEs”) or other research-related expenses during the extension of the research term.
     The development program for GSK-923295 may proceed for several years, and we will not be in a position to generate any revenues or material net cash flows from this potential drug candidate unless the program is successfully completed, regulatory approval is achieved and a drug is commercialized. GSK-923295 is at too early a stage of development for us to predict when or if this may occur. If GSK abandons development of GSK-923295 prior to regulatory approval, we may undertake and fund the clinical development of this drug candidate, or its commercialization, or we may seek a new partner for such clinical development or commercialization, or curtail or abandon such clinical development.
     We recorded research and development expenses for activities relating to our mitotic kinesin programs of approximately $4.0 million for the six months ended June 30, 2008, and $2.9 million for the six months ended June 30, 2007. We anticipate that our expenditures relating to the development of ispinesib and SB-743921 will increase significantly as we advance through clinical development. Our expenditures will also increase if GSK does not exercise its option to resume responsibility for some or all of the development and commercialization activities associated with ispinesib and SB-743921, or if we elect to co-fund later-stage development for one or more of ispinesib, SB-743921 and GSK-923295. For those drug candidates and potential drug candidates that GSK develops under the strategic alliance, which currently includes GSK-923295 and which may include either or both of ispinesib and SB-743921 if so elected by GSK pursuant to its option, we may elect to co-fund certain later-stage development activities which would increase our potential royalty rates on sales of resulting drugs and provide us with the option to secure co-promotion rights in North America. We expect that the royalties to be paid on potential future sales, if any, by GSK of each of ispinesib, SB-743921 and GSK-923295 will be based on increasing product sales and our anticipated level of co-funding, if any. If we exercise our co-promotion option, then we will receive reimbursement from GSK for certain sales force costs we incur in support of our commercial activities.
Research
     In April 2008, we announced the selection of a development compound directed towards the skeletal sarcomere. Preclinical data indicates that this compound is a highly specific small molecule activator of the troponin complex, increasing its sensitivity to calcium, and subsequently leading to an increase in skeletal muscle contractility. This compound has demonstrated encouraging pharmacological activity in non-clinical models that may relate to the potential treatment of skeletal muscle weakness associated with neuromuscular diseases or other conditions. This potential drug candidate is the fifth development compound to emerge from our research activities focused on discovering novel therapeutics directed towards cytoskeletal biology.
23

Table of Contents
     In the second quarter, we advanced novel smooth muscle myosin inhibitors in lead optimization activities towards the potential selection of one or more development compounds. Company scientists have characterized compounds arising from this research in pharmacology studies and have demonstrated encouraging evidence of efficacy for an inhaled formulation of certain of these compounds in preclinical bronchoconstriction models related to asthma and other reactive airways disorders.
Development Risks
     The successful development of all of our drug candidates is highly uncertain. We cannot estimate with certainty or know the exact nature, timing and estimated costs of the activities necessary to complete the development of any of our drug candidates or the date of completion of these development activities. We cannot estimate with certainty any of the foregoing due to the numerous risks and uncertainties associated with developing our drug candidates, including, but not limited to:
 	•	 	the uncertainty of the timing of the initiation and completion of patient enrollment in our clinical trials;	
 	 	 	 	
 	•	 	the possibility of delays in the collection of clinical trial data and the uncertainty of the timing of the analyses of our clinical trial data after such trials have been initiated and completed;	
 	 	 	 	
 	•	 	our potential inability to obtain or retain partners to assist in the design, management and funding of later stage clinical trials;	
 	 	 	 	
 	•	 	the possibility of delays in characterization, synthesis or optimization of potential drug candidates;	
 	 	 	 	
 	•	 	delays or additional costs in developing appropriate formulations of our drug candidates for clinical trial use;	
 	 	 	 	
 	•	 	the uncertainty of clinical trial results;	
 	 	 	 	
 	•	 	the uncertainty of obtaining FDA or other foreign regulatory agency approval required for the clinical investigation of new therapies; and	
 	 	 	 	
 	•	 	the uncertainty related to the development of commercial scale manufacturing processes and qualification of a commercial scale manufacturing facility.	
     If we fail to complete the development of any of our drug candidates in a timely manner, it could have a material adverse effect on our operations, financial position and liquidity. In addition, any failure by us or our partners to obtain, or any delay in obtaining, regulatory approvals for our drug candidates could have a material adverse effect on our results of operations. A further discussion of the risks and uncertainties associated with completing our programs on schedule, or at all, and certain consequences of failing to do so are discussed further in the risk factors entitled “We have never generated, and may never generate, revenues from commercial sales of our drugs and we may not have drugs to market for at least several years, if ever,” “Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates, which could prevent or significantly delay completion of clinical development and regulatory approval” and “Clinical trials are expensive, time consuming and subject to delay,” as well as other risk factors.
Revenues
     Our current revenue sources are limited, and we do not expect to generate any direct revenue from product sales for several years. We have recognized revenues from our strategic alliances with Amgen, GSK and AstraZeneca for license fees and contract research activities.
     Under our collaboration and option agreement with Amgen, we received an upfront, non-refundable license and technology access fee of $42.0 million. In connection with entering into the agreement, we also entered into a common stock purchase agreement with Amgen. In January 2007, we issued 3,484,806 shares of our common stock to Amgen for net proceeds of $32.9 million, of which the $6.9 million purchase premium was recorded as deferred revenue. We are amortizing the upfront fee and stock premium to license revenue ratably over the maximum term of the non-exclusive license, which is four years. We may receive additional payments from Amgen upon achieving certain precommercialization and commercialization milestones. Milestone payments are non-refundable and are recognized as revenue when earned, as evidenced by achievement of the specified milestones and the absence of ongoing performance obligations.
24

Table of Contents
     We may also be eligible to receive reimbursement for contract development activities subsequent to Amgen’s option exercise, which we will record as revenue if and when the related expenses are incurred. We record amounts received in advance of performance as deferred revenue.
     Charges to GSK in 2006 were based on negotiated rates intended to approximate the costs for our FTEs performing research under the strategic alliance and our out-of-pocket expenses, which we recorded as the related expenses were incurred. GSK paid us an upfront licensing fee, which we recognized ratably over the strategic alliance’s initial five-year research term, which ended in June 2006. In 2007, we received a $1.0 million milestone payment from GSK relating to its initiation of a phase I clinical trial of GSK-295. We may receive additional payments from GSK upon achieving certain precommercialization milestones. Milestone payments are non-refundable and are recognized as revenue when earned, as evidenced by achievement of the specified milestones and the absence of ongoing performance obligations. We record amounts received in advance of performance as deferred revenue. The revenues recognized to date are nonrefundable, even if the relevant research effort is not successful.
     Charges to AstraZeneca in 2005 were based on negotiated rates intended to approximate the costs for our FTEs performing research under the strategic alliance. The revenues recognized since inception to date are not refundable. The research term of our collaboration and license agreement with AstraZeneca expired in December 2005, and we formally terminated that agreement in August 2006.
     Because a substantial portion of our revenues for the foreseeable future will depend on achieving development and other precommercialization milestones under our strategic alliances with GSK and Amgen, our results of operations may vary substantially from year to year.
     We expect that our future revenues will most likely be derived from royalties on sales from drugs licensed to GSK or Amgen under our strategic alliances and from those licensed to future partners, as well as from direct sales of our drugs. If Amgen exercises its option, we will retain a product-by-product option to co-fund certain later-stage development activities under our strategic alliance with Amgen, thereby potentially increasing our royalties and affording us co-promotion rights in North America. For those products being developed by GSK under our strategic alliance, we also retain a product-by-product option to co-fund certain later-stage development activities, thereby potentially increasing our royalties and affording us co-promotion rights in North America. If we exercise our co-promotion rights under either strategic alliance, we are entitled to receive reimbursement for certain sales force costs we incur in support of our commercial activities.
Research and Development Expenses
     We incur research and development expenses associated with both partnered and unpartnered research activities, as well as the development and expansion of our drug discovery technologies. Research and development expenses related to our strategic alliance with GSK consisted primarily of costs related to research and screening, lead optimization and other activities relating to the identification of compounds for development as mitotic kinesin inhibitors for the treatment of cancer. Prior to June 2006, certain of these costs were reimbursed by GSK on an FTE basis. From 2001 through November 2006, GSK funded the majority of the costs related to the clinical development of ispinesib and SB-743921. Under our November 2006 amendment to our collaboration and license agreement with GSK, we assumed responsibility for the continued research, development and commercialization of inhibitors of kinesin spindle protein, including ispinesib and SB-743921, and other mitotic kinesins other than centromere-associated protein E, at our sole expense subject to GSK’s option to resume responsibility for the development and commercialization of either or both of ispinesib and SB-743921, exercisable during a defined period. We also have the option to co-fund certain later-stage development activities for GSK-923295. Our conduct of the research and development of ispinesib and SB-743921 and the potential exercise of our co-funding option will result in a significant increase in research and development expenses. We expect to incur research and development expenses in the continued conduct of preclinical studies and clinical trials for CK-1827452 and other of our cardiac myosin activator compounds for the treatment of heart failure and in connection with our early research programs in other diseases, as well as the continued refinement and application of our existing and future proprietary drug discovery technologies. Research and development expenses related to any development and commercialization activities we elect to fund would consist primarily of employee compensation, supplies and materials, costs for consultants and contract research, facilities costs and depreciation of equipment. From our inception through June 30, 2008, we incurred costs of approximately $64.2 million for research and development activities relating to mitotic kinesin inhibitors, $114.5 million for our cardiac contractility program, $51.4 million for our proprietary technologies and $82.3 million for other research and preclinical programs.
25

Table of Contents
General and Administrative Expenses
     General and administrative expenses consist primarily of compensation for employees in executive and administrative functions, including, but not limited to, finance, human resources, legal, business and commercial development and strategic planning. Other significant costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We anticipate continued increases in general and administrative expenses associated with operating as a publicly traded company.
Stock Compensation
     The following table summarizes stock-based compensation related to employee stock options and employee stock purchases for the three months and six months ended June 30, 2008 and June 30, 2007, which was allocated as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30, 2008	 	 	June 30, 2007	 	 	June 30, 2008	 	 	June 30, 2007	 	
Research and development	 	$	652	 	 	$	684	 	 	$	1,517	 	 	$	1,328	 	
General and administrative	 	 	695	 	 	 	792	 	 	 	1,356	 	 	 	1,308	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock-based compensation included in operating expenses	 	$	1,347	 	 	$	1,476	 	 	$	2,873	 	 	$	2,636	 	
     As of June 30, 2008, there was $11.1 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a weighted-average period of 2.78 years. In addition, we continue to amortize deferred stock-based compensation recorded prior to adoption of Statement of Financial Accounting Standard (“SFAS”) No. 123R (“SFAS 123R”) for stock options granted prior to the initial public offering. At June 30, 2008, the balance of deferred stock based compensation was $0.1 million, which we expect to amortize in the remaining quarters of 2008.
Income Taxes
     We account for income taxes in accordance with SFAS 109, “Accounting for Income Taxes,” which is the asset and liability method for accounting and reporting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. We have not recorded an income tax provision in the quarters ended June 30, 2008 or June 30, 2007 because we had a net taxable loss in both of those periods. Given that we have a history of recurring losses, we have recorded a full valuation allowance against our deferred tax assets.
     We also follow the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS 109” (“FIN 48”). This standard defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authorities based solely on the technical merits of the position. If the recognition threshold is met, the tax benefit is measured and recognized as the largest amount of tax benefit, in our judgment, which is greater than 50% likely to be realized. We are currently not subject to income tax examinations and, in general, all tax years remain open due to net operating losses.
     Interest and penalties are zero, and our policy for accounting for interest and penalties is to classify both as income tax expense in the financial statements. We do not expect our unrecognized tax benefits to change materially over the next 12 months.
Interest and Other Income and Expense
     Interest and other income and expense consist primarily of interest income and interest expense. Interest income is primarily generated from our cash, cash equivalents and investments. Interest expense generally relates to the borrowings under our equipment financing lines.
26

Table of Contents
Results of Operations
Revenues
     We recorded total revenues of $3.1 million and $6.1 million, in the second quarter and first half of 2008, respectively, compared with total revenues of $3.2 million and $6.4 million, respectively, for the same periods of 2007.
     Research and development revenues from related party refers to revenues from our partner, GSK, which is also a stockholder of the Company. Research and development revenues from GSK were $16,000 and $27,000, respectively, in the second quarter and first half of 2008, compared with $119,000 and $265,000, respectively, for the same periods of 2007, and represented patent expense reimbursements.
     License revenues from related parties refers to license revenue from our strategic alliances with Amgen and GSK. License revenues for the second quarter and first half of 2008 were $3.1 million and $6.1 million, respectively, and represented recognition of the upfront license fee and the premium paid on the common stock purchase by Amgen. License revenues for the second quarter and first half of 2007 were $3.1 million and $6.1 million, respectively, and represented recognition of the upfront license fee and the premium paid on the common stock purchase by Amgen. As of June 30, 2008, the remaining balance of deferred revenue relating to the upfront license fee and stock purchase premium paid by Amgen was $30.5 million. We are amortizing the Amgen deferred revenue on a straight-line basis over the maximum term of the non-exclusive license granted to Amgen under the collaboration and option agreement, which is four years.
     We anticipate that total revenues for the year ending December 31, 2008 will be approximately $12.0 million.
Research and Development Expenses
     Research and development expenses were $14.9 million and $29.0 million in the second quarter and first half of 2008, up from $13.7 million and $26.2 million for the same periods of 2007. The increase in the second quarter of 2008 compared to the same period in 2007, was primarily due to an increase of $0.9 million for clinical and preclinical outsourcing costs as we advanced our drug candidates for the treatment of cardiovascular disease and cancer through clinical trials, and increases of $0.2 million for compensation and benefit related costs and $0.2 million for laboratory related expenses. For the first half of 2008 compared to the same period in 2007, the increase in research and development was primarily due to an increase of $1.9 million for clinical and preclinical outsourcing costs, and increases of $0.6 million for compensation and benefit related costs and $0.5 million for laboratory related expenses.
     From a program perspective, the increase in spending in the second quarter of 2008 compared to the second quarter of 2007 was due to increases of $0.1 million related to our mitotic kinesin inhibitor program, $0.1 million of proprietary technologies and $1.8 million for our other research and preclinical programs, partially offset by decreases in spending for our cardiac contractility program of $0.8 million. For the first half of 2008 compared to the first half of 2007, the increase in research and development spending was due to increases of $1.1 million for our mitotic kinesin inhibitors and $3.1 million for our other research and preclinical programs, partially offset by decreases of $1.0 million in spending for cardiac contractility program and $0.4 million for our proprietary technologies.
     Research and development expenses incurred related to the following programs (in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Six Months Ended	 	
 	 	June 30,	 	 	June 30,	 	 	June 30,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Mitotic kinesin inhibitors	 	$	2.0	 	 	$	1.9	 	 	$	4.0	 	 	$	2.9	 	
Cardiac contractility	 	 	5.2	 	 	 	6.0	 	 	 	10.5	 	 	 	11.5	 	
Proprietary technologies	 	 	0.9	 	 	 	0.8	 	 	 	1.6	 	 	 	2.0	 	
All other research and preclinical programs	 	 	6.8	 	 	 	5.0	 	 	 	12.9	 	 	 	9.8	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total research and development expenses	 	$	14.9	 	 	$	13.7	 	 	$	29.0	 	 	$	26.2	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
27

Table of Contents
     Clinical timelines, likelihood of success and total completion costs vary significantly for each drug candidate and are difficult to estimate. We anticipate that we will make determinations as to which early research programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each drug candidate and available resources. The lengthy process of seeking regulatory approvals and subsequent compliance with applicable regulations requires the expenditure of substantial resources. Any failure by us to obtain and maintain, or any delay in obtaining, regulatory approvals could cause our research and development expenditures to increase and, in turn, could have a material adverse effect on our results of operations.
     We expect research and development expenditures to continue to increase in 2008. We expect to advance research and development of our drug candidate CK-1827452 for the potential treatment of heart failure and our drug candidates ispinesib and SB-743921 for the potential treatment of cancer. We anticipate that research and development expenses for the year ending December 31, 2008 will be in the range of $62.0 million to $67.0 million.
General and Administrative Expenses
     General and administrative expenses were $4.3 million and $8.4 million in the second quarter and first half of 2008, respectively, compared with $4.0 million and $8.5 million for the same periods of 2007. The increase in the second quarter of 2008 was primarily due an increase in outside services of $0.2 million. For the first half of 2008, the decrease in general and administrative expenses, compared to the same period in 2007, was primarily due to a decrease in legal expenses of $0.3 million, partially offset by an increase in outside services of $0.1 million and compensation and benefit related costs of $0.1 million.
     We expect that general and administrative expenses for the full year 2008 will continue the trend of increasing over prior years due to higher payroll-related expenses in support of our continuing corporate development activities, business development costs, expanding operational infrastructure, and costs associated with being a public company. We anticipate that general and administrative expenses for the year ending December 31, 2008 will be in the range of $20.0 million to $22.0 million.
Interest and Other Income and Expense
     Interest and other income was $0.8 million and $2.2 million in the second quarter and first half of 2008, respectively, compared with $2.1 million and $4.4 million for the same periods of 2007. The decrease in interest and other income for the periods in 2008 compared to the same periods in 2007, was due to a decrease in interest income of $1.3 million and $2.1 million in the second quarter and first half of 2008, respectively, resulting from lower average balances of cash, cash equivalents and investments and from lower market interest rates earned on these investments.
     Interest and other expense in the second quarter and first half of 2008 was $0.1 million and $0.3 million, respectively, and was $0.2 million and $0.4 million, respectively, for the same periods in 2007. Interest and other expense in all of these periods primarily consisted of interest expense on our equipment financing line of credit.
Critical Accounting Policies
     The accounting policies that we consider to be our most critical (i.e., those that are most important to the portrayal of our financial condition and results of operations and that require our most difficult, subjective or complex judgments), the effects of those accounting policies applied and the judgments made in their application are summarized in “ Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates”  in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
     In addition to the Critical Accounting Policies and Estimates summarized in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, we applied significant judgments and estimates in adopting SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). We used a discounted cash flow (“DCF”) model to determine the estimated fair value of our investment in auction rate securities, or ARS, as of June 30, 2008. Due to the lack of observable market quotes on our ARS portfolio, we utilized DCF valuation models that relied exclusively on significant inputs that were generally less observable from objective sources. Our ARS, valued using Level 3 inputs, represent 18 percent of assets measured at fair value under the provisions of SFAS 157. The valuation models used estimates of observable market data including yields or spreads of trading instruments that we believed to be similar or comparable
28

Table of Contents
and assumptions that we believed to be reasonable non-observable inputs such as illiquidity premium and likelihood of redemption. The valuation of our ARS is subject to uncertainties that are difficult to predict. Factors that may impact their valuation include changes to credit ratings of the securities and to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.
     Based on this assessment of fair value, as of June 30, 2008, we determined there was a decline in the fair value of our ARS investment of $1.3 million, and deemed the entire decline temporary. The unrealized losses are reported as a component of stockholders’ equity, except for unrealized losses determined to be other than temporary which are recorded in the Statement of Operations, in accordance with our policy and FSP No. FASB 115-1 and FASB 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” As of June 30, 2008 and December 31, 2007, we had not incurred any losses that we deemed other-than-temporary. We will continue to monitor the ARS market and consider its impact, if any, on the fair value of our ARS.
     If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income (loss) or impairment charges in future quarters.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
     Effective January 1, 2008, we adopted certain requirements of SFAS 157. See Note 1 , “Organization and Summary of Significant Accounting Policies —  Fair Value of Financial Instruments. ”
     On January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The adoption of SFAS 159 had no effect on our financial position or results of operations.
     We adopted Emerging Issues Task Force (“EITF”) Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” on a prospective basis for new contracts entered into on or after January 1, 2008. EITF Issue No. 07-3 states that nonrefundable advance payments for future research and development activities should be deferred and recognized as an expense as the goods are delivered or the related services are performed. Entities should then continue to evaluate whether they expect the goods to be delivered or services to be rendered and, if an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The adoption of EITF Issue No. 07-3 had no effect on our financial position or results of operations.
     In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, which addresses the continued use of the simplified method for estimating the expected term for stock based compensation. Previously, under SAB No. 107, the use of the simplified method was intended to be discontinued after December 31, 2007. Under SAB No. 110, companies may continue to use the simplified method in certain circumstances. We used the simplified method of estimating the expected term for stock based compensation from January 1, 2006, the date of adopting SFAS 123R, through December 31, 2007. Starting January 1, 2008, we ceased to use the simplified method under SAB No. 107. Instead, we use our own historical exercise activity and extrapolate the life cycle of options outstanding to arrive at our estimated expected term for new option grants.
     In November 2007, the EITF issued a consensus on EITF Issue No. 07-01, “Accounting for Collaboration Arrangements Related to the Development and Commercialization of Intellectual Property,” which is focused on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure questions. EITF Issue No. 07-01 is to be applied retrospectively for collaboration arrangements in fiscal years beginning after December 15, 2008. We are currently evaluating the impact on our financial statements of adopting EITF Issue No. 07-1.
     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” as an amendment to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 161 requires that the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete
29

Table of Contents
picture of the effects of using derivative instruments. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the impact of adopting this pronouncement.
Liquidity and Capital Resources
     From August 5, 1997, our date of inception, through March 31, 2008, we funded our operations through the sale of equity securities, equipment financings, non-equity payments from collaborators, government grants and interest income.
     Our cash, cash equivalents and investments, excluding restricted cash, totaled $105.6 million at June 30, 2008, down $34.2 million from $139.8 million at December 31, 2007. The decrease was primarily due to the use of cash to fund operations.
     We have received net proceeds from the sale of equity securities of $315.0 million from August 5, 1997, the date of our inception, through June 30, 2008, excluding sales of equity to GSK and Amgen. Included in these proceeds are $94.0 million received upon closing of the initial public offering of our common stock in May 2004. In connection with execution of the GSK Agreement in 2001, GSK made a $14.0 million equity investment in the Company. GSK made additional equity investments in the Company in 2003 and 2004 of $3.0 million and $7.0 million, respectively.
     In 2005, we entered into our first committed equity financing facility with Kingsbridge pursuant to which Kingsbridge committed to finance up to $75.0 million of capital for a three-year period. Subject to certain conditions and limitations, from time to time under this committed equity financing facility, at our election, Kingsbridge purchased newly-issued shares of our common stock at a price between 90% and 94% of the volume weighted average price on each trading day during an eight day, forward-looking pricing period. We received gross proceeds from draw downs and sales of our common stock to Kingsbridge under this committed equity financing facility as follows: 2005 — gross proceeds of $5.7 million from the sale of 887,576 shares, before offering costs of $178,000; 2006 — gross proceeds of $17.0 million from the sale of 2,740,735 shares; and 2007 — gross proceeds of $9.5 million from the sale of 2,075,177 shares. No further draw downs are available to us under this committed equity financing facility.
     In October 2007, we entered into a new committed equity financing facility with Kingsbridge, pursuant to which Kingsbridge committed to finance up to $75.0 million of capital for a three-year period. Subject to certain conditions and limitations, from time to time under this committed equity financing facility, at our election, Kingsbridge is committed to purchase newly-issued shares of our common stock at a price between 90% and 94% of the volume weighted average price on each trading day during an eight day, forward-looking pricing period. The maximum number of shares we may issue in any pricing period is the lesser of 2.5% of our market capitalization immediately prior to the commencement of the pricing period or $15.0 million. As part of the arrangement, we issued a warrant to Kingsbridge to purchase 230,000 shares of our common stock at a price of $7.99 per share, which represents a premium over the closing price of our common stock on the date we entered into this committed equity financing facility. This warrant is exercisable beginning six months after the date of grant and for a period of three years thereafter. Under the terms of this committed equity financing facility, the maximum number of shares we may sell is 9,779,411 (exclusive of the shares underlying the warrant) which, under the rules of the NASDAQ Stock Market LLC, is approximately the maximum number of shares we may sell to Kingsbridge without approval of our stockholders. This limitation may further limit the amount of proceeds we are able to obtain from this committed equity financing facility. We are not obligated to sell any of the $75.0 million of common stock available under this committed equity financing facility and there are no minimum commitments or minimum use penalties. This committed equity financing facility does not contain any restrictions on our operating activities, any automatic pricing resets or any minimum market volume restrictions. To date we have made no draw downs under this committed equity financing facility.
     In January 2006, we entered into a stock purchase agreement with certain institutional investors relating to the issuance and sale of 5,000,000 shares of our common stock at a price of $6.60 per share, for gross offering proceeds of $33.0 million. In connection with this offering, we paid an advisory fee to a registered broker-dealer of $1.0 million. After deducting the advisory fee and the offering costs, we received net proceeds of approximately $32.0 million from the offering.
     In December 2006, we entered into stock purchase agreements with selected institutional investors relating to the issuance and sale of 5,285,715 shares of our common stock at a price of $7.00 per share, for gross offering proceeds of $37.0 million. In connection with this offering, we paid placement agent fees to three registered broker-dealers totaling $1.9 million. After deducting the placement agent fees and the offering costs, we received net proceeds of approximately $34.9 million from the offering.
30

Table of Contents
     In connection with our entry into the collaboration and option agreement with Amgen, we entered into a common stock purchase agreement under which Amgen purchased 3,484,806 shares of our common stock at a price per share of $9.47, including a premium of $1.99 per share, and an aggregate purchase price of approximately $33.0 million. After deducting the offering costs, we received net proceeds of approximately $32.9 million. These shares were issued, and the related proceeds received, in January 2007.
     As of June 30, 2008, we have received $54.3 million in non-equity payments from GSK and $42.0 million in non-equity payments from Amgen.
     Under equipment financing arrangements, we received $23.7 million from August 5, 1997, the date of our inception, through June 30, 2008. Interest earned on investments, excluding non-cash amortization of purchase premiums, was $2.0 million in the first half of 2008, and $25.4 million from August 5, 1997, the date of our inception, through June 30, 2008.
     Net cash used by operating activities in the first half of 2008 was $31.7 million and primarily resulted from our net loss of $29.3 million.
     Deferred revenue decreased $6.1 million in the first half of 2008 to $30.5 million at June 30, 2008, due to the amortization of deferred Amgen license revenue.
     Net cash provided by investing activities was $3.7 million in the first half 2008 and primarily represented proceeds from the maturity of investments, net of investment purchases, of $3.2 million, partly offset by funds used to purchase property and equipment of $0.6 million. Restricted cash totaled $4.1 million at June 30, 2008, down from $5.2 million at December 31, 2007, with the decrease due to the contractual semi-annual reduction in the amount of security deposit required by our lender. At July 1, 2008, the restricted cash balance was $2.7 million.
     Net cash used by financing activities was $1.8 million in the first half of 2008 and primarily represented principal payments of $2.1 million on our lines of credit with General Electric Capital Corporation (“GE Capital”) to fund certain equipment, partially offset by the proceeds of $0.3 million from our employee stock purchase plan. In August 2007, we secured a new line of credit with GE Capital of up to $3.0 million to finance certain equipment until September 30, 2008. The line of credit is subject to our Master Security Agreement with GE Capital, dated February 2001 and as amended on March 24, 2005. Under the terms of the equipment financing line, funds borrowed by us from GE Capital are collateralized by our property and equipment purchased with such borrowed funds and other collateral. To date we have borrowed no funds under the August 2007 line.
     As of June 30, 2008, our investment portfolio included $18.7 million of AAA/Aaa rated student loan ARS, consisting of government-supported municipal debt obligations. The ARS, with total par value of $20.0 million, were classified as long-term investments because of the inability to determine when our investments in ARS would settle. Typically the fair value of ARS approximates par value due to the frequent resets through the auction process. The Company earns interest on its ARS at the contractual rates, however, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. We have recorded an unrealized loss of $1.3 million associated with our ARS as a component of stockholders’ equity.
     These ARS are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. As of December 31, 2007, there were no ARS in an unrealized loss position and there were no failed auctions associated with our ARS through that date. Our ARS with auction reset dates prior to February 13, 2008 had successful auctions at which their interest rates were reset. In February 2008, we liquidated $3.2 million of our auction rate securities at par, which were classified as short-term investment as of December 31, 2007. The recent uncertainties in the credit markets have affected all of our holdings in ARS and auctions for our investments in these securities have failed to settle on their respective settlement dates since February 2008. Consequently, the investments are not currently liquid and we will not be able to access these funds until a future auction on these investments is successful, the issuer redeems the outstanding securities, the securities mature or we sell the securities in the secondary market. Maturity dates for these ARS range from 2036 to 2045. These failures resulted in the interest rates on these investments resetting to contractually stipulated “fail rates” that are variable based on short-term municipal bond or other market indices, or fixed rates that may result in us earning above-market interest rates on these investments.
31

Table of Contents
     As of June, 2008, future minimum payments under lease obligations and equipment financing lines were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Within	 	 	Two to	 	 	Four to	 	 	After	 	 	 	 	
 	 	One Year	 	 	Three Years	 	 	Five Years	 	 	Five Years	 	 	Total	 	
Operating leases	 	$	3,089	 	 	$	6,381	 	 	$	3,900	 	 	$	313	 	 	$	13,683	 	
Equipment financing line	 	 	3,029	 	 	 	3,086	 	 	 	489	 	 	 	—	 	 	 	6,604	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	6,118	 	 	$	9,467	 	 	$	4,389	 	 	$	313	 	 	$	20,287	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Our long-term commitments under operating leases relate to payments under our two facility leases in South San Francisco, California, which expire in 2011 and 2013.
     In future periods, we expect to incur substantial costs as we continue to expand our research programs and related research and development activities.
     Our future capital uses and requirements depend on numerous forward-looking factors. These factors include, but are not limited to, the following:
 	•	 	the initiation, progress, timing, scope and completion of preclinical research, development and clinical trials for our drug candidates and potential drug candidates;	
 	 	 	 	
 	•	 	the time and costs involved in obtaining regulatory approvals;	
 	 	 	 	
 	•	 	delays that may be caused by requirements of regulatory agencies;	
 	 	 	 	
 	•	 	if Amgen exercises its option, Amgen’s decisions with regard to funding of development and commercialization of CK-1827452 or other compounds for the treatment of heart failure under our collaboration;	
 	 	 	 	
 	•	 	GSK’s decisions with regard to future funding of development of our drug candidates and potential drug candidates, including GSK-923295 and, if GSK exercises its option, either or both of ispinesib and SB-743921;	
 	 	 	 	
 	•	 	our level of funding for the development of current or future drug candidates;	
 	 	 	 	
 	•	 	the number of drug candidates we pursue;	
 	 	 	 	
 	•	 	the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;	
 	 	 	 	
 	•	 	our ability to establish and maintain selected strategic alliances and activities required for commercialization of our potential drugs;	
 	 	 	 	
 	•	 	our plans or ability to establish development, sales, marketing or manufacturing capabilities and to achieve market acceptance for potential drugs;	
 	 	 	 	
 	•	 	expanding and advancing our research programs;	
 	 	 	 	
 	•	 	hiring of additional employees and consultants;	
 	 	 	 	
 	•	 	expanding our facilities;	
 	 	 	 	
 	•	 	the acquisition of technologies, products and other business opportunities that require financial commitments; and	
 	 	 	 	
 	•	 	our revenues, if any, from successful development of our drug candidates and commercialization of potential drugs.	
     We believe that our existing cash and cash equivalents and interest earned on investments will be sufficient to meet our projected operating requirements for at least the next 12 months. If, at any time, our prospects for internally financing our research and development programs decline, we may decide to reduce research and development expenses by delaying, discontinuing or reducing our funding of development of one or more of our drug candidates or potential drug candidates. Alternatively, we might raise funds
32

Table of Contents
through public or private financings, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on favorable terms, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Similarly, financing obtained through future co-development arrangements may require us to forego certain commercial rights to future drug candidates. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy.
Off-balance Sheet Arrangements
     As of June 30, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     Our exposure to market risk has not changed materially subsequent to our disclosures in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
     Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, subject to the limitations described below, that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
(b) Changes in internal control over financial reporting
     There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(c) Limitations on the Effectiveness of Controls
     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     None.
ITEM 1A. RISK FACTORS
     In evaluating our business, you should carefully consider the following risks in addition to the other information in this report. Any of the following risks could materially and adversely affect our business, results of operations, financial condition or your investment
33

Table of Contents
in our securities, and many are beyond our control. It is not possible to predict or identify all such factors and, therefore, you should not consider any of the above risks to be a complete statement of all the potential risks or uncertainties that we face.
Risks Related To Our Business
Our drug candidates are in the early stages of clinical testing and we have a history of significant losses and may not achieve or sustain profitability and, as a result, you may lose all or part of your investment.
     Our drug candidates are in the early stages of clinical testing, and we must conduct significant additional clinical trials before we can seek the regulatory approvals necessary to begin commercial sales of our drugs. We have incurred operating losses in each year since our inception in 1997 due to costs incurred in connection with our research and development activities and general and administrative costs associated with our operations. We expect to incur increasing losses for at least several years, as we continue our research activities and conduct development of, and seek regulatory approvals for, our drug candidates, and commercialize any approved drugs. If our drug candidates fail or are significantly delayed in clinical trials or do not gain regulatory approval, or if our drugs do not achieve market acceptance, we will not be profitable. If we fail to become and remain profitable, or if we are unable to fund our continuing losses, you could lose all or part of your investment.
We have never generated, and may never generate, revenues from commercial sales of our drugs and we may not have drugs to market for at least several years, if ever.
     We currently have no drugs for sale and we cannot guarantee that we will ever have marketable drugs. We must demonstrate that our drug candidates satisfy rigorous standards of safety and efficacy to the FDA and other regulatory authorities in the United States and abroad. We and our partners will need to conduct significant additional research and preclinical and clinical testing before we or our partners can file applications with the FDA or other regulatory authorities for approval of our drug candidates. In addition, to compete effectively, our drugs must be easy to use, cost-effective and economical to manufacture on a commercial scale, compared to other therapies available for the treatment of the same conditions. We may not achieve any of these objectives. CK-1827452, our drug candidate for the treatment of heart failure, and ispinesib, SB-743921 and GSK-923295, our drug candidates for the treatment of cancer, are currently our only drug candidates in clinical trials and we cannot be certain that the clinical development of these or any future drug candidate will be successful, that they will receive the regulatory approvals required to commercialize them, or that any of our other research programs will yield a drug candidate suitable for clinical testing or commercialization. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for several years, if at all. The development of any one or all of these drug candidates may be discontinued at any stage of our clinical trials programs and we may not generate revenue from any of these drug candidates.
We currently finance and plan to continue to finance our operations through the sale of equity, strategic alliances and debt financings, which may result in additional dilution to our stockholders, relinquishment of valuable technology rights or the imposition of restrictive covenants, or which may cease to be available on favorable terms or at all.
     We have funded all of our operations and capital expenditures with proceeds from both private and public sales of our equity securities, strategic alliances with GSK, Amgen, AstraZeneca and others, equipment financings, interest on investments and government grants. We believe that our existing cash and cash equivalents, potential payments from GSK and Amgen, interest earned on investments, proceeds from equipment financings and potential proceeds from our 2007 committed equity financing facility with Kingsbridge will be sufficient to meet our projected operating requirements for at least the next 12 months. To meet our future cash requirements, we may raise funds through public or private equity offerings, strategic alliances or debt financings. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional dilution. To the extent that we raise additional funds through strategic alliance and licensing arrangements, we will likely have to relinquish valuable rights to our technologies, research programs or drug candidates, or grant licenses on terms that may not be favorable to us. To the extent that we raise additional funds through debt financing, such financing may involve covenants that restrict our business activities. In addition, there can be no assurance that any such funding, if needed, will be available to us on favorable terms, or at all. If we can not raise the funds we need on favorable terms, or at all, our ability to conduct our business will be significantly harmed and we may need to discontinue certain research and development activities, and our stock price could be negatively affected.
34

Table of Contents
Clinical trials may fail to demonstrate the desired safety and efficacy of our drug candidates, which could prevent or significantly delay completion of clinical development and regulatory approval.
     Prior to receiving approval to commercialize any of our drug candidates, we must adequately demonstrate to the FDA and foreign regulatory authorities that such drug candidate is both sufficiently safe and effective with substantial evidence from well-controlled clinical trials. In clinical trials we will need to demonstrate efficacy for the treatment of specific indications and monitor safety throughout the clinical development process and possibly following approval. None of our drug candidates have yet been demonstrated to be safe and effective in clinical trials and there is no assurance that they will. In addition, for each of our current preclinical compounds, we must adequately demonstrate satisfactory chemistry, formulation, stability and toxicity in order to file an investigational new drug application (“IND”) that would allow us to advance that compound into clinical trials. If our preclinical studies, current clinical trials or future clinical trials are unsuccessful, our business will be significantly harmed and our stock price could be negatively affected.
     All of our drug candidates are prone to the risks of failure inherent in drug development. Preclinical studies may not yield results that would adequately support the filing of an IND (or a foreign equivalent) with respect to our potential drug candidates. Even if these applications are or have been filed with respect to our drug candidates, the results of preclinical studies do not necessarily predict the results of clinical trials. For example, although preclinical testing indicated that ispinesib causes tumor regression in a variety of tumor types, to date Phase II clinical trials of ispinesib have not shown clinical activity in a number of different tumor types. Similarly, Phase I clinical trials in healthy volunteers and clinical results from Phase I and II trials in patients are not necessarily indicative of the results of later-stage clinical trials. Data from Phase III clinical trials are necessary to establish whether a drug candidate is safe and effective for the applicable indication. In addition, there can be no assurance that the design of the clinical trials for any of our drug candidates is focused on appropriate indications, tumor types, patient populations, dosing regimens, safety or efficacy parameters, or other variables which will result in obtaining the desired safety or efficacy data to support regulatory approval to commercialize the drug. For example, in a number of two-stage Phase II clinical trials designed to evaluate the safety and efficacy of ispinesib as monotherapy in the first- or second-line treatment of patients with different forms of cancer, ispinesib did not satisfy the criteria for advancement to Stage 2. Also, there can be no assurance that the methods we select to assess particular safety or efficacy parameters will yield the same statistical precision in their estimation of our drug candidates’ effects as may other alternative methodologies. Even if we believe the data collected from clinical trials of our drug candidates are promising, such data may not be sufficient to support approval by the FDA or foreign regulatory authorities. Preclinical and clinical data can be interpreted in different ways. Accordingly, the FDA or foreign regulatory authorities could interpret such data in different ways than we or our partners do, which could delay, limit or prevent regulatory approval.
     Administering any of our drug candidates or potential drug candidates may produce undesirable side effects, also known as adverse effects. Toxicities and adverse effects that we have observed in preclinical studies for some compounds in a particular research and development program may also occur in preclinical studies or clinical trials of other compounds from the same program. Potential toxicity issues may arise from the effects of the active pharmaceutical ingredient (“API”) itself or from impurities or degradants that are present in the API or could form over time in the formulated drug candidate or the API. Such toxicities or adverse effects could delay or prevent the filing of an IND (or a foreign equivalent) with respect to such drug candidates or potential drug candidates or cause us to cease clinical trials with respect to any drug candidate. In clinical trials, administering any of our drug candidates to humans may produce adverse effects. For example, in clinical trials of ispinesib, the most commonly observed dose-limiting toxicity was neutropenia, a decrease in the number of a certain type of white blood cell that results in an increase in susceptibility to infection. In a Phase I clinical trial of SB-743921, the dose-limiting toxicities observed were: prolonged neutropenia, with or without fever and with or without infection; elevated transaminases and hyperbilirubinemia, both of which are abnormalities of liver function; and hyponatremia, which is a low concentration of sodium in the blood. In a Phase I clinical trial of CK-1827452, intolerable doses of CK-1827452 were associated with complaints of chest discomfort, palpitations, dizziness and feeling hot, increases in heart rate, declines in blood pressure, electrocardiographic changes consistent with acute myocardial ischemia and transient rises in cardiac troponins I and T, which are markers of possible myocardial injury. If these or other adverse effects are severe or frequent enough to outweigh the potential efficacy of a drug candidate, our clinical trials for such drug candidate may be halted, delayed or interrupted. Furthermore, the FDA or other regulatory authorities could deny approval of such drug candidate for any or all targeted indications. The FDA, other regulatory authorities, our partners or we may suspend or terminate clinical trials with our drug candidates at any time. Even if one or more of our drug candidates were approved for sale, the occurrence of even a limited number of toxicities or adverse effects when used in large populations may cause the FDA to impose restrictions on, or stop, the further marketing of such drugs. Indications of potential adverse effects or toxicities which may occur in clinical trials and which we believe are not significant during the course of such clinical trials may later turn out to actually constitute serious adverse effects or toxicities when a drug has been used in large populations or for extended periods of time. Any failure or significant delay in
35

Table of Contents
completing preclinical studies or clinical trials for our drug candidates, or in receiving and maintaining regulatory approval for the sale of any drugs resulting from our drug candidates, may significantly harm our business and negatively affect our stock price.
     Clinical trials are expensive, time-consuming and subject to delay.
     Clinical trials are subject to rigorous regulatory requirements and are very expensive, difficult and time-consuming to design and implement, especially in the heart failure and cancer indications that we are pursuing. According to industry studies, the entire drug development and testing process takes on average 12 to 15 years, and the fully capitalized resource cost of new drug development averages approximately $800 million. However, individual clinical trials and individual drug candidates may incur a range of costs or time demands above or below this average. The length of time and number of trial sites and patients required for clinical trials vary substantially based on the type, complexity, novelty, intended use of the drug candidate and safety concerns. We estimate that clinical trials of our most advanced drug candidates will continue for several years, but they may take significantly longer to complete. The commencement and completion of our clinical trials could be delayed or prevented by many factors, including, but not limited to:
 	•	 	delays in obtaining, or inability to obtain, regulatory or other approvals to commence and conduct clinical trials in the manner we or our partners deem necessary for the appropriate and timely development of our drug candidates and commercialization of any resulting drugs;	
 	 	 	 	
 	•	 	delays in identifying and reaching agreement, or inability to identify and reach agreement, on acceptable terms with prospective clinical trial sites;	
 	 	 	 	
 	•	 	delays or additional costs in developing, or inability to develop, appropriate formulations of our drug candidates for clinical trial use;	
 	 	 	 	
 	•	 	slower than expected rates of patient recruitment and enrollment, including as a result of competition for patients with other clinical trials; limited numbers of patients that meet the enrollment criteria; patients’, investigators’ or trial sites’ reluctance to agree to the requirements of a protocol; or the introduction of alternative therapies or drugs by others;	
 	 	 	 	
 	•	 	for those drug candidates that are the subject of a strategic alliance, delays in reaching agreement with our partner as to appropriate development strategies;	
 	 	 	 	
 	•	 	an investigational review board (“IRB”) may require changes to a protocol that then require approval from regulatory agencies and other IRBs, or regulatory authorities may require changes to a protocol that then require approval from the IRBs;	
 	 	 	 	
 	•	 	for clinical trials conducted outside of the United States, the time and resources required to identify, interpret and comply with foreign regulatory requirements or changes in those requirements;	
 	 	 	 	
 	•	 	lack of effectiveness of our drug candidates during clinical trials;	
 	 	 	 	
 	•	 	unforeseen safety issues;	
 	 	 	 	
 	•	 	inadequate supply of clinical trial materials;	
 	 	 	 	
 	•	 	uncertain dosing issues;	
 	 	 	 	
 	•	 	introduction of new therapies or changes in standards of practice or regulatory guidance that render our clinical trial endpoints or the targeting of our proposed indications obsolete;	
 	 	 	 	
 	•	 	inability to monitor patients adequately during or after treatment; and	
 	 	 	 	
 	•	 	inability or unwillingness of medical investigators to follow our clinical protocols.	
36

Table of Contents
     We do not know whether planned clinical trials will begin on time, or whether planned or currently ongoing clinical trials will need to be restructured or will be completed on schedule, if at all. Significant delays in clinical trials will impede our ability to commercialize our drug candidates and generate revenue and could significantly increase our development costs.
     We have limited capacity to carry out our own clinical trials in connection with the development of our drug candidates and potential drug candidates and, to the extent we elect to develop a drug candidate without a strategic partner, we will need to expand our development capacity and will require additional funding.
     The development of drug candidates is complicated, and the resources that we currently have to carry out such development are limited. Pursuant to our collaboration and option agreement with Amgen, we are responsible for conducting Phase IIa clinical development for our drug candidate CK-1827452. We cannot engage another strategic partner for CK-1827452 until Amgen elects not to exercise its option to conduct later-stage clinical development for CK-1827452 or its option expires. If Amgen elects not to exercise its option to conduct later-stage clinical development for CK-1827452, we currently do not have an alternative strategic partner for that drug candidate. Pursuant to our amended collaboration and license agreement with GSK, we are responsible for conducting clinical development for our drug candidates ispinesib and SB-743921. Currently, we rely on GSK to conduct preclinical and clinical development for GSK-923295. We cannot engage another strategic partner for ispinesib or SB-743921 until GSK’s option to conduct later-stage clinical development for that drug candidate expires. If GSK elects to terminate its development activities with respect to GSK-923295, or not to exercise its option to conduct later-stage clinical development for either of ispinesib or SB-743921, we currently do not have an alternative strategic partner for these drug candidates.
     For our drug candidates for which we expect to conduct clinical trials at our expense, such as CK-1827452, ispinesib and SB-743921, we plan to rely on contractors for the manufacture and distribution of clinical supplies. To the extent we conduct clinical trials for a drug candidate without support from a strategic partner, we will need to develop additional skills, technical expertise and resources necessary to carry out such development activities on our own or through the use of other third parties, such as contract research organizations (“CROs“), and will incur significant costs.
     We utilize CROs for our clinical trials within and outside of the United States. We do not have control over many aspects of our CROs’ activities, and cannot fully control the amount or timing of resources that they devote to our programs. CROs may not assign as high a priority to our programs or pursue them as diligently as we would if we were undertaking such programs ourselves, and therefore may not complete their respective activities on schedule. CROs may also have relationships with our competitors and potential competitors, and may prioritize those relationships ahead of their relationships with us. Outside of the United States, we are particularly dependent on our CROs’ expertise in communicating with clinical trial sites and regulatory authorities and ensuring that our clinical trials and related activities and regulatory filings comply with applicable local laws. The failure of CROs to carry out development activities on our behalf according to our requirements and the FDA’s or other regulatory agencies’ standards and in accordance with applicable laws, or our failure to properly coordinate and manage such activities, could increase the cost of our operations and delay or prevent the development, approval and commercialization of our drug candidates. In addition, if a CRO fails to perform as agreed, our ability to collect damages may be contractually limited.
     If we fail to develop the additional skills, technical expertise and resources necessary to carry out the development of our drug candidates or to effectively manage our CROs carrying out such development, or if such CROs fail to perform as agreed, the commercialization of our drug candidates will be delayed or prevented.
     If we fail to enter into and maintain successful strategic alliances for our drug candidates, potential drug candidates or research and development programs,, we will have to reduce, delay or discontinue our development of those drug candidates, potential drug candidates and programs or increase our expenditures.
     Our strategy for developing, manufacturing and commercializing our drug candidates and potential drug candidates currently requires us to enter into and successfully maintain strategic alliances with pharmaceutical companies or other industry participants to advance our programs and reduce our expenditures on each program. We currently have strategic alliances with Amgen relating to CK-1827452 and with GSK relating to ispinesib, SB-743921 and GSK-923295. Similarly, we expect to rely on one or more strategic partners to advance and develop our potential drug candidate directed towards the skeletal sarcomere and programs relating to skeletal muscle contractility and smooth muscle contractility. However, we may not be able to negotiate and enter into such strategic alliances on acceptable terms, if at all. If we are not able to maintain our existing strategic alliances or establish and maintain additional strategic alliances, we will have to limit the size or scope of, or delay or discontinue, one or more of our drug development programs
37

Table of Contents
or research programs or undertake and fund these programs ourselves. If we elect to continue to conduct any of these drug development programs or research programs on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all.
If Amgen does not exercise its option for CK-1827452, we will have to reduce, delay or discontinue our development of CK-1827452 or increase our expenditures.
     Our collaboration and option agreement with Amgen grants it an option relating to development and commercialization rights for CK-1827452. Amgen’s option is exercisable during a defined period, the ending of which is dependent upon the satisfaction of certain conditions, primarily the delivery of Phase I and Phase IIa clinical trials data for CK-1827452 in accordance with an agreed development plan, the results of which reasonably support its progression into Phase IIb clinical development. Amgen can exercise its option during a defined period by paying us a specified option fee. We may be unable to provide to Amgen the necessary data to inform its decision as to whether to exercise its option within our anticipated timeframe, or at all, or Amgen may dispute whether we have provided sufficient information and data to require Amgen to decide whether to exercise its option. In addition, Amgen may elect not to exercise its option, irrespective of the data that we provide. If Amgen elects not to exercise its option for CK-1827452, we would have to seek an alternative strategic partner for the CK-1827452 development program. However, we may not be able to negotiate and enter into such a strategic alliance on acceptable terms, if at all. Without a strategic partner, we would have to limit the size or scope of, or delay or discontinue, development of CK-1827452 or undertake and fund such development ourselves. If we elect to continue to conduct development on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. Further, a decision by Amgen not to exercise its option could negatively affect our stock price.
If GSK does not exercise its option for either or both of ispinesib and SB-743921, we will have to reduce, delay or discontinue our development of those drug candidates or increase our expenditures.
     Our collaboration and license agreement with GSK grants it an option relating to development and commercialization rights for either or both of ispinesib and SB-743921. GSK’s option is exercisable until the end of 2008. GSK can exercise its option during a defined period by paying us a specified option fee. We may be unable to provide to GSK the necessary data to inform its decision as to whether to exercise its option within our anticipated timeframe, or at all. In addition, GSK may elect not to exercise its option, irrespective of the data that we provide. If GSK elects not to exercise its option for either or both of ispinesib and SB-743921, we would have to seek an alternative strategic partner for these programs. However, we may not be able to negotiate and enter into such strategic alliances on acceptable terms, if at all. Without a strategic partner, we would have to limit the size or scope of, or delay or discontinue, one or both of our these programs or undertake and fund these programs ourselves. If we elect to continue to conduct either program on our own, we will need to obtain additional capital, which may not be available to us on acceptable terms, or at all. Further, a decision by GSK not to exercise its option could negatively affect our stock price.
We depend on GSK for the conduct, completion and funding of the clinical development and commercialization of GSK-923295.
     Under our strategic alliance, GSK is responsible for the clinical development and obtaining and maintaining regulatory approval of our drug candidate GSK-923295 for cancer and other indications. GSK is responsible for filing applications with the FDA or other regulatory authorities for approval of GSK-923295 and will be the owner of any marketing approvals issued by the FDA or other regulatory authorities for GSK-923295. If the FDA or other regulatory authorities approve GSK-923295, GSK will also be responsible for the marketing and sale of the resulting drug, subject to our right to co-promote GSK-923295 in North America if we exercise our option to co-fund certain later-stage development activities for GSK-923295. However, even if we do exercise our option to co-fund the development of GSK-923295, we cannot control whether GSK will devote sufficient attention and resources to the clinical trials program for GSK-923295 or will proceed in an expeditious manner. In addition, even if the FDA or other regulatory agencies approve GSK-923295, GSK may elect not to proceed with the commercialization of the resulting drug. GSK generally has discretion to elect whether to pursue or abandon the development of GSK-923295 and may terminate our strategic alliance for any reason upon six months prior notice. These decisions are outside our control.
     In particular, if the initial results of some of its early clinical trials do not meet GSK’s expectations, GSK may elect to terminate further development of GSK-923295 or certain of the potential clinical trials for GSK-923295, even if the actual number of patients treated at such time is relatively small. If GSK abandons GSK-923295, it would result in a delay in or prevent us from commercializing GSK-923295, and would delay or prevent our ability to generate revenues. Disputes may arise between us and GSK,
38

Table of Contents
which may delay or cause the termination of any GSK-923295 clinical trials, result in significant litigation or arbitration, or cause GSK to act in a manner that is not in our best interest. If development of GSK-923295 does not progress for these or any other reasons, we would not receive further milestone payments from GSK with respect to GSK-923295. If GSK abandons development of GSK-923295 prior to regulatory approval or if it elects not to proceed with commercialization of the resulting drug following regulatory approval, we would have to seek a new partner for clinical development or commercialization, curtail or abandon such clinical development or commercialization, or undertake and fund the clinical development of GSK-923295 or commercialization of the resulting drug ourselves. If we seek a new partner but are unable to do so on acceptable terms, or at all, or do not have sufficient funds to conduct such development or commercialization ourselves, we would have to curtail or abandon such development or commercialization, which could harm our business.
The success of our development activities depends in part on the performance of our strategic partners, over which we have little or no control.
     Our ability to commercialize drugs that we develop with our partners and that generate royalties from product sales depends on our partners’ abilities to assist us in establishing the safety and efficacy of our drug candidates, obtaining and maintaining regulatory approvals and achieving market acceptance of the drugs once commercialized. Our partners may elect to delay or terminate development of one or more drug candidates, independently develop drugs that could compete with ours or fail to commit sufficient resources to the marketing and distribution of drugs developed through their strategic alliances with us. Our partners may not proceed with the development and commercialization of our drug candidates with the same degree of urgency as we would because of other priorities they face. In particular, we are relying on GSK to conduct clinical development of GSK-923295. There can be no assurance that GSK will not modify its plans to conduct such clinical development or will proceed with such clinical development diligently. In addition, if GSK exercises its option with respect to either or both of ispinesib and SB-743921, or if Amgen exercises its option with respect to CK-1827452, they will then be responsible for the clinical development of those respective drug candidates. We do not control the clinical development being conducted or that may be conducted in the future by GSK or Amgen, including the timing of initiation, termination or completion of clinical trials, the analysis of data arising out of such clinical trials or the timing of release of complete data concerning such clinical trials, which may impact our ability to report on their results. If our partners fail to perform diligently, our potential for revenue from drugs developed through our strategic alliances, if any, could be dramatically reduced.
We have no manufacturing capacity and depend on our strategic partners or contract manufacturers to produce our clinical trial drug supplies for each of our drug candidates and potential drug candidates, and anticipate continued reliance on contract manufacturers for the development and commercialization of our potential drugs.
     We do not currently operate manufacturing facilities for clinical or commercial production of our drug candidates or potential drug candidates. We have limited experience in drug formulation and manufacturing, and we lack the resources and the capabilities to manufacture any of our drug candidates on a clinical or commercial scale. As a result, we rely on GSK to conduct such activities for the ongoing clinical development of GSK-923295. For CK-1827452, ispinesib, SB-743921, we rely on a limited number of contract manufacturers, and, in particular, we rely on single-source contract manufacturers for the active pharmaceutical ingredient and the drug product supply for our clinical trials. We expect to rely on contract manufacturers to supply all future drug candidates for which we conduct clinical development. If any of our existing or future contract manufacturers fail to perform as agreed, it could delay clinical development or regulatory approval of our drug candidates or commercialization of our drugs, producing additional losses and depriving us of potential product revenues. In addition, if a contract manufacturer fails to perform as agreed, our ability to collect damages may be contractually limited.
     Our drug candidates require precise, high quality manufacturing. The failure to achieve and maintain high manufacturing standards, including failure to detect or control anticipated or unanticipated manufacturing errors or the frequent occurrence of such errors, could result in patient injury or death, discontinuance or delay of on-going or planned clinical trials, delays or failures in product testing or delivery, cost overruns, product recalls or withdrawals and other problems that could seriously hurt our business. Contract drug manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel. These manufacturers are subject to stringent regulatory requirements, including the FDA’s current good manufacturing practices regulations and similar foreign laws and standards. Each contract manufacturer must pass a pre-approval inspection before we can obtain marketing approval for any of our drug candidates and following approval will be subject to ongoing periodic unannounced inspections by the FDA, the U.S. Drug Enforcement Agency and other regulatory agencies, to ensure strict compliance with current good manufacturing practices and other applicable government regulations and corresponding foreign laws and standards. We seek to ensure that our contract manufacturers comply fully with all applicable regulations, laws and
39

Table of Contents
standards. However, we do not have control over our contract manufacturers’ compliance with these regulations, laws and standards. If one of our contract manufacturers fails to pass its pre-approval inspection or maintain ongoing compliance at any time, the production of our drug candidates could be interrupted, resulting in delays or discontinuance of our clinical trials, additional costs and potentially lost revenues. In addition, failure of any third party manufacturers or us to comply with applicable regulations, including pre- or post-approval inspections and the current good manufacturing practice requirements of the FDA or other comparable regulatory agencies, could result in sanctions being imposed on us. These sanctions could include fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delay, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operational restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.
     In addition, our existing and future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to successfully produce, store and distribute our drug candidates. If a natural disaster, business failure, strike or other difficulty occurs, we may be unable to replace such contract manufacturer in a timely or cost-effective manner and the production of our drug candidates would be interrupted, resulting in delays and additional costs.
     Switching manufacturers or manufacturing sites may be difficult and time-consuming because the number of potential manufacturers is limited. In addition, before a drug from any replacement manufacturer or manufacturing site can be commercialized, the FDA must approve that site. Such approval would require new testing and compliance inspections. A new manufacturer or manufacturing site also would have to be educated in, or develop substantially equivalent processes for, production of our drugs and drug candidates. It may be difficult or impossible to transfer certain elements of a manufacturing process to a new manufacturer or for us to find a replacement manufacturer on acceptable terms quickly, or at all, either of which would delay or prevent our ability to develop drug candidates and commercialize any resulting drugs.
Our focus to date on the discovery and development of drug candidates directed against specific proteins and pathways within the cytoskeleton is unproven, and we do not know whether we will be able to develop any drug candidates of commercial value.
     To date, we have focused our drug discovery and development activities on the cytoskeleton, including in the areas of muscle biology and oncology. While a number of commonly used drugs and a growing body of research validate the importance of the cytoskeleton in the origin and progression of a number of diseases, no existing drugs specifically and directly interact with the proteins and the pathways that our drug candidates seek to modulate. As a result, we cannot be certain that our drug candidates and potential drug candidates will appropriately modulate the targeted proteins and pathways or produce commercially viable drugs that safely and effectively treat heart failure, cancer or other diseases, or that the results we have seen in preclinical models will translate into similar results in humans. In addition, even if we are successful in developing and receiving regulatory approval for a commercially viable drug for the treatment of a particular disease, we cannot be certain that we will also be able to develop and receive regulatory approval for drug candidates for the treatment of other forms of that disease or other diseases. If we or our partners fail to develop and commercialize our drug candidates, we will not achieve commercial success, which would materially harm our business.
Our success depends substantially upon our ability to obtain and maintain intellectual property protection relating to our drug candidates and research technologies.
     We own or hold exclusive licenses to a number of U.S. and foreign patents and patent applications directed to our drug candidates and research technologies. Our success depends on our ability to obtain patent protection both in the United States and in other countries for our drug candidates, their methods of manufacture and use, and our technologies. Our ability to protect our drug candidates and technologies from unauthorized or infringing use by third parties depends substantially on our ability to obtain and enforce our patents. If our issued patents and patent applications, if granted, do not adequately describe, enable or otherwise provide coverage of our technologies and drug candidates, including CK-1827452, ispinesib, SB-743921 and GSK-923295, we would not be able to exclude others from developing or commercializing these drug candidates. Furthermore, the degree of future protection of our proprietary rights is uncertain because legal means may not adequately protect our rights or permit us to gain or keep our competitive advantage.
     Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the claim scope of these patents, our ability to obtain and enforce patents that may issue from any pending or future patent applications is uncertain and involves complex legal, scientific and factual questions. The standards which the U.S. Patent and Trademark Office (“PTO”) and its foreign counterparts use to grant patents are not always applied predictably or uniformly and are
40

Table of Contents
ultimately subject to change. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. Thus, we cannot be sure that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents do issue, we cannot be sure that the claims of these patents will be held valid or enforceable by a court of law, will provide us with any significant protection against competitive products, or will afford us a commercial advantage over competitive products. For example:
 	•	 	we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;	
 	 	 	 	
 	•	 	we or our licensors might not have been the first to file patent applications for these inventions;	
 	 	 	 	
 	•	 	others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;	
 	 	 	 	
 	•	 	some or all of our or our licensors’ pending patent applications may not result in issued patents;	
 	 	 	 	
 	•	 	our and our licensors’ issued patents may not provide a basis for commercially viable drugs or therapies, or may not provide us with any competitive advantages, or may be challenged and invalidated by third parties;	
 	 	 	 	
 	•	 	our or our licensors’ patent applications or patents may be subject to interference, opposition or similar administrative proceedings;	
 	 	 	 	
 	•	 	we may not develop additional proprietary technologies or drug candidates that are patentable; or	
 	 	 	 	
 	•	 	the patents of others may prevent us or our partners from discovering, developing or commercializing our drug candidates.	
     Patent protection is afforded on a country by country basis. The laws of some foreign jurisdictions do not protect intellectual property rights to the same extent as in the United States. Many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. Some of our development efforts are performed in countries outside of the United States through third party contractors. We may not be able to effectively monitor and assess intellectual property developed by these contractors; therefore, we may not appropriately protect this intellectual property and could thus lose valuable intellectual property rights. In addition, the legal protection afforded to inventors and owners of intellectual property in countries outside of the United States may not be as protective of intellectual property rights as in the United States, and we may, therefore, be unable to acquire and protect intellectual property developed by these contractors to the same extent as if these development activities were being conducted in the United States. If we encounter difficulties in protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.
     Under our license agreement with the University of California and Stanford University, we have obtained a license to certain United States patents and pending United States and foreign patent applications relating to certain of our research activities. If we fail to fulfill our obligations under this license agreement, including certain diligence obligations, this agreement may be terminated, in which case we would no longer have a license to these patents or to future patents that may issue from the pending applications. This may impair our ability to continue to practice the research methods covered by the issued patents, which could harm our business. Alternatively, our license rights may become non-exclusive, which would allow the University of California and Stanford University to grant third parties the right to practice such patents.
     We rely on intellectual property assignment agreements with our corporate partners, employees, consultants, scientific advisors and other collaborators to grant us ownership of new intellectual property that is developed. These agreements may not result in the effective assignment to us of that intellectual property. As a result, our ownership of key intellectual property could be compromised.
     Changes in either the patent laws or their interpretation in the United States or other countries may diminish the value of our intellectual property or our ability to obtain patents. For example, the U.S. Senate is currently considering a bill that could change U.S. law regarding, among other things, post-grant review of issued patents and the calculation of damages once patent infringement has been determined by a court of law. If enacted into law, these provisions could severely weaken patent protection in the United States. Recently, the PTO adopted new rules that were to become effective on November 1, 2007, regarding processes for obtaining patents in
41

Table of Contents
the United States. However, the U.S. District Court for the Eastern District of Virginia issued a permanent injunction preventing implementation of the new rules. This decision is now being appealed. The new rules are numerous and complex and, if made effective, generally are expected to make it more difficult for patent applicants to obtain patents, especially with regard to pharmaceutical products and processes. The rules changes, if they were to become effective, would likely make it more difficult for us and others to obtain patent protection in the United States for any future drug candidates.
     If we do not obtain adequate intellectual property protection for our products in the United States, competitors could duplicate them without repeating the extensive testing that we had been required to undertake to obtain approval of the products by the FDA. Regardless of any patent protection, under the current statutory framework the FDA is prohibited by law from approving any generic version of any of our products for at least five years after it has approved our product. Upon the expiration of that period, or if that time period is altered, the FDA could approve a generic version of our product unless we have patent protection sufficient for us to block that generic version. Without sufficient patent protection, the applicant for a generic version of our product would only be required to conduct a relatively inexpensive study to show that its product is bioequivalent to our product, and would not have to repeat the studies that we conducted to demonstrate that the product is safe and effective. In the absence of adequate patent protection in other countries, competitors may similarly be able to obtain regulatory approval in those countries of products that duplicate our products.
     We also rely on trade secrets to protect our technology, especially where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we endeavor to use reasonable efforts to protect our trade secrets, our or our partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our information to competitors. In addition, confidentiality agreements, if any, executed by such persons may not be enforceable or provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure. If we were to enforce a claim that a third party had illegally obtained and was using our trade secrets, our enforcement efforts would be expensive and time-consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, if our competitors independently develop information that is equivalent to our trade secrets, it will be more difficult for us to enforce our rights and our business could be harmed.
     If we are not able to defend the patent or trade secret protection position of our technologies and drug candidates, then we will not be able to exclude competitors from developing or marketing competing drugs, and we may not generate enough revenue from product sales to justify the cost of development of our drugs and to achieve or maintain profitability.
If we are sued for infringing intellectual property rights of third parties, such litigation will be costly and time-consuming, and an unfavorable outcome would have a significant adverse effect on our business.
     Our ability to commercialize drugs depends on our ability to sell such drugs without infringing the patents or other proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the therapeutic areas in which we are developing drug candidates and exploring for new potential drug candidates. In addition, because patent applications can take several years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our drug candidates may infringe. There could also be existing patents of which we are not aware that our drug candidates may inadvertently infringe.
     Currently, we are aware of an issued U.S. patent and at least one pending U.S. patent application assigned to Curis, Inc. (“Curis”), relating to certain compounds in the quinazolinone class. Ispinesib falls into this class of compounds. The Curis U.S. patent claims a method of use for inhibiting signaling by what is called the hedgehog pathway using certain such compounds. Curis also has pending applications in Europe, Japan, Australia and Canada with claims covering certain quinazolinone compounds, compositions thereof and/or methods of their use. We are also aware that two of the Australian applications have been allowed and two of the European applications have been granted. In Europe, Australia and elsewhere, the grant of a patent may be opposed by one or more parties. We have opposed the granting of certain such patents to Curis in Europe and in Australia. One of the European patents which we opposed was recently revoked and is no longer valid in Europe. Curis has appealed this decision.
     Curis or a third party may assert that the manufacture, use, importation or sale of ispinesib may infringe one or more of these patents. We believe that we have valid defenses against the issued U.S. patent owned by Curis if it were to be asserted against us. However, we cannot guarantee that a court would find such defenses valid or that any additional oppositions would be successful. We
42

Table of Contents
have not attempted to obtain a license to these patents. If we decide to seek a license to these patents, we cannot guarantee that such a license would be available on acceptable terms, if at all.
     Other future products of ours may be impacted by patents of companies engaged in competitive programs with significantly greater resources (such as Bayer AG, Merck & Co., Inc., Merck GmbH, Eli Lilly and Company, Bristol-Myers Squibb, Array Biopharma Inc., ArQule, Inc., and AstraZeneca). Further development of these products could be impacted by these patents and result in significant legal fees.
     If a third party claims that our actions infringe on their patents or other proprietary rights, we could face a number of issues that could seriously harm our competitive position, including, but not limited to:
 	•	 	infringement and other intellectual property claims that, even if meritless, can be costly and time-consuming to litigate and can delay the regulatory approval process and divert management’s attention from our core business strategy;	
 	 	 	 	
 	•	 	substantial damages for past infringement which we may have to pay if a court determines that our drugs or technologies infringe a competitor’s patent or other proprietary rights;	
 	 	 	 	
 	•	 	a court prohibiting us from selling or licensing our drugs or technologies unless the holder licenses the patent or other proprietary rights to us, which it is not required to do; and	
 	 	 	 	
 	•	 	if a license is available from a holder, we may have to pay substantial royalties or grant cross licenses to our patents or other proprietary rights.	
     If any of these events occur, it could significantly harm our business and negatively affect our stock price.
We may become involved in disputes with our strategic partners over intellectual property ownership, and publications by our research collaborators and scientific advisors could impair our ability to obtain patent protection or protect our proprietary information, which, in either case, would have a significant impact on our business.
     Inventions discovered under our strategic alliance agreements become jointly owned by our strategic partners and us in some cases, and the exclusive property of one of us in other cases. Under some circumstances, it may be difficult to determine who owns a particular invention, or whether it is jointly owned, and disputes could arise regarding ownership of those inventions. These disputes could be costly and time-consuming, and an unfavorable outcome would have a significant adverse effect on our business if we were not able to protect or license rights to these inventions. In addition, our research collaborators and scientific advisors have contractual rights to publish data and other proprietary information, subject to our prior review. Publications by our research collaborators and scientific advisors containing such information, either with our permission or in contravention of their agreements with us, could benefit our current or potential competitors and may impair our ability to obtain patent protection or protect our proprietary information, which could significantly harm our business.
We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
     Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential drugs, which could significantly harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and distract management.
43

Table of Contents
To the extent we elect to fund the development of a drug candidate or the commercialization of a drug at our expense, we will need substantial additional funding.
     The discovery, development and commercialization of new drugs for the treatment of a wide array of diseases is costly. As a result, to the extent we elect to fund the development of a drug candidate or the commercialization of a drug at our expense, we will need to raise additional capital to:
 	•	 	expand our research and development and technologies;	
 	 	 	 	
 	•	 	fund clinical trials and seek regulatory approvals;	
 	 	 	 	
 	•	 	build or access manufacturing and commercialization capabilities;	
 	 	 	 	
 	•	 	implement additional internal systems and infrastructure;	
 	 	 	 	
 	•	 	maintain, defend and expand the scope of our intellectual property; and	
 	 	 	 	
 	•	 	hire and support additional management and scientific personnel.	
 	 	 	 	
 	Our future funding requirements will depend on many factors, including, but not limited to:	
 	 	 	 	
 	•	 	the rate of progress and cost of our clinical trials and other research and development activities;	
 	 	 	 	
 	•	 	the costs and timing of seeking and obtaining regulatory approvals;	
 	 	 	 	
 	•	 	the costs associated with establishing manufacturing and commercialization capabilities;	
 	 	 	 	
 	•	 	the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;	
 	 	 	 	
 	•	 	the costs of acquiring or investing in businesses, products and technologies;	
 	 	 	 	
 	•	 	the effect of competing technological and market developments; and	
 	 	 	 	
 	•	 	the payment and other terms and timing of any strategic alliance, licensing or other arrangements that we may establish.	
     Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to continue to finance our future cash needs primarily through public or private equity offerings, debt financings and strategic alliances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more of our clinical trials or research and development programs or future commercialization initiatives.
We expect to expand our development, clinical research, sales and marketing capabilities, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
     We expect to have significant growth in expenditures, the number of our employees and the scope of our operations, in particular with respect to those drug candidates that we elect to develop or commercialize independently or together with a partner. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
We may not be able to successfully scale-up manufacture of our drug candidates in sufficient quality and quantity, which would delay or prevent us from developing our drug candidates and commercializing resulting approved drugs, if any.
     To date, our drug candidates have been manufactured in small quantities for preclinical studies and early-stage clinical trials. In order to conduct larger scale or late-stage clinical trials for a drug candidate and for commercialization of the resulting drug if that
44

Table of Contents
drug candidate is approved for sale, we will need to manufacture it in larger quantities. We may not be able to successfully increase the manufacturing capacity for any of our drug candidates, whether in collaboration with third-party manufacturers or on our own, in a timely or cost-effective manner or at all. If a contract manufacturer makes improvements in the manufacturing process for our drug candidates, we may not own, or may have to share, the intellectual property rights to such improvements. Significant scale-up of manufacturing may require additional validation studies, which are costly and which the FDA must review and approve. In addition, quality issues may arise during such scale-up activities because of the inherent properties of a drug candidate itself or of a drug candidate in combination with other components added during the manufacturing and packaging process or during shipping and storage of the finished product or active pharmaceutical ingredients. If we are unable to successfully scale-up manufacture of any of our drug candidates in sufficient quality and quantity, the development of that drug candidate and regulatory approval or commercial launch for any resulting drugs may be delayed or there may be a shortage in supply, which could significantly harm our business.
We currently have no marketing or sales staff, and if we are unable to enter into or maintain strategic alliances with marketing partners or if we are unable to develop our own sales and marketing capabilities, we may not be successful in commercializing our potential drugs.
     We currently have no sales, marketing or distribution capabilities. We plan to commercialize ourselves drugs that can be effectively marketed and sold in concentrated markets that do not require a large sales force to be competitive. To achieve this goal, we will need to establish our own specialized sales force and marketing organization with technical expertise and with supporting distribution capabilities. Developing such an organization is expensive and time-consuming and could delay a product launch. In addition, we may not be able to develop this capacity efficiently, cost-effectively or at all, which could make us unable to commercialize our drugs. To commercialize our drugs that we determine not to market on our own, we will depend on strategic alliances with third parties, such as GSK and Amgen, which have established distribution systems and direct sales forces. If we are unable to enter into such arrangements on acceptable terms, we may not be able to successfully commercialize such drugs. To the extent that we are not successful in commercializing any drugs ourselves or through a strategic alliance, our product revenues will suffer, our business will suffer and the price of our common stock could decrease.
Our failure to attract and retain skilled personnel could impair our drug development and commercialization activities.
     Our performance is substantially dependent on the performance of our senior management and key scientific and technical personnel. The loss of the services of any member of our senior management, scientific or technical staff may significantly delay or prevent the achievement of drug development and other business objectives by diverting management’s attention to transition matters and identification of suitable replacements, and could have a material adverse effect on our business, operating results and financial condition. We also rely on consultants and advisors to assist us in formulating our research and development strategy. All of our consultants and advisors are either self-employed or employed by other organizations, and they may have conflicts of interest or other commitments, such as consulting or advisory contracts with other organizations, that may affect their ability to contribute to us.
     In addition, we believe that we will need to recruit additional executive management and scientific and technical personnel. There is currently intense competition for skilled executives and employees with relevant scientific and technical expertise, and this competition is likely to continue. Our inability to attract and retain sufficient scientific, technical and managerial personnel could limit or delay our product development activities, which would adversely affect the development of our drug candidates and commercialization of our potential drugs and growth of our business.
Risks Related To Our Industry
Our competitors may develop drugs that are less expensive, safer or more effective, which may diminish or eliminate the commercial success of any drugs that we may commercialize.
     We compete with companies that are also developing drug candidates that focus on the cytoskeleton, as well as companies that have developed drugs or are developing alternative drug candidates for cardiovascular diseases, cancer and other diseases for which our compounds may be useful treatments. For example, if CK-1827452 or any other of our compounds is approved for marketing by the FDA for heart failure, that compound could compete against current generically available therapies, such as milrinone, dobutamine or digoxin or newer marketed drugs such as nesiritide, as well as potentially against other novel drug candidates in development, such as levosimendan, which is being developed in the United States by Abbott Laboratories, in collaboration with Orion Pharma, and is
45

Table of Contents
commercially available in a number of countries outside of the United States, and istaroxamine, which is being developed by Debiopharm Group.
     Similarly, if approved for marketing by the FDA, depending on the approved clinical indication, our anti-cancer drug candidates such as ispinesib, SB-743921 and GSK-923295 could compete against existing cancer treatments such as paclitaxel, docetaxel, vincristine, vinorelbine, navelbine, ixabepilone and potentially against other novel anti-cancer drug candidates that are currently in development such as those that are reformulated taxanes, other tubulin binding compounds or epothilones. We are also aware that Merck & Co., Inc., Eli Lilly and Company, Bristol-Myers Squibb, Array Biopharma Inc., ArQule, Inc. and others are conducting research and development focused on kinesin spindle protein and other mitotic kinesins. In addition, Bristol-Myers Squibb, Merck & Co., Inc., Novartis, Genentech, AstraZeneca, Hoffman-La Roche Ltd. and other pharmaceutical and biopharmaceutical companies are developing other approaches to inhibiting mitosis.
     Our competitors may:
 	•	 	develop drug candidates and market drugs that are less expensive or more effective than our future drugs;	
 	 	 	 	
 	•	 	commercialize competing drugs before we or our partners can launch any drugs developed from our drug candidates;	
 	 	 	 	
 	•	 	hold or obtain proprietary rights that could prevent us from commercializing our products;	
 	 	 	 	
 	•	 	initiate or withstand substantial price competition more successfully than we can;	
 	 	 	 	
 	•	 	more successfully recruit skilled scientific workers from the limited pool of available talent;	
 	 	 	 	
 	•	 	more effectively negotiate third-party licenses and strategic alliances;	
 	 	 	 	
 	•	 	take advantage of acquisition or other opportunities more readily than we can;	
 	 	 	 	
 	•	 	develop drug candidates and market drugs that increase the levels of safety or efficacy that our drug candidates will need to show in order to obtain regulatory approval; or	
 	 	 	 	
 	•	 	introduce therapies or market drugs that render the market opportunity for our potential drugs obsolete.	
     We will compete for market share against large pharmaceutical and biotechnology companies and smaller companies that are collaborating with larger pharmaceutical companies, new companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors, either alone or together with their partners, may develop new drug candidates that will compete with ours. These competitors may, and in certain cases do, operate larger research and development programs or have substantially greater financial resources than we do. Our competitors may also have significantly greater experience in:
 	•	 	developing drug candidates;	
 	 	 	 	
 	•	 	undertaking preclinical testing and clinical trials;	
 	 	 	 	
 	•	 	building relationships with key customers and opinion-leading physicians;	
 	 	 	 	
 	•	 	obtaining and maintaining FDA and other regulatory approvals of drug candidates;	
 	 	 	 	
 	•	 	formulating and manufacturing drugs; and	
 	 	 	 	
 	•	 	launching, marketing and selling drugs.	
     If our competitors market drugs that are less expensive, safer or more efficacious than our potential drugs, or that reach the market sooner than our potential drugs, we may not achieve commercial success. In addition, the life sciences industry is characterized by
46

Table of Contents
rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change we may be unable to compete effectively. Our competitors may render our technologies obsolete by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our drug discovery process that we believe we derive from our research approach and proprietary technologies.
The regulatory approval process is expensive, time-consuming and uncertain and may prevent our partners or us from obtaining approvals to commercialize some or all of our drug candidates.
     The research, testing, manufacturing, selling and marketing of drugs are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Neither we nor our partners are permitted to market our potential drugs in the United States until we receive approval of a new drug application (“NDA”) from the FDA. Neither we nor our partners have received marketing approval for any of Cytokinetics’ drug candidates.
     Obtaining NDA approval can be a lengthy, expensive and uncertain process. In addition, failure to comply with the FDA and other applicable foreign and U.S. regulatory requirements may subject us to administrative or judicially imposed sanctions. These include warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production, and refusal to approve pending NDAs or supplements to approved NDAs.
     Regulatory approval of an NDA or NDA supplement is never guaranteed, and the approval process typically takes several years and is extremely expensive. The FDA and foreign regulatory agencies also have substantial discretion in the drug approval process. Despite the time and expense exerted, failure can occur at any stage, and we could encounter problems that cause us to abandon clinical trials or to repeat or perform additional preclinical testing and clinical trials. The number and focus of preclinical studies and clinical trials that will be required for approval by the FDA and foreign regulatory agencies varies depending on the drug candidate, the disease or condition that the drug candidate is designed to address, and the regulations applicable to any particular drug candidate. The FDA and foreign regulatory agencies can delay, limit or deny approval of a drug candidate for many reasons, including, but not limited to:
 	•	 	they might determine that a drug candidate is not be safe or effective;	
 	 	 	 	
 	•	 	they might not find the data from preclinical testing and clinical trials sufficient;	
 	 	 	 	
 	•	 	they might not approve our or our contract manufacturer’s processes or facilities; or	
 	 	 	 	
 	•	 	they might change its approval policies or adopt new regulations.	
     Even if we receive regulatory approval to manufacture and sell a drug in a particular regulatory jurisdiction, other jurisdictions’ regulatory authorities may not approve that drug for manufacture and sale. If we or our partners fail to receive and maintain regulatory approval for the sale of any drugs resulting from our drug candidates, it would significantly harm our business and negatively affect our stock price.
If we or our partners receive regulatory approval for our drug candidates, we will also be subject to ongoing obligations to and continued regulatory review by the FDA and foreign regulatory agencies, such as continued safety reporting requirements, and we may also be subject to additional post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize our potential drugs.
     Any regulatory approvals that we or our partners receive for our drug candidates may be subject to limitations on the indicated uses for which the drug may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA or foreign regulatory agencies approves any of our drug candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping for the drug will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the drug, including adverse events of unanticipated severity or frequency, or the discovery that adverse effects or toxicities previously observed in preclinical research or clinical trials that were believed to be minor actually constitute much more serious problems, may result in restrictions on the marketing of the drug, and could include withdrawal of the drug from the market.
47

Table of Contents
     The policies of the FDA and foreign regulatory agencies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our drug candidates. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we might not be permitted to market our drugs and our business would suffer.
If physicians and patients do not accept our drugs, we may be unable to generate significant revenue, if any.
     Even if our drug candidates obtain regulatory approval, the resulting drugs, if any, may not gain market acceptance among physicians, healthcare payors, patients and the medical community. Even if the clinical safety and efficacy of drugs developed from our drug candidates are established for purposes of approval, physicians may elect not to recommend these drugs for a variety of reasons including, but not limited to:
 	•	 	timing of market introduction of competitive drugs;	
 	 	 	 	
 	•	 	clinical safety and efficacy of alternative drugs or treatments;	
 	 	 	 	
 	•	 	cost-effectiveness;	
 	 	 	 	
 	•	 	availability of coverage and reimbursement from health maintenance organizations and other third-party payors;	
 	 	 	 	
 	•	 	convenience and ease of administration;	
 	 	 	 	
 	•	 	prevalence and severity of adverse side effects;	
 	 	 	 	
 	•	 	other potential disadvantages relative to alternative treatment methods; or	
 	 	 	 	
 	•	 	insufficient marketing and distribution support.	
     If our drugs fail to achieve market acceptance, we may not be able to generate significant revenue and our business would suffer.
The coverage and reimbursement status of newly approved drugs is uncertain and failure to obtain adequate coverage and reimbursement could limit our ability to market any drugs we may develop and decrease our ability to generate revenue.
     There is significant uncertainty related to the coverage and reimbursement of newly approved drugs. The commercial success of our potential drugs in both domestic and international markets is substantially dependent on whether third-party coverage and reimbursement is available for our potential drugs by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drugs, and, as a result, they may not cover or provide adequate payment for our potential drugs. They may not view our potential drugs as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential drugs to be marketed on a competitive basis. If we are unable to obtain adequate coverage and reimbursement for our potential drugs, our ability to generate revenue may be adversely affected. Likewise, legislative or regulatory efforts to control or reduce healthcare costs or reform government healthcare programs could result in lower prices or rejection of coverage and reimbursement for our potential drugs. Changes in coverage and reimbursement policies or healthcare cost containment initiatives that limit or restrict reimbursement for our drugs may cause our revenue to decline.
We may be subject to costly product liability or other liability claims and may not be able to obtain adequate insurance.
     The use of our drug candidates in clinical trials may result in adverse effects. We currently maintain product liability insurance. We cannot predict all the possible harms or adverse effects that may result from our clinical trials. We may not have sufficient resources to pay for any liabilities resulting from a claim excluded from, or beyond the limit of, our insurance coverage. Our insurance does not cover third parties’ negligence or malpractice, and our clinical investigators and sites may have inadequate insurance or none at all. In addition, in order to conduct clinical trials or otherwise carry out our business, we may have to contractually assume
48

Table of Contents
liabilities for which we may not be insured. If we are unable to look to our own or a third party’s insurance to pay claims against us, we may have to pay any arising costs and damages ourselves, which may be substantial.
     In addition, once we have commercially launched drugs based on our drug candidates, we will face even greater exposure to product liability claims. This risk exists even with respect to those drugs that are approved for commercial sale by the FDA and foreign regulatory agencies and manufactured in licensed and regulated facilities. We intend to secure limited product liability insurance coverage, but may not be able to obtain such insurance on acceptable terms with adequate coverage, or at reasonable costs. There is also a risk that third parties that we have agreed to indemnify could incur liability, or that third parties that have agreed to indemnify us do not fulfill their obligations. Even if we were ultimately successful in product liability litigation, the litigation would consume substantial amounts of our financial and managerial resources and may create adverse publicity, all of which would impair our ability to generate sales of the affected product as well as our other potential drugs. Moreover, product recalls may be issued at our discretion or at the direction of the FDA and foreign regulatory agencies, other governmental agencies or other companies having regulatory control for drug sales. If product recalls occur, they are generally expensive and often have an adverse effect on the image of the drugs being recalled as well as the reputation of the drug’s developer or manufacturer.
We use hazardous chemicals and radioactive and biological materials in our business. Responding to any claims relating to improper handling, storage or disposal of these materials could be time-consuming and costly.
     Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from those materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials. Compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and production activities.
     In addition, our partners may use hazardous materials in connection with our strategic alliances. To our knowledge, their work is performed in accordance with applicable biosafety regulations. In the event of a lawsuit or investigation, however, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials used by these parties. Further, we may be required to indemnify our partners against all damages and other liabilities arising out of our development activities or drugs produced in connection with these strategic alliances, which could be costly and time-consuming and distract management.
Our facilities in California are located near an earthquake fault, and an earthquake or other types of natural disasters, catastrophic events or resource shortages could disrupt our operations and adversely affect our results.
     Important documents and records, such as hard copies of our laboratory books and records for our drug candidates and compounds and our electronic business records, are located in our corporate headquarters at a single location in South San Francisco, California near active earthquake zones. In the event of a natural disaster, such as an earthquake or flood, a catastrophic event such as a disease pandemic or terrorist attack or localized extended outages of critical utilities or transportation systems, we do not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption. Our partners and other third parties on which we rely may also be subject to business interruptions from such events. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt our operations and cause expense, thus adversely affecting our business and financial results.
Risks Related To Our Common Stock
We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above your investment price.
     The stock market, particularly in recent years, has experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the market price of our common stock include, but are not limited to:
 	•	 	results from, delays in, or discontinuation of, any of the clinical trials for our drug candidates for the treatment of heart failure or cancer, including the current and proposed clinical trials for CK-1827452 for heart failure, ispinesib for breast cancer and leukemia, SB-743921 for Hodgkin and non-Hodgkin lymphoma, and GSK-923295 for cancer, and including delays resulting from slower than expected or suspended patient enrollment or discontinuations resulting from a failure to meet pre-defined clinical end-points;	
 	 	 	 	
 	•	 	announcements concerning our strategic alliances with Amgen, GSK or future strategic alliances, including, but not limited to, announcements concerning Amgen’s option relating to CK-1827452 and GSK’s option relating to either or both of ispinesib and SB-743921;	
49

Table of Contents
 	 	
 	•	 	announcements concerning clinical trials;	
 	 	 	 	
 	•	 	failure or delays in entering additional drug candidates into clinical trials;	
 	 	 	 	
 	•	 	failure or discontinuation of any of our research programs;	
 	 	 	 	
 	•	 	issuance of new or changed securities analysts’ reports or recommendations;	
 	 	 	 	
 	•	 	failure or delays in establishing new strategic alliances, or the terms of such alliances;	
 	 	 	 	
 	•	 	market conditions in the pharmaceutical, biotechnology and other healthcare related sectors;	
 	 	 	 	
 	•	 	actual or anticipated fluctuations in our quarterly financial and operating results;	
 	 	 	 	
 	•	 	developments or disputes concerning our intellectual property or other proprietary rights;	
 	 	 	 	
 	•	 	introduction of technological innovations or new commercial products by us or our competitors;	
 	 	 	 	
 	•	 	issues in manufacturing our drug candidates or drugs;	
 	 	 	 	
 	•	 	market acceptance of our drugs;	
 	 	 	 	
 	•	 	third-party healthcare coverage and reimbursement policies;	
 	 	 	 	
 	•	 	FDA or other U.S. or foreign regulatory actions affecting us or our industry;	
 	 	 	 	
 	•	 	litigation or public concern about the safety of our drug candidates or drugs;	
 	 	 	 	
 	•	 	additions or departures of key personnel; or	
 	 	 	 	
 	•	 	volatility in the stock prices of other companies in our industry.	
     These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert our management’s time and attention.
If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.
     As of July 31, 2008, our executive officers, directors and their affiliates beneficially owned or controlled approximately 26.1% of the outstanding shares of our common stock (after giving effect to the exercise of all outstanding vested and unvested options and warrants). Accordingly, these executive officers, directors and their affiliates, acting as a group, will have substantial influence over
50

Table of Contents
the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also delay or prevent a change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.
Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.
     Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), new Securities and Exchange Commission regulations and NASDAQ Stock Market LLC rules are creating uncertainty for public companies. We are presently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs. For example, compliance with the internal control requirements of Sarbanes-Oxley Section 404 has to date required the commitment of significant resources to document and test the adequacy of our internal control over financial reporting. While our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2007, our internal control over financial reporting was effective, we can provide no assurance as to conclusions of management or by our independent registered public accounting firm with respect to the effectiveness of our internal control over financial reporting in the future. These new or changed laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest the resources necessary to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies, due to ambiguities related to practice or otherwise, regulatory authorities may initiate legal proceedings against us, which could be costly and time-consuming, and our reputation and business may be harmed.
Volatility in the stock prices of other companies may contribute to volatility in our stock price.
     The stock market in general, and The NASDAQ Global Market (“NASDAQ”) and the market for technology companies in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of early stage and development stage life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs, potential liabilities and the diversion of management’s attention and resources, and could harm our reputation and business.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
     We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses. In addition, the terms of existing or any future debts may preclude us from paying these dividends.
Our common stock is thinly traded and there may not be an active, liquid trading market for our common stock.
     There is no guarantee that an active trading market for our common stock will be maintained on NASDAQ, or that the volume of trading will be sufficient to allow for timely trades. Investors may not be able to sell their shares quickly or at the latest market price if trading in our stock is not active or if trading volume is limited. In addition, if trading volume in our common stock is limited, trades of relatively small numbers of shares may have a disproportionate effect on the market price of our common stock.
51

Table of Contents
     Risks Related To Our Financing Vehicles and Investments
Our committed equity financing facility with Kingsbridge may not be available to us if we elect to make a draw down, may require us to make additional “blackout” or other payments to Kingsbridge, and may result in dilution to our stockholders.
     In October 2007, we entered into a committed equity financing facility with Kingsbridge. This committed equity financing facility entitles us to sell and obligates Kingsbridge to purchase, from time to time over a period of three years, shares of our common stock for cash consideration up to an aggregate of $75.0 million, subject to certain conditions and restrictions. Kingsbridge will not be obligated to purchase shares under this committed equity financing facility unless certain conditions are met, which include a minimum price for our common stock; the accuracy of representations and warranties made to Kingsbridge; compliance with laws; effectiveness of the registration statement registering for resale the shares of common stock to be issued in connection with this committed equity financing facility; and the continued listing of our stock on NASDAQ. In addition, Kingsbridge is permitted to terminate this committed equity financing facility if it determines that a material and adverse event has occurred affecting our business, operations, properties or financial condition and if such condition continues for a period of 10 days from the date Kingsbridge provides us notice of such material and adverse event. If we are unable to access funds through this committed equity financing facility, or if Kingsbridge terminates this committed equity financing facility, we may be unable to access capital on favorable terms or at all.
     We are entitled, in certain circumstances, to deliver a blackout notice to Kingsbridge to suspend the use of the resale registration statement and prohibit Kingsbridge from selling shares under the resale registration statement. If we deliver a blackout notice in the 15 trading days following the settlement of a draw down, or if the registration statement is not effective in circumstances not permitted by the agreement, then we must make a payment to Kingsbridge, or issue Kingsbridge additional shares in lieu of this payment, calculated on the basis of the number of shares held by Kingsbridge (exclusive of shares that Kingsbridge may hold pursuant to exercise of the Kingsbridge warrant) and the change in the market price of our common stock during the period in which the use of the registration statement is suspended. If the trading price of our common stock declines during a suspension of the registration statement, the blackout or other payment could be significant.
     Should we sell shares to Kingsbridge under this committed equity financing facility, or issue shares in lieu of a blackout payment, it will have a dilutive effective on the holdings of our current stockholders, and may result in downward pressure on the price of our common stock. If we draw down under this committed equity financing facility, we will issue shares to Kingsbridge at a discount of up to 10 percent from the volume weighted average price of our common stock. If we draw down amounts under this committed equity financing facility when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price.
We may be required to record impairment charges in future quarters as a result of the decline in value of our investments in auction rate securities.
     We hold interest-bearing student loan auction rate securities (“ARS”) that represent investments in pools of assets. These ARS are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected all of our holdings in ARS and auctions for our investments in these securities have failed to settle on their respective settlement dates. Consequently, these investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the outstanding securities, the securities mature or a buyer is found outside of the auction process. Maturity dates for these ARS range from 2036 to 2045. To date, we have recorded $1.3 million of unrealized loss in other comprehensive income (loss) related to the ARS that we hold in our investment portfolio. However, if the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income (loss) or impairment charges in future quarters. This could adversely impact our results of operations and financial condition. Furthermore, in light of auction failures associated with our ARS, we re-classified our ARS as long-term investments due to the uncertainty associated with the timing of our ability to access the funds underlying these investments. If we are unable to access the funds underlying these investments in a timely manner, we may need to find alternate sources of funding for certain of our operations, which may not be available on favorable terms, or at all, and our business could be adversely effected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
     We made no repurchases of our common stock during the six months ended June 30, 2008. As of June 30, 2008, there were no remaining shares of common stock subject to repurchase by us.
52

Table of Contents
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Our Annual Meeting of Stockholders was held on May 22, 2008 in South San Francisco, California. Of the 49,301,300 shares of the Company’s common stock entitled to vote at the meeting, 39,048,355 shares of common stock, or 79%, of the total eligible votes to be cast, were represented at the meeting in person or by proxy, constituting a quorum. The voting results were as follows:
     The stockholders elected A. Grant Heidrich and James H. Sabry as Class I directors, each to serve for a three-year term until their successors are duly elected and qualified. The votes were as follows:
 	 	 	 	 	
Name	 	For	 	Withheld	
A. Grant Heidrich	 	38,512,135	 	536,220	
James H. Sabry	 	34,683,566	 	4,364,789	
     Our other directors with terms of office that continued after the Annual Meeting of Stockholders were Robert Blum, Stephen Dow, Charles Homcy, Mark McDade, Michael Schmertzler and James Spudich.
     The stockholders ratified the selection by the Audit Committee of the Board of Directors of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008. The votes were as follows:
 	 	 	 	 	 	 	
For	 	Against	 	Abstain	 	Broker Non-Vote	
39,006,038	 	38,546	 	3,771	 	O	
     The stockholders approved the amendment to the Amended and Restated Certificate of Incorporation increasing the number of authorized shares of common stock from 120,000,000 shares to 170,000,000 shares. The votes were as follows:
 	 	 	 	 	 	 	
For	 	Against	 	Abstain	 	Broker Non-Vote	
31,993,251	 	7,112,697	 	2,407	 	O	
     The stockholders approved the amended and restated 2004 Equity Incentive Plan. The votes were as follows:
 	 	 	 	 	 	 	
For	 	Against	 	Abstain	 	Broker Non-Vote	
28,961,221	 	3,658,269	 	2,281,129	 	4,147,736	
ITEM 5. OTHER INFORMATION
     In August 2008, the Company entered into an Amended and Restated Executive Employment Agreement with each of David J. Morgans, Jr., Sharon Barbari, Michael Rabson, Andrew A. Wolff, David W. Cragg and Jay K. Trautman, each in substantially the form filed as Exhibit 10.68 to this report. Also in August 2008, the Company entered into an Amended and Restated Executive Employment Agreement with Robert I. Blum as filed as Exhibit 10.69 to this report. These agreements were entered into in order to comply with Section 409A of the Internal Revenue Code and its regulations.
     In August 2008, the Company also entered into an Indemnification Agreement with each of Robert I. Blum, David J. Morgans, Jr., Sharon Barbari, Michael Rabson, Andrew A. Wolff, David W. Cragg and Jay K. Trautman, each in substantially the form filed as Exhibit 10.1 to this report.
ITEM 6. EXHIBITS
 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	
Number	 	 	 	 	 	Exhibit Description	
3.1	 	 	(1	)	 	Amended and Restated Certificate of Incorporation.	
53

Table of Contents
 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	
Number	 	 	 	 	 	Exhibit Description	
3.2	 	 	(1	)	 	Amended and Restated Bylaws.	
 	 	 	 	 	 	 	
4.1	 	 	(2	)	 	Specimen Common Stock Certificate.	
 	 	 	 	 	 	 	
4.2	 	 	(1	)	 	Fourth Amended and Restated Investors Rights Agreement, dated March 21, 2003, by and among the Company and certain stockholders of the Company.	
 	 	 	 	 	 	 	
4.3	 	 	(1	)	 	Master Security Agreement, dated February 2, 2001, by and between the Company and General Electric Capital Corporation.	
 	 	 	 	 	 	 	
4.4	 	 	(1	)	 	Cross-Collateral and Cross-Default Agreement by and between the Company and General Electric Capital Corporation.	
 	 	 	 	 	 	 	
4.5	 	 	(3	)	 	Warrant for the purchase of shares of common stock, dated October 28, 2005, issued by the Company to Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
4.6	 	 	(3	)	 	Registration Rights Agreement, dated October 28, 2005, by and between the Company and Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
4.7	 	 	(4	)	 	Registration Rights Agreement, dated as of December 29, 2006, by and between the Company and Amgen Inc.	
 	 	 	 	 	 	 	
4.8	 	 	(5	)	 	Warrant for the purchase of shares of common stock, dated October 15, 2007, issued by the Company to Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
4.9	 	 	(5	)	 	Registration Rights Agreement, dated October 15, 2007, by and between the Company and Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
10.1	 	 	 	 	 	Form of Indemnification Agreement between the Company and each of its directors and executive officers.	
 	 	 	 	 	 	 	
10.3	 	 	 	 	 	2004 Equity Incentive Plan (as amended and restated as of May 22, 2008).	
 	 	 	 	 	 	 	
10.66*	 	 	(6	)	 	Scientific Advisory Board Consulting Agreement, dated April 1, 2008, by and between the Company and James H. Sabry.	
 	 	 	 	 	 	 	
10.67*	 	 	(7	)	 	Letter Amendment to the Collaboration Agreement, dated June 18, 2008, by and between the Company and Glaxo Group Limited, a GlaxoSmithKline company.	
 	 	 	 	 	 	 	
10.68	 	 	 	 	 	Form of Executive Employment Agreement between the Company and its executive officers.	
 	 	 	 	 	 	 	
10.69	 	 	 	 	 	Amended and Restated Executive Employment Agreement, dated May 21, 2007, by and between the Company and Robert I. Blum.	
 	 	 	 	 	 	 	
31.1	 	 	 	 	 	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	 	 	 	 	
31.2	 	 	 	 	 	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	 	 	 	 	
32.1	 	 	 	 	 	Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).	

 	 	 	
*	 	Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 406 under the Securities Act of 1933 or Rule 24b-2 under the Securities Exchange Act of 1934, as applicable.	
 	 	 	
(1)	 	Incorporated by reference from our registration statement on Form S-1, registration number 333-112261, declared effective by the Securities and Exchange Commission on April 29, 2004.	
54

Table of Contents
 	 	 	
(2)	 	Incorporated by reference from our Quarterly Report on Form 10-Q, filed with the Security and Exchange Commission on May 9, 2007.	
 	 	 	
(3)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 20, 2006.	
 	 	 	
(4)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 3, 2007.	
 	 	 	
(5)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2007.	
 	 	 	
(6)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 2, 2008.	
 	 	 	
(7)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 20, 2008.	

55

Table of Contents
SIGNATURES
     Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 	 	 	 	 	
Dated: August 5, 2008	 	CYTOKINETICS, INCORPORATED	 	 	
 	 	(Registrant)	 	 	
 	 	 	 	 	
 	 	/s/ Robert I. Blum
  Robert I. Blum	 	 	
 	 	President and Chief Executive Officer	 	 	
 	 	(Principal Executive Officer)	 	 	
 	 	 	 	 	
 	 	/s/ Sharon Barbari
  Sharon Barbari	 	 	
 	 	Senior Vice President, Finance and Chief Financial Officer	 	 	
 	 	(Principal Financial Officer)	 	 	
56

Table of Contents
EXHIBIT INDEX
 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	
Number;	 	 	 	 	 	Exhibit Description	
3.1	 	 	(1	)	 	Amended and Restated Certificate of Incorporation.	
 	 	 	 	 	 	 	
3.2	 	 	(1	)	 	Amended and Restated Bylaws.	
 	 	 	 	 	 	 	
4.1	 	 	(2	)	 	Specimen Common Stock Certificate.	
 	 	 	 	 	 	 	
4.2	 	 	(1	)	 	Fourth Amended and Restated Investors Rights Agreement, dated March 21, 2003, by and among the Company and certain stockholders of the Company.	
 	 	 	 	 	 	 	
4.3	 	 	(1	)	 	Master Security Agreement, dated February 2, 2001, by and between the Company and General Electric Capital Corporation.	
 	 	 	 	 	 	 	
4.4	 	 	(1	)	 	Cross-Collateral and Cross-Default Agreement by and between the Company and General Electric Capital Corporation.	
 	 	 	 	 	 	 	
4.5	 	 	(3	)	 	Warrant for the purchase of shares of common stock, dated October 28, 2005, issued by the Company to Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
4.6	 	 	(3	)	 	Registration Rights Agreement, dated October 28, 2005, by and between the Company and Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
4.7	 	 	(4	)	 	Registration Rights Agreement, dated as of December 29, 2006, by and between the Company and Amgen Inc.	
 	 	 	 	 	 	 	
4.8	 	 	(5	)	 	Warrant for the purchase of shares of common stock, dated October 15, 2007, issued by the Company to Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
4.9	 	 	(5	)	 	Registration Rights Agreement, dated October 15, 2007, by and between the Company and Kingsbridge Capital Limited.	
 	 	 	 	 	 	 	
10.1	 	 	 	 	 	Form of Indemnification Agreement between the Company and each of its directors and executive officers.	
 	 	 	 	 	 	 	
10.3	 	 	 	 	 	2004 Equity Incentive Plan (as amended and restated as of May 22, 2008).	
 	 	 	 	 	 	 	
10.66*	 	 	(6	)	 	Scientific Advisory Board Consulting Agreement, dated April 1, 2008, by and between the Company and James H. Sabry.	
 	 	 	 	 	 	 	
10.67*	 	 	(7	)	 	Letter Amendment to the Collaboration Agreement, dated June 18, 2008, by and between the Company and Glaxo Group Limited, a GlaxoSmithKline company.	
 	 	 	 	 	 	 	
10.68	 	 	 	 	 	Form of Executive Employment Agreement between the Company and its executive officers.	
 	 	 	 	 	 	 	
10.69	 	 	 	 	 	Amended and Restated Executive Employment Agreement, dated May 21, 2007, by and between the Company and Robert I. Blum.	
 	 	 	 	 	 	 	
31.1	 	 	 	 	 	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	 	 	 	 	
31.2	 	 	 	 	 	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	
 	 	 	 	 	 	 	
32.1	 	 	 	 	 	Certifications of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).	

 	 	 	
*	 	Pursuant to a request for confidential treatment, portions of this Exhibit have been redacted from the publicly filed document and have been furnished separately to the Securities and Exchange Commission as required by Rule 406 under the Securities Act of 1933 or Rule 24b-2 under the Securities Exchange Act of 1934, as applicable.	
57

Table of Contents
 	 	 	
(1)	 	Incorporated by reference from our registration statement on Form S-1, registration number 333-112261, declared effective by the Securities and Exchange Commission on April 29, 2004.	
 	 	 	
(2)	 	Incorporated by reference from our Quarterly Report on Form 10-Q, filed with the Security and Exchange Commission on May 9, 2007.	
 	 	 	
(3)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 20, 2006.	
 	 	 	
(4)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 3, 2007.	
 	 	 	
(5)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2007.	
 	 	 	
(6)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 2, 2008.	
 	 	 	
(7)	 	Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 20, 2008.	

58

Exhibit 10.1
CYTOKINETICS, INCORPORATED
INDEMNIFICATION AGREEMENT
     This Indemnification Agreement (“Agreement”) is made as of this ___day of                     ,                     , by and between Cytokinetics, Incorporated, a Delaware corporation (the “ Company ”), and                       (“ Indemnitee ”).
     WHEREAS, the Company and Indemnitee recognize the significant cost of directors’ and officers’ liability insurance and the general reductions in the coverage of such insurance;
     WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the coverage of liability insurance has been severely limited; and
     WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law.
     NOW, THEREFORE, in consideration for Indemnitee’s services as an officer or director of the Company, the sufficiency of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows:
     1. Indemnification.
          (a) Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or any alternative dispute resolution mechanism, whether civil, criminal, formal or informal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while serving in Indemnitee’s capacity as a director, officer, employee or agent of the Company or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of  nolo contendere  or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Indemnitee’s conduct was unlawful.
          (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director,
- 1 -

 
officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while serving in Indemnitee’s capacity as a director, officer, employee or agent of the Company or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and, to the fullest extent permitted by law, amounts paid in settlement in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment (for which no further right of appeal exists) to be liable to the Company in the performance of Indemnitee’s duty to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper.
          (c) Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Subsections (a) and (b) of this Section 1, or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by Indemnitee in connection therewith. Without limiting the foregoing, if any action, suit or proceeding is disposed of, on the merits or otherwise (including a disposition without prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) a final adjudication that the Indemnitee was liable to the Company, (iii) a plea of guilty or  nolo contendere  by the Indemnitee, (iv) a final adjudication that the Indemnitee did not act in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and (v) with respect to any criminal proceeding, a final adjudication that the Indemnitee had reasonable cause to believe his or her conduct was unlawful, the Indemnitee shall be considered for the purpose hereof to have been wholly successful with respect thereto.
          (d) The termination of any action, suit or proceeding referred to in Subsections (a) or (b) of this Section 1, or of any claim, issue or matter therein, by settlement (with or without court approval), or upon a plea of  nolo contendere  or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action, suit or proceeding, create a presumption that Indemnitee had reasonable cause to believe that his or her conduct was unlawful.
     2. Expenses; Indemnification Procedure.
Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. As used herein, “ Expenses ” shall mean: (i) all reasonable attorney’s fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or
- 2 -

 
otherwise participating in, an action, suit or proceeding, including on any appeal, any premium, security for, and other costs relating to any costs bond, supersedes bond, or other appeal bond or its equivalent; (ii) any expense, liability or loss arising out of or in connection with any action, suite or proceeding subject to Section 1(a) or 1(b), including without limitation, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement; (iii) any interest, assessments or other charges imposed thereon, any federal, state, local or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this Agreement; and (iv) any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. The advances to be made hereunder shall be paid by the Company to Indemnitee within thirty (30) days following delivery of a written request therefore by Indemnitee to the Company. The right to be indemnified or to receive advancement of Expenses under this Agreement (i) is a contract right based upon good and valuable consideration, pursuant to which Indemnitee may sue, (ii) is and is intended to be retroactive and shall be available as to events occurring prior to the date of this Agreement and (iii) shall continue after any rescission or restrictive modification of this Agreement as to events occurring prior thereto. The Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that the Indemnitee undertakes to the fullest extent permitted by law to repay the advance (without interest) if and to the extent that it is ultimately determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by the Company. No other form of undertaking shall be required other than the execution of this Agreement.
          (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the President of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed, five business days if sent by airmail to a country outside of North America; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.
          (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 2 shall be made promptly, and in any event no later than thirty (30) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company’s Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within thirty (30) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys’ fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. If the Company contests Indemnitee’s right to indemnification, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances
- 3 -

 
because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including it Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct.
          (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
          (e) Selection of Counsel. If Company is obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election to do so. Notwithstanding the foregoing, the Company shall not be permitted to settle any action or claim on behalf of Indemnitee in any manner which would impose any unindemnified liability or penalty on the Indemnitee or require any acknowledgement of wrongdoing on the part of the Indemnitee without Indemnitee’s written consent, which consent shall not be unreasonably withheld. The Company agrees that it will not, without the prior written consent of the Indemnitee, settle, compromise or consent to the entry of any judgment in any pending or threatened claim relating to the matters contemplated hereby (if the Indemnitee is a party thereto or has been threatened to be made or would reasonably be expected to be made a party thereto) unless such settlement, compromise or consent includes an unconditional release of the Indemnitee from all liability arising or that may arise out of such claim. The Indemnitee shall not be liable for any settlement of any claim effected against the Indemnitee without Indemnitee’s written consent. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his or her counsel in any such proceeding at Indemnitee’s expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Company. The Company shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Company or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii)(B) above.
     3. Additional Indemnification Rights; Nonexclusivity.
          (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company’s Certificate of Incorporation, the Company’s Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be,  ipso facto , within the purview of Indemnitee’s rights and Company’s obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not
- 4 -

 
otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties’ rights and obligations hereunder.
          (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company’s Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding.
          (c) Contribution. The Company hereby agrees to fully indemnify and hold harmless Indemnitee from any claims for contribution which may be brought by officers, directors or employees of the Company (other than Indemnitee) who may be jointly liable with Indemnitee.
          (d) Information Sharing. If the Indemnitee is the subject of or is implicated in any way during an investigation, whether formal or informal, the Company shall share with Indemnitee any information it has turned over to any third parties concerning the investigation.
     4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.
     5. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company’s right under public policy to indemnify Indemnitee.
     6. Officer and Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company’s performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company’s directors, if Indemnitee is a director; or of the Company’s officers, if Indemnitee is not a director of the Company but is an officer. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. If the Company determines that it will eliminate or reduce the level of insurance coverage described herein applicable at any time to Indemnitee,
- 5 -

 
the Company shall provide Indemnitee with thirty (30) days prior written notice prior to effectuating such elimination or reduction.
     7. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.
     8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:
          (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or
          (b) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or
          (c) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been actually paid directly to Indemnitee by an insurance carrier under a policy of officers’ and directors’ liability insurance maintained by the Company.
          (d) Claims under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute, however, notwithstanding anything to the contrary stated or implied in this Section 8(d), indemnification pursuant to this Agreement relating to any action, suit or proceeding against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Exchange Act or similar provisions of any federal, state or local laws shall not be prohibited if Indemnitee establishes in any action, suit or proceeding that no recovery of such profits from Indemnitee is permitted under Section 16(b) of the Exchange Act or similar provisions of any federal, state or local laws.
     9. Construction of Certain Phrases.
          (a) For purposes of this Agreement, references to the “Company” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation,
- 6 -

 
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.
          (b) For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to “serving at the request of the Company” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this Agreement.
     10. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original.
     11. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all, substantially all or a substantial part of the business or assets of the Company. This Agreement shall inure to the benefit of Indemnitee and Indemnitee’s heirs, legal representatives, executives and administrators. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all or a substantial part of the business or assets of the Company, to assume and agree in writing to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.
     12. Attorneys’ Fees. If any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys’ fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. If an action is instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys’ fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defenses to such action were made in bad faith or were frivolous.
     13. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and shall apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, as the time such act or omission occurred. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is a director, officer, employee or other agent of the Company (or is or was serving at the request of the Company as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee may be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in such capacity.
- 7 -

 
     14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.
     15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware.
     16. Waiver of Jury. Each of the parties hereto hereby agrees to waive its respective rights to a jury trial of any claim or cause of action based upon or arising out of this Agreement or the transactions contemplated hereby. The scope of this Waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this Agreement, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each party hereto further represents and warrants that it has reviewed this Waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel.
     17. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware without regard to the conflict of law principles thereof.
     18. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee’s estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period;  provided, however , that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
     19. Subrogation. If a payment is made under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.
     20. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. The failure of either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party.
     21. Remedies. The Company and Indemnitee agree that a monetary remedy for breach of this Agreement may be inadequate, impracticable and difficult to prove, and further agree that such breach may cause Indemnitee irreparable harm. Accordingly, the parties hereto agree that Indemnitee may enforce this Agreement by seeking injunctive relief and/or specific performance hereof, without any necessity of showing actual damage or irreparable harm and that by seeking injunctive relief and/or specific performance, Indemnitee shall not be precluded from seeking or obtaining any other relief to
- 8 -

 
which he or she may be entitled. The Company and Indemnitee further agree that Indemnitee shall be entitled to such specific performance and injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the necessity of posting bonds or other undertaking in connection therewith. The Company acknowledges that in the absence of a waiver, Indemnitee may be obligated to post a bond or make an undertaking, and the Company hereby waives any such requirement of a bond or undertaking.
     22. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto, and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements, relating to the subject matter hereof between the parties hereto. This Agreement can only be modified by a writing specifically stating the intent to amend this Agreement and signed by the Indemnitee and an authorized representative of the Company.
     23. Advice of Counsel. Each party acknowledges that, in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel, and has read and understood all of the terms and provisions of this Agreement. This Agreement will not be construed against any party by reason of the drafting or preparation hereof.
     24. Headings. The headings for each Article and Section in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular article or section.
     25. Waiver. Any delay in enforcing a party’s rights under this Agreement or any waiver as to a particular default or other matter will not constitute a waiver of such party’s rights to the future enforcement of its rights under this Agreement, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time.
[The remainder of this page is intentionally left blank. The signature page follows.]
- 9 -

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

 	 	CYTOKINETICS, INCORPORATED	 	 	

 	 	 	 	 	 	 	
 	 	 	 	 	
 	 	Signature of Authorized Signatory	 	 	

 	 	 	 	 	
 	 	Print Name and Title	 	 	
 	 	 	 	 	 	 	
 	 	Address:	 	 	 	 	

 	 	 	 	 	 	 	

 	 	 	 	 	 	 	

 	 	 	 	 	
AGREED TO AND ACCEPTED:	 	 	
 	 	 	 	 	
INDEMNITEE:	 	 	

 	 	 	
Signature	 	 	

 	 	 	
Print Name and Title	 	 	
 	 	 	 	 	
Address:	 	 	 	 	

 	 	 	 	 	

 	 	 	 	 	
- 10 -

Exhibit 10.3
CYTOKINETICS, INCORPORATED
2004 EQUITY INCENTIVE PLAN
(as amended and restated as of May 22,2008)
     1. Purposes of the Plan. The purposes of this Plan are:
     • to attract and retain the best available personnel for positions of substantial responsibility,
     • to provide additional incentive to Employees, Directors and Consultants, and
     • to promote the success of the Company’s business.
     The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Performance Units and Performance Shares.
     2. Definitions. As used herein, the following definitions will apply:
     (a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.
     (b) “Affiliated SAR” means an SAR that is granted in connection with a related Option, and which automatically will be deemed to be exercised at the same time that the related Option is exercised.
     (c) “Applicable Laws” means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
     (d) “Approval Authority” means an authority, governmental or otherwise, that regulates pre-market approval of goods and services.
     (e) “Award” means, individually or collectively, a grant under the Plan of Options, SARs, Restricted Stock, Performance Units or Performance Shares.
     (f) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.
     (g) “Board” means the Board of Directors of the Company.
     (h) “Cash Position” means the Company’s or a business unit’s level of cash, cash equivalents, and available for sale marketable securities.
     (i) “Change in Control” means the occurrence of any of the following events:
     (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or
     (ii) The consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets;

 
     (iii) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who either (A) are Directors as of the effective date of the Plan, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or
     (iv) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.
     (j) “Clinical Progression” means, for any Performance Period, a Product’s entry into or completion of a phase of clinical development, such as when a Product enters into or completes a Phase 1, Phase 2, Phase 3 or other clinical study.
     (k) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code herein will be a reference to any successor or amended section of the Code.
     (l) “Collaboration Arrangement” means, for any Performance Period, entry into an agreement or arrangement with a third party for the development, commercialization, marketing or distribution of a Product or for the conducting of a research program to discover or develop a Product or technologies.
     (m) “Collaboration Progression” means, for any Performance Period, an event that triggers an obligation or payment right to accrue under a Collaboration Agreement.
     (n) “Committee” means a committee of Directors appointed by the Board in accordance with Section 4 of the Plan.
     (o) “Common Stock” means the common stock of the Company.
     (p) “Company” means Cytokinetics, Incorporated, a Delaware corporation, or any successor thereto.
     (q) “Consultant” means any person, including an advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity.
     (r) “Determination Date” means the latest possible date that will not jeopardize the qualification of an Award granted under the Plan as “performance-based compensation” under Section 162(m) of the Code.
     (s) “Director” means a member of the Board.
     (t) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.
     (u) “Earnings Per Share” means as to any Performance Period, the Company’s or a business unit’s Net Income, divided by a weighted average number of common shares outstanding and dilutive common equivalent shares deemed outstanding, determined in accordance with generally accepted accounting principles.
     (v) “Employee” means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.
     (w) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
2

 
     (x) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or cancelled in exchange for Awards of the same type (which may have lower exercise prices and different terms), Awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any outstanding Awards to a financial institution or other person or entity selected by the Administrator, and/or (iii) the exercise price of an outstanding Award is reduced. The Administrator will determine the terms and conditions of any Exchange Program in its sole discretion, subject to the provisions of Section 4(c).
     (y) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
     (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the Nasdaq Global Market, the Nasdaq Global Select Market or the Nasdaq Capital Market, its Fair Market Value will be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in  The Wall Street Journal  or such other source as the Administrator deems reliable;
     (ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock will be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in  The Wall Street Journal  or such other source as the Administrator deems reliable; or
     (iii) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.
     (z) “Financing Event” means, for any Performance Period, the closing of any financing event for capital raising purposes.
     (aa) “Fiscal Year” means the fiscal year of the Company.
     (bb) “Freestanding SAR” means an SAR that is granted independently of any Option.
     (cc) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
     (dd) “Net Income” means as to any Performance Period, the income after taxes of the Company or a business unit for the Performance Period determined in accordance with generally accepted accounting principles.
     (ee) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
     (ff) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
     (gg) “Operating Cash Flow” means the Company’s or a business unit’s sum of Net Income plus depreciation and amortization less capital expenditures plus changes in working capital comprised of accounts receivable, inventories, other current assets, trade accounts payable, accrued expenses, product warranty, advance payments from customers and long-term accrued expenses, determined in accordance with generally acceptable accounting principles.
     (hh) “Operating Expenses” means the sum of the Company’s or a business unit’s research and development expenses and selling and general and administrative expenses during a Performance Period.
     (ii) “Operating Income” means the Company’s or a business unit’s income from operations determined in accordance with generally accepted accounting principles.
     (jj) “Option” means a stock option granted pursuant to the Plan.
     (kk) “Outside Director” means a Director who is not an Employee.
     (ll) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code.
     (mm) “Participant” means the holder of an outstanding Award.
3

 
     (nn) “Performance Period” means any Fiscal Year or such other period as determined by the Administrator in its sole discretion.
     (oo) “Performance Share” means an Award granted to a Participant pursuant to Section 9.
     (pp) “Performance Unit” means an Award granted to a Participant pursuant to Section 9.
     (qq) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator.
     (rr) “Plan” means this 2004 Equity Incentive Plan.
     (ss) “Product” means any drug candidate or product candidate requiring pre-market approval by an Approval Authority.
     (tt) “Product Approval” means the approval by any Approval Authority of the right to market or sell a Product.
     (uu) “Product Revenues” means as to any Performance Period, the Company’s or a business unit’s sales, royalties, license fees, milestones and related-party revenues, determined in accordance with generally accepted accounting principles.
     (vv) “Profit After Tax” means as to any Performance Period, the Company’s or a business unit’s income after taxes, determined in accordance with generally accepted accounting principles.
     (ww) “Projects in Development” refers to one or more projects at any or all stages of development from conception, discovery, and/or initial research through Product Approval, including, but not limited to, pre-clinical studies, filing of an investigational new drug application (IND) or foreign equivalent, Phase 1, Phase 2, and Phase 3 clinical trials and submission and approval of a new drug application (NDA) or foreign equivalent.
     (xx) “Regulatory Filings” means as to any Performance Period, filings submitted to an Approval Authority with respect to a Product for which the Company is pursuing Product Approval.
     (yy) “Restricted Stock” means shares of Common Stock issued pursuant to a Restricted Stock award under Section 7 of the Plan, or issued pursuant to the early exercise of an Option.
     (zz) “Return on Assets” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s Operating Income before incentive compensation, divided by average net Company or business unit, as applicable, assets, determined in accordance with generally accepted accounting principles.
     (aaa) “Return on Equity” means as to any Performance Period, the percentage equal to the Company’s Profit After Tax divided by average stockholder’s equity, determined in accordance with generally accepted accounting principles.
     (bbb) “Revenue Growth” means as to any Performance Period, the Company’s or a business unit’s net sales determined in accordance with generally accepted accounting principles, compared to the net sales of the immediately preceding quarter.
     (ccc) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.
     (ddd) “Section 16(b)” means Section 16(b) of the Exchange Act.
     (eee) “Service Provider” means an Employee, Director or Consultant.
     (fff) “Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.
     (ggg) “Stock Appreciation Right” or “SAR” means an Award, granted alone or in connection with an Option, that pursuant to Section 8 is designated as a SAR.
4

 
     (hhh) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.
     (iii) “Tandem SAR” means an SAR that is granted in connection with a related Option, the exercise of which will require forfeiture of the right to purchase an equal number of Shares under the related Option (and when a Share is purchased under the Option, the SAR will be canceled to the same extent).
     (jjj) “Total Stockholder Return” means the total return (change in share price plus reinvestment of any dividends) of a share of Common Stock.
     3. Stock Subject to the Plan.
     (a) Stock Subject to the Plan. Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is (A) 8,817,040 Shares plus (B) any Shares returned on or after February 29, 2008 to the 1997 Stock Option/Stock Issuance Plan as a result of termination of options or repurchase of Shares issued under such plan up to a maximum of 1,220,000 Shares. The Shares may be authorized, but unissued, or reacquired Common Stock.
     (b) Full Value Awards. Any Shares subject to Awards granted with an exercise price less than the Fair Market Value on the date of grant of such Awards will be counted against the numerical limits of this Section 3 as two Shares for every one Share subject thereto. Further, if Shares acquired pursuant to any such Award are forfeited or repurchased by the Company and would otherwise return to the Plan pursuant to Section 3(c), two times the number of Shares so forfeited or repurchased will return to the Plan and will again become available for issuance.
     (c) Lapsed Awards. If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to Restricted Stock, Performance Shares or Performance Units, is forfeited to or repurchased by the Company, the unpurchased Shares (or for Awards other than Options and Stock Appreciation Rights, the forfeited or repurchased Shares) which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). Upon exercise of a Stock Appreciation Right settled in Shares, the gross number of Shares covered by the portion of the Award so exercised will cease to be available under the Plan. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of Shares owned by the Participant, the number of Shares available for issuance under the Plan will be reduced by the gross number of Shares for which the Option is exercised. Shares that have actually been issued under the Plan under any Award will not be returned to the Plan and will not become available for future distribution under the Plan; provided, however, that if unvested Shares of Restricted Stock, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company, such Shares will become available for future grant under the Plan. Shares used to pay the tax and exercise price of an Award will not become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. Notwithstanding the foregoing provisions of this Section 3(c), subject to adjustment provided in Section 13, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, to the extent allowable under Section 422 of the Code, any Shares that become available for issuance under the Plan under this Section 3(c).
     (d) Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Plan.
     4. Administration of the Plan.
(a) Procedure.
     (i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service Providers may administer the Plan.
     (ii) Section 162(m). To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as “performance-based compensation” within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code.
5

 
     (iii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.
     (iv) Other Administration. Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.
     (b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:
     (i) to determine the Fair Market Value;
     (ii) to select the Service Providers to whom Awards may be granted hereunder;
     (iii) to determine the number of Shares to be covered by each Award granted hereunder;
     (iv) to approve forms of agreement for use under the Plan;
     (v) to determine the terms and conditions of any, and with the approval of the Company’s stockholders, to institute an Exchange Program;
     (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;
     (vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
     (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws;
     (ix) to modify or amend each Award (subject to Section 18(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period of Awards longer than is otherwise provided for in the Plan;
     (x) to allow Participants to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Award that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld (the Fair Market Value of the Shares to be withheld will be determined on the date that the amount of tax to be withheld is to be determined and all elections by a Participant to have Shares withheld for this purpose will be made in such form and under such conditions as the Administrator may deem necessary or advisable);
     (xi) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;
     (xii) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award
     (xiii) to make all other determinations deemed necessary or advisable for administering the Plan.
     (c) Prohibition Against Repricing. Subject to adjustments made pursuant to Section 13, in no event shall the Administrator have the right to amend the terms of any Award to reduce the exercise price of such outstanding Award or cancel an outstanding Award in exchange for cash or other Awards with an exercise price that is less than the exercise price of the original Award without stockholder approval.
     (d) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.
6

 
     5. Eligibility. Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Performance Units and Performance Shares may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.
     6. Stock Options.
     (a) Limitations.
     (i) Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted.
     (ii) The following limitations will apply to grants of Options:
     (1) No Service Provider will be granted, in any Fiscal Year, Options to purchase more than 1,500,000 Shares.
     (2) In connection with his or her initial service, a Service Provider may be granted Options to purchase up to an additional 1,500,000 Shares, which will not count against the limit set forth in Section 6(a)(ii)(1) above.
     (3) The foregoing limitations will be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 13.
     (4) If an Option is cancelled in the same Fiscal Year in which it was granted (other than in connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (1) and (2) above.
     (b) Term of Option. The term of each Option will be stated in the Award Agreement. In the case of an Incentive Stock Option, the term will be ten (10) years from the date of grant or such shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.
     (c) Option Exercise Price and Consideration.
     (i) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator, subject to the following:
     (1) In the case of an Incentive Stock Option
     a) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than 110% of the Fair Market Value per Share on the date of grant.
     b) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price will be no less than 100% of the Fair Market Value per Share on the date of grant.
     c) Notwithstanding the foregoing, Incentive Stock Options may be granted with a per Share exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.
     (2) In the case of a Nonstatutory Stock Option, the per Share exercise price will be determined by the Administrator. In the case of a Nonstatutory Stock Option intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, the per Share exercise price will be no less than 100% of the Fair Market Value per Share on the date of grant.
7

 
     (ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.
     (iii) Form of Consideration. The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: (1) cash; (2) check; (3) promissory note; (4) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option will be exercised and provided that accepting such Shares, in the sole discretion of the Administrator, shall not result in any adverse accounting consequences to the Company; (5) consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; (6) a reduction in the amount of any Company liability to the Participant, including any liability attributable to the Participant’s participation in any Company-sponsored deferred compensation program or arrangement; (7) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (8) any combination of the foregoing methods of payment.
     (d) Exercise of Option.
     (i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.
     An Option will be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Award Agreement) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan.
     Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
     (ii) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service Provider, other than upon the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
     (iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participant’s termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
     (iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised following the Participant’s death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participant’s designated beneficiary, provided such beneficiary has been designated prior to Participant’s death in a form
8

 
acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following Participant’s death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
     7. Restricted Stock.
     (a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine.
     (b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Notwithstanding the foregoing sentence, for Restricted Stock intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, during any Fiscal Year no Participant will receive more than an aggregate of 1,000,000 Shares of Restricted Stock. Notwithstanding the foregoing limitation, in connection with his or her initial service as an Employee, for Restricted Stock intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, an Employee may be granted an aggregate of up to an additional 1,000,000 Shares of Restricted Stock. Unless the Administrator determines otherwise, Shares of Restricted Stock will be held by the Company as escrow agent until the restrictions on such Shares have lapsed.
     (c) Transferability. Except as provided in this Section 7, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.
     (d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
     (e) Removal of Restrictions. Except as otherwise provided in this Section 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.
     (f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.
     (g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.
     (h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.
     (i) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the Administrator on or before the Determination Date. In granting Restricted Stock which is intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).
     8. Stock Appreciation Rights.
     (a) Grant of SARs. Subject to the terms and conditions of the Plan, a SAR may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion. The Administrator may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination thereof.
9

 
     (b) Number of Shares. The Administrator will have complete discretion to determine the number of SARs granted to any Service Provider; provided, however, no Service Provider will be granted, in any Fiscal Year, SARs covering more than 1,500,000 Shares. Notwithstanding the limitation in the previous sentence, in connection with his or her initial service a Service Provider may be granted SARs covering up to an additional 1,500,000 Shares. The foregoing limitations will be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 13. In addition, if a SAR is cancelled in the same Fiscal Year in which it was granted (other than in connection with a transaction described in Section 13), the cancelled SAR will be counted against the numerical share limits set forth above.
     (c) Exercise Price and Other Terms. The Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of SARs granted under the Plan; provided, however, that the per Share exercise price of a SAR will be no less than 100% of the Fair Market Value per Share on the date of grant. However, the exercise price of Tandem or Affiliated SARs will equal the exercise price of the related Option.
     (d) Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. With respect to a Tandem SAR granted in connection with an Incentive Stock Option: (a) the Tandem SAR will expire no later than the expiration of the underlying Incentive Stock Option; (b) the value of the payout with respect to the Tandem SAR will be for no more than one hundred percent (100%) of the difference between the exercise price of the underlying Incentive Stock Option and the Fair Market Value of the Shares subject to the underlying Incentive Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR will be exercisable only when the Fair Market Value of the Shares subject to the Incentive Stock Option exceeds the Exercise Price of the Incentive Stock Option.
     (e) Exercise of Affiliated SARs. An Affiliated SAR will be deemed to be exercised upon the exercise of the related Option. The deemed exercise of an Affiliated SAR will not necessitate a reduction in the number of Shares subject to the related Option.
     (f) Exercise of Freestanding SARs. Freestanding SARs will be exercisable on such terms and conditions as the Administrator, in its sole discretion, will determine.
     (g) SAR Agreement. Each SAR grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
     (h) Maximum Term/Expiration of SARs. An SAR granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(b) relating to the maximum term and Section 6(d) relating to exercise also will apply to SARs.
     (i) Payment of SAR Amount. Upon exercise of an SAR, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:
     (i) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times
     (ii) The number of Shares with respect to which the SAR is exercised.
     At the discretion of the Administrator, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
     9. Performance Units and Performance Shares.
     (a) Grant of Performance Units/Shares. Performance Units and Performance Shares may be granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant provided that during any Fiscal Year, for Performance Units or Performance Shares intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, (i) no Participant will receive Performance Units having an initial value greater than $4,000,000, and (ii) no Participant will receive more than 1,000,000 Performance Shares. Notwithstanding the foregoing limitation, for Performance Shares intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, in connection with his or her initial service, a Service Provider may be granted up to an additional 1,000,000 Performance Shares.
10

 
     (b) Value of Performance Units/Shares. Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.
     (c) Performance Objectives and Other Terms. The Administrator will set performance objectives or other vesting provisions in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Service Providers. Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, will determine. The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals, applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion.
     (d) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.
     (e) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration of the applicable Performance Period. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.
     (f) Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for grant under the Plan.
     (g) Section 162(m) Performance Restrictions. For purposes of qualifying grants of Performance Units/Shares as “performance-based compensation” under Section 162(m) of the Code, the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals will be set by the Administrator on or before the Determination Date. In granting Performance Units/Shares which are intended to qualify under Section 162(m) of the Code, the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) of the Code (e.g., in determining the Performance Goals).
     10. Performance Goals. The granting and/or vesting of Awards of Restricted Stock, Performance Shares and Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) of the Code and may provide for a targeted level or levels of achievement (“Performance Goals” ) including: (i) Cash Position, (ii) Clinical Progression, (iii) Collaboration Arrangement, (iv) Collaboration Progression, (v) Earnings Per Share, (vi) Financing Event, (vii) Net Income, (viii) Operating Cash Flow, (ix) Operating Expenses, (x) Operating Income, (xi) Product Approval, (xii) Product Revenues, (xiii) Profit After Tax, (xiv) Projects in Development, (xv) Regulatory Filings, (xvi) Return on Assets, (xvii) Return on Equity, (xviii) Revenue Growth, and (xix) Total Stockholder Return. Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Participant. Any Performance Goals may be used to measure the performance of the Company as a whole or a business unit of the Company and may be measured relative to a peer group or index. With respect to any Award, Performance Goals may be used alone or in combination. The Performance Goals may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Administrator will determine whether any significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Participant. In all other respects, Performance Goals will be calculated in accordance with the Company’s financial statements, generally accepted accounting principles, or under a methodology established by the Administrator prior to the issuance of an Award, which is consistently applied and identified in the financial statements, including footnotes, or the management discussion and analysis section of the Company’s annual report. In determining the amounts earned by a Participant pursuant to an Award intended to qualified as “performance-based compensation” under Section 162(m) of the Code, the Administrator will have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period. A Participant will be eligible to receive payment pursuant to an Award intended to qualify as “performance-based compensation” under Section 162(m) of the Code for a Performance Period only if the Performance Goals for such period are achieved.
11

 
     11. Leaves of Absence. Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence. A Service Provider will not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between locations of the Company or between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, then six months and a day following the 1st day of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.
     12. Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the Administrator deems appropriate; provided, however, that the Administrator may only make an Award transferable to one or more of the following: (i) the Participant’s spouse, children or grandchildren (including any adopted and step children or grandchildren), parents, grandparents, siblings or any “Family Member” (as defined pursuant to Rule 701 of the Securities Act of 1933, as amended) of the Participant; (ii) a trust for the benefit of one or more of the Participant or the persons referred to in clause (i); (iii) a partnership, limited liability company or corporation in which the Participant or the persons referred to in clause (i) are the only partners, members or stockholders; or (iv) charitable donations.
     13. Adjustments; Dissolution or Liquidation; Merger or Change in Control.
     (a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, shall appropriately adjust the number and class of Shares that may be delivered under the Plan and/or the number, class, and price of Shares covered by each outstanding Award, the numerical Share limits in Sections 3, 6, 7, 8, and 9 of the Plan.
     (b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.
     (c) Change in Control. In the event of a Change in Control, each outstanding Award will be assumed or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the Award, the Participant will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock shall lapse, and, with respect to Performance Shares and Performance Units, all performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted for in the event of a Change in Control, the Administrator will notify the Participant in writing or electronically that the Option or Stock Appreciation Right will be fully vested and exercisable for a period of time determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
     With respect to Awards granted to an Outside Director that are assumed or substituted for, if on the date of or following such assumption or substitution the Participant’s status as a Director or a director of the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the Participant not at the request of the successor, then the Participant will fully vest in and have the right to exercise Options and/or Stock Appreciation Rights as to all of the Shares subject to the Award, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock shall lapse, and, with respect to Performance Shares and Performance Units, all performance goals or other vesting criteria will be deemed achieved at target levels and all other terms and conditions met.
     For the purposes of this subsection (c), an Award will be considered assumed if, following the Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) or, in the case of a Stock Appreciation Right upon the exercise of which the Administrator determines to pay cash or a Performance Share or Performance Unit which the Administrator can determine to pay in cash, the fair market value of the consideration received in the merger or Change in Control by holders of Common Stock for
12

 
each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Performance Share or Performance Unit, for each Share subject to such Award (or in the case of Performance Units, the number of implied shares determined by dividing the value of the Performance Units by the per share consideration received by holders of Common Stock in the Change in Control), to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.
     Notwithstanding anything in this Section 13(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its successor modifies any of such performance goals without the Participant’s consent; provided, however, a modification to such performance goals only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
     14. Tax Withholding
     (a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof).
     (b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (i) paying cash, (ii) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the amount required to be withheld, (iii) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld, or (iv) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld. The amount of the withholding requirement will be deemed to include any amount which the Administrator agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
     15. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Company, nor will they interfere in any way with the Participant’s right or the Company’s right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.
     16. Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.
     17. Term of Plan. Subject to Section 21 of the Plan, the Plan will become effective upon its adoption by the Board. It will continue in effect for a term of ten (10) years unless terminated earlier under Section 18 of the Plan.
     18. Amendment and Termination of the Plan.
     (a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate the Plan.
     (b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.
     (c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
13

 
     19. Conditions Upon Issuance of Shares.
     (a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.
     (b) Investment Representations. As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
     20. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority will not have been obtained.
     21. Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within twelve (12) months after the date the Plan is adopted. Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws.
14

Exhibit 10.68
CYTOKINETICS, INCORPORATED
EXECUTIVE EMPLOYMENT AGREEMENT
     This Executive Employment Agreement (this “Agreement”) is made and entered into by and between                       (“ Executive ”) and Cytokinetics, Incorporated, a Delaware corporation (the “ Company ”), effective as of                        (the “ Effective Date ”).
BACKGROUND
     A. It is expected that the Company from time to time will consider a possible acquisition by another company or other change of control. The Board of Directors of the Company (the “ Board ”) recognizes that such consideration can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the Company’s and its stockholders’ best interests to assure that the Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a change of control of the Company.
     B. The Board believes that it is in the Company’s and its stockholders’ the best interests of to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of the Company upon a change of control for the benefit of its stockholders.
     C. The Board believes that it is in the Company’s the best interests to provide Executive with certain severance benefits upon Executive’s termination of employment following a change of control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with the Company notwithstanding a possible change of control.
AGREEMENT
     The parties hereby agree as follows:
     1. Definition of Terms. The following capitalized terms referred to in this Agreement will have the following meanings:
          (a) “Arbitration Agreement” means the Arbitration Agreement by and between the Company and Executive, as may be amended from time to time, and any successor agreement thereto.
          (b) “Benefit Plans” means plans, policies or arrangements that the Company sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executive and/or Executive’s eligible dependents with medical, dental, vision and/or financial counseling benefits. Benefit Plans do not include any other type of benefit (including, but not by way of limitation, disability, life insurance or retirement benefits).
Page 1 of 12

 
A requirement that the Company provide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless the coverage is no less favorable, taken as a whole, than that provided to other Officers at the same time during the period Executive is entitled to receive severance pursuant to this Agreement. The Company may, at its option, satisfy any requirement that the Company provide coverage under any Benefit Plan by reimbursing Executive’s premiums under Title X of the Consolidated Budget Reconciliation Act of 1985, as amended (“ COBRA ”) after Executive has properly elected continuation coverage under COBRA (in which case Executive will be solely responsible for electing such coverage for his or her eligible dependents).
          (c) “Cause” means any of the following:
                    (i) Executive’s failure by to substantially perform Executive’s duties with the Company (other than due to Executive’s incapacity as a result of physical or mental illness for a period not to exceed 90 days);
                    (ii) Executive’s engaging in conduct which is materially injurious to the Company, its business or reputation, or which constitutes gross misconduct;
                    (iii) Executive’s material breach of this Agreement, the Invention Agreement or any other agreements between Executive and the Company;
                    (iv) Executive’s material breach, or act or omission in material contravention of, the Company’s policies adopted by the Board or any committee thereof, including, without limitation, the Company’s Code of Ethics, Insider Trading Compliance Program, Disclosure Process and Procedures and Corporate Governance Guidelines;
                    (v) Executive’s conviction for or admission or plea of no contest with respect to a felony; or
                    (vi) Executive’s act of fraud against the Company, misappropriation of material property belonging to the Company, or act of violence against an officer, director, employee, contractor, agent or representative of the Company;
          provided, however, that if any of the foregoing events in (i), (iii) or (iv) are reasonably capable of being cured, such event will only be deemed to be “Cause” if the Company has provided written notice to Executive describing the nature of such event, and Executive fails to cure such event to the Company’s reasonable satisfaction within thirty (30) days of his or her receipt of such notice.
          (d) “Change of Control” means the occurrence of any of the following:
                    (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or
Page 2 of 12

 
                    (ii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or
                    (iii) The consummation of the sale, lease or other disposition by the Company of all or substantially all the Company’s assets.
                    (iv) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors of the Company are Incumbent Directors. “ Incumbent Director ” means a director of the Board who either (A) is a director of the Board as of the Effective Date, or (B) is elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination did not occur in connection with any transaction described in subsection (d)(i), (d)(ii) or (d)(iii) above.
          (e) “Code” means the Internal Revenue Code of 1986, as amended.
          (f) “Disability” means that Executive has been unable to perform his or her Company duties as the result of his or her incapacity due to physical or mental illness, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to Executive or Executive’s legal representative. Termination resulting from Disability may only be effected after at least thirty (30) days’ written notice by the Company of its intention to terminate Executive’s employment. If Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate will automatically be deemed to have been revoked.
          (g) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
          (h) “Good Reason” means the occurrence of any one or more of the following conditions, unless agreed to by Executive in writing or as set forth below:
 	(i)	 	A material diminution in the Executive’s base compensation;	
 	 	 	 	
 	(ii)	 	A material diminution in the Executive’s authority, duties or responsibilities;	
 	 	 	 	
 	(iii)	 	A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, e.g., a requirement that the Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation);	
Page 3 of 12

 
 	(iv)	 	A material diminution in the budget over which the Executive retains authority prior to such change;	
 	 	 	 	
 	(v)	 	A material change in the geographic location at which the Executive must perform the services (i.e., the relocation of Executive’s place of employment to a location more than 50 miles from the Company’s office location at the time of the Change of Control); or	
 	 	 	 	
 	(vi)	 	Any other action or inaction that constitutes a material breach by the Company or a successor entity of this Agreement;	
provided that, to establish “Good Reason,” Executive must give written notice of occurrence of the applicable event to the Company within ninety (90) days of the initial existence of the condition. If such condition is not cured to Executive’s reasonable satisfaction within thirty (30) days from the Company’s receipt of such notice, then Executive may exercise Executive’s rights under this Agreement to resign for Good Reason, provided that if Executive has not exercised such right within forty-five (45) days of the date of such notice, Executive will be deemed to have agreed to the occurrence of such event.
          (i) “Invention Agreement” means the Proprietary Information and Invention Assignment Agreement by and between the Company and Executive, as may be amended from time to time, and any successor agreement thereto.
          (j) “Officer” means an “officer” of the Company, as defined in Rule 16a-1(f) under the Exchange Act.
          (k) “Section 409A” means Section 409A of the Code and the final regulations and any guidance promulgated thereunder.
          (l) “Section 409A Limit” means two (2) times the lesser of: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the Company’s taxable year preceding the Company’s taxable year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; and (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated.
          (m) “Treasury Regulations” means Title 26 of the U.S. Code of Federal Regulations.
     2. Term of Agreement. This Agreement will terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied.
     3. At-Will Employment. The Company and Executive acknowledge that Executive’s employment is and will continue to be at-will, as defined under applicable law. If Executive’s employment terminates for any reason, including (without limitation) any
Page 4 of 12

 
termination prior to a Change of Control, Executive will not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or by law.
     4. Duties and Scope of Employment.
          (a) Positions and Duties. As of the Effective Date, Executive will serve as                     of the Company. Executive will render such business and professional services in the performance of his or her duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the Board.
          (b) Obligations. While Executive is employed by the Company, Executive will (i) perform his or her duties faithfully and to the best of his or her ability and will devote his or her full business efforts and time to the Company, and (ii) not engage in any other employment, occupation or consulting activity for any material direct or indirect remuneration without the Board’s prior approval.
     5. Compensation.
          (a) Base Salary. While Executive is employed by the Company, the Company will pay Executive an annual salary as determined in the discretion of the Board or any committee thereof. The base salary will be paid periodically in accordance with the Company’s normal payroll practices and will be subject to the usual, required withholding. Executive’s salary will be subject to review and adjustments will be made based upon the Company’s normal performance review practices.
          (b) Performance Bonus. Executive will be eligible to receive an annual bonus and other bonuses, less applicable withholding taxes, as determined by the Board or any committee thereof in the Board’s or such committee’s sole discretion.
          (c) Equity Compensation. Executive will be eligible to receive stock option grants, and other equity compensation awards, as determined by the Board or any committee thereof in the Board’s or such committee’s sole discretion.
     6. Employee Benefits. While Executive is an employee of the Company, Executive will be entitled to participate in the Benefit Plans currently and hereafter maintained by the Company of general applicability to other Officers, subject to any eligibility or other terms of such Benefit Plans. The Company reserves the right to cancel or change the Benefit Plans it offers to its employees at any time.
     7. Vacation. Executive will be entitled to vacation in accordance with the Company’s vacation policy, with the timing and duration of specific vacations mutually and reasonably agreed to by the parties hereto.
     8. Expenses. The Company will reimburse Executive for reasonable travel, entertainment or other expenses incurred by Executive in the furtherance of or in connection with the performance of Executive’s duties as an employee of the Company, in accordance with the Company’s expense reimbursement policy as in effect from time to time.
Page 5 of 12

 
     9. Severance Benefits.
          (a) Involuntary Termination Following a Change of Control. If within eighteen (18) months following a Change of Control:
 	(X)	 	(i) Executive terminates his or her employment with the Company (or any parent or subsidiary of the Company) for Good Reason, or	
 	 	 	 	
 	 	 	(ii) the Company (or any parent or subsidiary of the Company) terminates Executive’s employment for other than Cause; and	
 	 	 	 	
 	(Y)	 	Executive signs and does not revoke a standard release of claims with the Company in a form reasonably acceptable to the Company;	
then Executive will receive the following severance from the Company:
                    (i) Severance Payment. Executive will be entitled to (A) receive continuing payments of severance pay (less applicable withholding taxes) at a rate equal to Executive’s base salary rate, as then in effect, for a period of eighteen (18) months from the date of such termination, to be paid periodically in accordance with the Company’s normal payroll policies; and (B) a lump-sum payment equal to 100% of Executive’s target annual bonus as of the date of such termination.
                    (ii) Equity Awards. All of Executive’s then-outstanding equity awards, including, without limitation, stock options and restricted stock awards, will immediately vest and, if applicable, become exercisable, as to 100% of such award.
                    (iii) Continued Employee Benefits. Executive will receive Company-paid coverage for Executive and Executive’s eligible dependents under the Company’s Benefit Plans for a period equal to the shorter of (A) eighteen (18) months, and (B) such time as Executive secures employment with benefits substantially similar, taken as a whole, to those provided under the Company’s Benefit Plans at that time.
          (b) Timing of Severance Payments.
                    (i) General. Any lump-sum severance payment to which Executive is entitled will be paid by the Company to Executive in cash and in full, within ten (10) calendar days after the date of the termination of Executive’s employment as provided in Section 9(a), or if later, the effective date of the release of claims, and any other severance payments will be paid in accordance with normal payroll policies as provided in Section 9(a). If Executive should die before all amounts have been paid, such unpaid amounts will be paid in a lump-sum payment to Executive’s designated beneficiary, if living, or otherwise to the personal representative of Executive’s estate.
                    (ii) Section 409A.
Page 6 of 12

 
                         (A) Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then the severance payable to Executive, if any, pursuant to this Agreement, together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “ Deferred Compensation Separation Benefits ”) that would otherwise be payable within the first six (6) months following Executive’s termination of employment, will instead become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s termination of employment. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following his or her termination but prior to the six (6) month anniversary of his or her termination, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
                         (B) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above.
                         (C) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above.
                         (D) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.
          (c) Voluntary Resignation; Termination for Cause. If Executive’s employment terminates within eighteen (18) months following a Change of Control (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive will not be entitled to receive severance or other benefits, except for those as may then be established under the Company’s then existing severance plans and Benefits Plans or pursuant to other written agreements with the Company.
          (d) Disability; Death. If the Company terminates Executive’s employment as a result of Executive’s Disability, or Executive’s employment terminates due to his or her death, then Executive will not be entitled to receive severance or other benefits, except for those as may
Page 7 of 12

 
then be established under the Company’s then existing written severance and Benefits Plans or pursuant to other written agreements with the Company.
          (e) Termination Apart from Change of Control. If Executive’s employment terminates for any reason, either prior to the occurrence of a Change of Control or after the eighteen (18) month period following a Change of Control, then Executive will be entitled to receive severance and any other benefits only as may then be established under the Company’s existing written severance plans and Benefits Plans, if any, or pursuant to any other written agreements with the Company.
          (f) Exclusive Remedy. If Executive’s employment terminates within eighteen (18) months following a Change of Control, the provisions of this Section 9 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or the Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive will be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change in Control other than those benefits expressly set forth in this Section 9.
     10. Conditional Nature of Severance Payments.
          (a) Invention Agreement. If Executive is in material breach of the Invention Agreement, including, without limitation, Executive’s obligations of confidentiality and of non-solicitation contained in the Invention Agreement, then upon such breach by Executive: (i) Executive will refund to the Company all cash paid to Executive pursuant to Section 9 of this Agreement; and (ii) all severance benefits pursuant to this Agreement will immediately cease.
          (b) Non-Competition. Executive acknowledges that the nature of the Company’s business is such that if Executive were to become employed by, or substantially involved in, the business of a competitor of the Company during the eighteen (18) months following the termination of Executive’s employment, it would be very difficult for Executive not to rely on or use the Company’s trade secrets and confidential information. Accordingly, to avoid the inevitable disclosure of the Company’s trade secrets and confidential information, Executive agrees and acknowledges that Executive’s right to receive the severance payments set forth in this Agreement (to the extent Executive is otherwise entitled to such payments) will be conditioned upon Executive not directly or indirectly engaging in (whether as an employee, consultant, agent, proprietor, principal, partner, stockholder, corporate officer, director or otherwise), nor having any ownership interest in or participating in the financing, operation, management or control of, any person, firm, corporation or business that directly competes with the Company or is a customer of the Company during such 18-month period. Notwithstanding the foregoing, Executive may own, directly or indirectly, up to 2% of the capital stock of a company that directly competes with the Company, provided such capital stock is traded on a national securities exchange or through the automated quotation system of a registered securities association. Upon any breach of this Section, (i) Executive will refund to the Company all cash paid to Executive pursuant to Section 9 of this Agreement; and (ii) all severance payments pursuant to this Agreement will immediately cease.
Page 8 of 12

 
     11. Limitation on Payments. If the severance and other benefits provided for in this Agreement or otherwise payable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code, and (ii) but for this Section 11, would be subject to the excise tax imposed by Section 4999 of the Code, then Executive’s severance benefits will be either:
          (a) delivered in full, or
          (b) delivered as to such lesser extent which would result in no portion of such severance benefits being subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the excise tax imposed by Section 4999, results in the receipt by Executive on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and Executive otherwise agree in writing, any determination required under this Section 11 will be made in writing by the Company’s independent public accountants immediately prior to Change of Control (the “ Accountants ”), whose determination will be conclusive and binding upon Executive and the Company for all purposes. For purposes of making the calculations required by this Section 11, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is a “substantial authority” tax reporting position. The Company and Executive will furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company will bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 11. If there is a reduction pursuant to this Section 11 of the severance benefits to be delivered to Executive, such reduction will first be applied to any cash amounts to be delivered to Executive under this Agreement and thereafter to any other severance benefits of Executive hereunder.
     12. Invention and Arbitration Agreements. Executive agrees and acknowledges that the Invention Agreement and the Arbitration Agreement will continue in full force and effect and Executive agrees to abide by the terms thereof.
     13. Successors.
          (a) The Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume the obligations and rights under this Agreement and agree expressly to perform the obligations under this Agreement in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets that executes and delivers an agreement setting forth the assumption described above or that becomes bound by this Agreement by operation of law.
Page 9 of 12

 
          (b) Executive’s Successors. This Agreement and all rights of Executive hereunder will inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
     14. Notice.
          (a) General. Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of its Chief Executive Officer (or, if Executive holds the position of Chief Executive Officer, then to the Company’s General Counsel).
          (b) Notice of Termination. Any termination by the Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation will be communicated by a notice of termination to the other party hereto given in accordance with Section 14(a). Such notice will indicate the specific termination provision in this Agreement relied upon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice).
     15. Miscellaneous Provisions.
          (a) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor, except as otherwise contemplated in this Agreement, will any such payment be reduced by any earnings that Executive may receive from any other source.
          (b) Waiver and Modification. No provision of this Agreement will be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at another time.
          (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.
          (d) Entire Agreement. This Agreement, the Invention Agreement and the Arbitration Agreement constitute the entire agreement of the parties hereto with respect to their respective subject matter, and supersede in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to such subject matter.
          (e) Choice of Law. The laws of the State of California (without reference to its choice of laws provisions that would lead to the application of the laws of another State) will
Page 10 of 12

 
govern the validity, interpretation, construction and performance of, and any disputes in connection with, this Agreement.
          (f) Severability. If any provisions herein are found to be unenforceable on the grounds that they conflict with applicable laws, the parties intend that such provisions be replaced, reformed or narrowed so that their original business purpose can be accomplished to the extent permitted by law, and that the remaining provisions will not in any way be affected or impaired thereby.
          (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.
          (h) Advice of Counsel; Understanding of Obligations. Each party acknowledges that, in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel. This Agreement will not be construed against any party by reason of the drafting or preparation hereof. Executive represents that he or she has read and understood all of his or her obligations under this Agreement, the Invention Agreement and the Arbitration Agreement, and hereby confirms the reasonableness of the duration, scope and geographic coverage of such obligations.
          (i) Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.
[The remainder of this page is intentionally left blank. The signature page follows.]
Page 11 of 12

 
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below, to be effective as of the Effective Date.

COMPANY	 	CYTOKINETICS, INCORPORATED	 	 	
 	 	 	 	 	 	 	
 	 	By:	 	 	 	 	

 	 	Name:	 	 	 	 	

 	 	Title:	 	 	 	 	

EXECUTIVE	 	By:	 	 	 	 	

 	 	Name:	 	 	 	 	

 	 	Title:	 	 	 	 	
 	 	 	 	 	 	 	
Page 12 of 12

Exhibit 10.69
CYTOKINETICS, INCORPORATED
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
     This Amended and Restated Executive Employment Agreement (this “Agreement”) is made and entered into by and between Robert I. Blum (“ Executive ”) and Cytokinetics, Incorporated, a Delaware corporation (the “ Company ”), effective as of May 21, 2007 (the “ Effective Date ”).
BACKGROUND
     A. It is expected that the Company from time to time will consider a possible acquisition by another company or other change of control. The Board of Directors of the Company (the “ Board ”) recognizes that such consideration can be a distraction to Executive and can cause Executive to consider alternative employment opportunities. The Board has determined that it is in the Company’s and its stockholders’ best interests to assure that the Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat or occurrence of a change of control of the Company.
     B. The Board believes that it is in the Company’s and its stockholders’ the best interests of to provide Executive with an incentive to continue his or her employment and to motivate Executive to maximize the value of the Company upon a change of control for the benefit of its stockholders.
     C. The Board believes that it is in the Company’s the best interests to provide Executive with certain severance benefits upon Executive’s termination of employment following a change of control. These benefits will provide Executive with enhanced financial security and incentive and encouragement to remain with the Company notwithstanding a possible change of control.
     D. This Agreement is intended to supersede and replace in its entirety that certain Executive Employment Agreement by and between the Company and Executive dated May 21, 2007, in order to bring the compensation arrangements between the parties into conformance with Section 409A (as defined below) and clarify certain matters.
AGREEMENT
     The parties hereby agree as follows:
     1. Definition of Terms. The following capitalized terms referred to in this Agreement will have the following meanings:
          (a) “Arbitration Agreement” means the Arbitration Agreement by and between the Company and Executive, as may be amended from time to time, and any successor agreement thereto.
Page 1 of 12

 
          (b) “Benefit Plans” means plans, policies or arrangements that the Company sponsors (or participates in) and that immediately prior to Executive’s termination of employment provide Executive and/or Executive’s eligible dependents with medical, dental, vision and/or financial counseling benefits. Benefit Plans do not include any other type of benefit (including, but not by way of limitation, disability, life insurance or retirement benefits). A requirement that the Company provide Executive and Executive’s eligible dependents with coverage under the Benefit Plans will not be satisfied unless the coverage is no less favorable, taken as a whole, than that provided to other Officers at the same time during the period Executive is entitled to receive severance pursuant to this Agreement. The Company may, at its option, satisfy any requirement that the Company provide coverage under any Benefit Plan by reimbursing Executive’s premiums under Title X of the Consolidated Budget Reconciliation Act of 1985, as amended (“ COBRA ”) after Executive has properly elected continuation coverage under COBRA (in which case Executive will be solely responsible for electing such coverage for his or her eligible dependents).
          (c) “Cause” means any of the following:
               (i) Executive’s failure by to substantially perform Executive’s duties with the Company (other than due to Executive’s incapacity as a result of physical or mental illness for a period not to exceed 90 days);
               (ii) Executive’s engaging in conduct which is materially injurious to the Company, its business or reputation, or which constitutes gross misconduct;
               (iii) Executive’s material breach of this Agreement, the Invention Agreement or any other agreements between Executive and the Company;
               (iv) Executive’s material breach, or act or omission in material contravention of, the Company’s policies adopted by the Board or any committee thereof, including, without limitation, the Company’s Code of Ethics, Insider Trading Compliance Program, Disclosure Process and Procedures and Corporate Governance Guidelines;
               (v) Executive’s conviction for or admission or plea of no contest with respect to a felony; or
               (vi) Executive’s act of fraud against the Company, misappropriation of material property belonging to the Company, or act of violence against an officer, director, employee, contractor, agent or representative of the Company;
          provided, however, that if any of the foregoing events in (i), (iii) or (iv) are reasonably capable of being cured, such event will only be deemed to be “Cause” if the Company has provided written notice to Executive describing the nature of such event, and Executive fails to cure such event to the Company’s reasonable satisfaction within thirty (30) days of his or her receipt of such notice.
Page 2 of 12

 
          (d) “Change of Control” means the occurrence of any of the following:
               (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company’s then outstanding voting securities; or
               (ii) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or
               (iii) The consummation of the sale, lease or other disposition by the Company of all or substantially all the Company’s assets.
               (iv) Any action or event occurring within a two-year period, as a result of which fewer than a majority of the directors of the Company are Incumbent Directors. “ Incumbent Director ” means a director of the Board who either (A) is a director of the Board as of the Effective Date, or (B) is elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors whose election or nomination did not occur in connection with any transaction described in subsection (d)(i), (d)(ii) or (d)(iii) above.
          (e) “Code” means the Internal Revenue Code of 1986, as amended.
          (f) “Disability” means that Executive has been unable to perform his or her Company duties as the result of his or her incapacity due to physical or mental illness, and such inability, at least twenty-six (26) weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and reasonably acceptable to Executive or Executive’s legal representative. Termination resulting from Disability may only be effected after at least thirty (30) days’ written notice by the Company of its intention to terminate Executive’s employment. If Executive resumes the performance of substantially all of his or her duties hereunder before the termination of his or her employment becomes effective, the notice of intent to terminate will automatically be deemed to have been revoked.
          (g) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
          (h) “Good Reason” means the occurrence of any one or more of the following conditions, unless agreed to by Executive in writing or as set forth below:
 	(i)	 	A material diminution in the Executive’s base compensation;	
 	 	 	 	
 	(ii)	 	A material diminution in the Executive’s authority, duties or responsibilities;	
Page 3 of 12

 
 	(iii)	 	A material diminution in the authority, duties, or responsibilities of the supervisor to whom the Executive is required to report, e.g., a requirement that the Executive report to a corporate officer or employee instead of reporting directly to the board of directors of a corporation (or similar governing body with respect to an entity other than a corporation);	
 	 	 	 	
 	(iv)	 	A material diminution in the budget over which the Executive retains authority prior to such change;	
 	 	 	 	
 	(v)	 	A material change in the geographic location at which the Executive must perform the services (i.e., the relocation of Executive’s place of employment to a location more than 50 miles from the Company’s office location at the time of the Change of Control); or	
 	 	 	 	
 	(vi)	 	Any other action or inaction that constitutes a material breach by the Company or a successor entity of this Agreement;	
provided that, to establish “Good Reason,” Executive must give written notice of occurrence of the applicable event to the Company within ninety (90) days of the initial existence of the condition. If such condition is not cured to Executive’s reasonable satisfaction within thirty (30) days from the Company’s receipt of such notice, then Executive may exercise Executive’s rights under this Agreement to resign for Good Reason, provided that if Executive has not exercised such right within forty-five (45) days of the date of such notice, Executive will be deemed to have agreed to the occurrence of such event.
          (i) “Invention Agreement” means the Proprietary Information and Invention Assignment Agreement by and between the Company and Executive, as may be amended from time to time, and any successor agreement thereto.
          (j) “Officer” means an “officer” of the Company, as defined in Rule 16a-1(f) under the Exchange Act.
          (k) “Section 409A” means Section 409A of the Code and the final regulations and any guidance promulgated thereunder.
          (l) “Section 409A Limit” means two (2) times the lesser of: (i) Executive’s annualized compensation based upon the annual rate of pay paid to Executive during the Company’s taxable year preceding the Company’s taxable year of Executive’s termination of employment as determined under Treasury Regulation 1.409A-1(b)(9)(iii)(A)(1) and any Internal Revenue Service guidance issued with respect thereto; and (ii) the maximum amount that may be taken into account under a qualified plan pursuant to Section 401(a)(17) of the Code for the year in which Executive’s employment is terminated.
          (m) “Treasury Regulations” means Title 26 of the U.S. Code of Federal Regulations.
Page 4 of 12

 
     2. Term of Agreement. This Agreement will terminate upon the date that all of the obligations of the parties hereto with respect to this Agreement have been satisfied.
     3. At-Will Employment. The Company and Executive acknowledge that Executive’s employment is and will continue to be at-will, as defined under applicable law. If Executive’s employment terminates for any reason, including (without limitation) any termination prior to a Change of Control, Executive will not be entitled to any payments, benefits, damages, awards or compensation other than as provided by this Agreement or by law.
     4. Duties and Scope of Employment.
          (a) Positions and Duties. As of the Effective Date, Executive will serve as President and Chief Executive Officer of the Company. Executive will render such business and professional services in the performance of his or her duties, consistent with Executive’s position within the Company, as will reasonably be assigned to him by the Board.
          (b) Obligations. While Executive is employed by the Company, Executive will (i) perform his or her duties faithfully and to the best of his or her ability and will devote his or her full business efforts and time to the Company, and (ii) not engage in any other employment, occupation or consulting activity for any material direct or indirect remuneration without the Board’s prior approval.
     5. Compensation.
          (a) Base Salary. While Executive is employed by the Company, the Company will pay Executive an annual salary as determined in the discretion of the Board or any committee thereof. The base salary will be paid periodically in accordance with the Company’s normal payroll practices and will be subject to the usual, required withholding. Executive’s salary will be subject to review and adjustments will be made based upon the Company’s normal performance review practices.
          (b) Performance Bonus. Executive will be eligible to receive an annual bonus and other bonuses, less applicable withholding taxes, as determined by the Board or any committee thereof in the Board’s or such committee’s sole discretion.
          (c) Equity Compensation. Executive will be eligible to receive stock option grants, and other equity compensation awards, as determined by the Board or any committee thereof in the Board’s or such committee’s sole discretion.
     6. Employee Benefits. While Executive is an employee of the Company, Executive will be entitled to participate in the Benefit Plans currently and hereafter maintained by the Company of general applicability to other Officers, subject to any eligibility or other terms of such Benefit Plans. The Company reserves the right to cancel or change the Benefit Plans it offers to its employees at any time.
     7. Vacation. Executive will be entitled to vacation in accordance with the Company’s vacation policy, with the timing and duration of specific vacations mutually and reasonably agreed to by the parties hereto.
Page 5 of 12

 
     8. Expenses. The Company will reimburse Executive for reasonable travel, entertainment or other expenses incurred by Executive in the furtherance of or in connection with the performance of Executive’s duties as an employee of the Company, in accordance with the Company’s expense reimbursement policy as in effect from time to time.
     9. Severance Benefits.
          (a) Involuntary Termination Following a Change of Control. If within eighteen (18) months following a Change of Control:
 	(X)	 	(i) Executive terminates his or her employment with the Company (or any parent or subsidiary of the Company) for Good Reason, or	

 	(ii)	 	the Company (or any parent or subsidiary of the Company) terminates Executive’s employment for other than Cause; and	

 	(Y)	 	Executive signs and does not revoke a standard release of claims with the Company in a form reasonably acceptable to the Company;	
then Executive will receive the following severance from the Company:
               (i) Severance Payment. Executive will be entitled to (A) receive continuing payments of severance pay (less applicable withholding taxes) at a rate equal to Executive’s base salary rate, as then in effect, for a period of twenty-four (24) months from the date of such termination, to be paid periodically in accordance with the Company’s normal payroll policies; and (B) a lump-sum payment equal to 100% of Executive’s target annual bonus as of the date of such termination.
               (ii) Equity Awards. All of Executive’s then-outstanding equity awards, including, without limitation, stock options and restricted stock awards, will immediately vest and, if applicable, become exercisable, as to 100% of such award.
               (iii) Continued Employee Benefits. Executive will receive Company-paid coverage for Executive and Executive’s eligible dependents under the Company’s Benefit Plans for a period equal to the shorter of (A) twenty-four (24) months, and (B) such time as Executive secures employment with benefits substantially similar, taken as a whole, to those provided under the Company’s Benefit Plans at that time.
          (b) Timing of Severance Payments.
               (i) General. Any lump-sum severance payment to which Executive is entitled will be paid by the Company to Executive in cash and in full, within ten (10) calendar days after the date of the termination of Executive’s employment as provided in Section 9(a), or if later, the effective date of the release of claims, and any other severance payments will be paid in accordance with normal payroll policies as provided in Section 9(a). If Executive should die before all amounts have been paid, such unpaid amounts will be paid in a lump-sum payment to
Page 6 of 12

 
Executive’s designated beneficiary, if living, or otherwise to the personal representative of Executive’s estate.
               (ii) Section 409A.
                    (A) Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” within the meaning of Section 409A at the time of Executive’s termination (other than due to death), then the severance payable to Executive, if any, pursuant to this Agreement, together with any other severance payments or separation benefits that are considered deferred compensation under Section 409A (together, the “ Deferred Compensation Separation Benefits ”) that would otherwise be payable within the first six (6) months following Executive’s termination of employment, will instead become payable on the first payroll date that occurs on or after the date six (6) months and one (1) day following the date of Executive’s termination of employment. All subsequent Deferred Compensation Separation Benefits, if any, will be payable in accordance with the payment schedule applicable to each payment or benefit. Notwithstanding anything herein to the contrary, if Executive dies following his or her termination but prior to the six (6) month anniversary of his or her termination, then any payments delayed in accordance with this paragraph will be payable in a lump sum as soon as administratively practicable after the date of Executive’s death and all other Deferred Compensation Separation Benefits will be payable in accordance with the payment schedule applicable to each payment or benefit. Each payment and benefit payable under this Agreement is intended to constitute separate payments for purposes of Section 1.409A-2(b)(2) of the Treasury Regulations.
                    (B) Any amount paid under this Agreement that satisfies the requirements of the “short-term deferral” rule set forth in Section 1.409A-1(b)(4) of the Treasury Regulations will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above.
                    (C) Any amount paid under this Agreement that qualifies as a payment made as a result of an involuntary separation from service pursuant to Section 1.409A-1(b)(9)(iii) of the Treasury Regulations that do not exceed the Section 409A Limit will not constitute Deferred Compensation Separation Benefits for purposes of clause (i) above.
                    (D) The foregoing provisions are intended to comply with the requirements of Section 409A so that none of the severance payments and benefits to be provided hereunder will be subject to the additional tax imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. The Company and Executive agree to work together in good faith to consider amendments to this Agreement and to take such reasonable actions which are appropriate or desirable to avoid imposition of any additional tax or income recognition prior to actual payment to Executive under Section 409A.
          (c) Voluntary Resignation; Termination for Cause. If Executive’s employment terminates within eighteen (18) months following a Change of Control (i) voluntarily by Executive other than for Good Reason or (ii) for Cause by the Company, then Executive will not be entitled to receive severance or other benefits, except for those as may then
Page 7 of 12

 
be established under the Company’s then existing severance plans and Benefits Plans or pursuant to other written agreements with the Company.
          (d) Disability; Death. If the Company terminates Executive’s employment as a result of Executive’s Disability, or Executive’s employment terminates due to his or her death, then Executive will not be entitled to receive severance or other benefits, except for those as may then be established under the Company’s then existing written severance and Benefits Plans or pursuant to other written agreements with the Company.
          (e) Termination Apart from Change of Control. If Executive’s employment terminates for any reason, either prior to the occurrence of a Change of Control or after the eighteen (18) month period following a Change of Control, then Executive will be entitled to receive severance and any other benefits only as may then be established under the Company’s existing written severance plans and Benefits Plans, if any, or pursuant to any other written agreements with the Company.
          (f) Exclusive Remedy. If Executive’s employment terminates within eighteen (18) months following a Change of Control, the provisions of this Section 9 are intended to be and are exclusive and in lieu of any other rights or remedies to which Executive or the Company may otherwise be entitled, whether at law, tort or contract, in equity, or under this Agreement. Executive will be entitled to no benefits, compensation or other payments or rights upon termination of employment following a Change in Control other than those benefits expressly set forth in this Section 9.
     10. Conditional Nature of Severance Payments.
          (a) Invention Agreement. If Executive is in material breach of the Invention Agreement, including, without limitation, Executive’s obligations of confidentiality and of non-solicitation contained in the Invention Agreement, then upon such breach by Executive: (i) Executive will refund to the Company all cash paid to Executive pursuant to Section 9 of this Agreement; and (ii) all severance benefits pursuant to this Agreement will immediately cease.
          (b) Non-Competition. Executive acknowledges that the nature of the Company’s business is such that if Executive were to become employed by, or substantially involved in, the business of a competitor of the Company during the twenty-four (24) months following the termination of Executive’s employment, it would be very difficult for Executive not to rely on or use the Company’s trade secrets and confidential information. Accordingly, to avoid the inevitable disclosure of the Company’s trade secrets and confidential information, Executive agrees and acknowledges that Executive’s right to receive the severance payments set forth in this Agreement (to the extent Executive is otherwise entitled to such payments) will be conditioned upon Executive not directly or indirectly engaging in (whether as an employee, consultant, agent, proprietor, principal, partner, stockholder, corporate officer, director or otherwise), nor having any ownership interest in or participating in the financing, operation, management or control of, any person, firm, corporation or business that directly competes with the Company or is a customer of the Company during such 24-month period. Notwithstanding the foregoing, Executive may own, directly or indirectly, up to 2% of the capital stock of a company that directly competes with the Company, provided such capital stock is traded on a
Page 8 of 12

 
national securities exchange or through the automated quotation system of a registered securities association. Upon any breach of this Section, (i) Executive will refund to the Company all cash paid to Executive pursuant to Section 9 of this Agreement; and (ii) all severance payments pursuant to this Agreement will immediately cease.
     11. Golden Parachute Excise Tax Gross-Up. If the severance and other benefits provided for in this Agreement or otherwise payable to Executive constitute “parachute payments” within the meaning of Section 280G of the Code and will be subject to the excise tax imposed by Section 4999 of the Code (the “ Excise Tax ”), then Executive will receive from the Company (i) an additional cash payment sufficient to pay such  Excise Tax, and (ii) an additional payment sufficient to pay the cumulative Excise Tax and  all cumulative federal and state income taxes (including any interest and penalties imposed with respect to such taxes) arising from the payments made by the Company to Executive pursuant to this sentence ((i) and (ii) collectively, the “ Gross-Up Payment ”).  Unless the Company and Executive otherwise agree in writing, the determination of Executive’s Excise Tax liability and the amount of the Gross-Up Payment required to be paid under this Section will be made in writing by the Company’s accountants (the “ Accountants ”), which will provide detailed supporting calculations both to the Company and Executive within thirty (30) days after the Company’s receipt of notice from Executive that there has been a parachute payment, or such earlier time as the Company requests.  Executive will receive such Gross-Up Payment within thirty (30) days after receipt of the Accountants’ determination, but no later than the close of the calendar year following the calendar year in which Executive pays the applicable Excise Tax to the Internal Revenue Service (the “ IRS ”).  If the IRS determines that the Excise Tax incurred by Executive is greater or lesser than the amount so determined by the Accountants (“ Overpayment ” and “ Underpayment ,” respectively), each party agrees to promptly make such additional payment, including interest and any tax penalties, to the other party as the Accountants reasonably determine is appropriate to ensure that the net economic effect to Executive under this Section, on an after-tax basis, is as if the Excise Tax did not apply to Executive; provided, however, that any Underpayment will be made to Executive no later than the close of the calendar year following the calendar year in which the Executive pays the Underpayment to the IRS.  For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is a “substantial authority” tax reporting position.  The Company and Executive will furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section.  The Company will bear all costs the Accountants reasonably incur in connection with any calculations contemplated by this Section. 
     12. Invention and Arbitration Agreements. Executive agrees and acknowledges that the Invention Agreement and the Arbitration Agreement will continue in full force and effect and Executive agrees to abide by the terms thereof.
     13. Successors.
          (a) The Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets will assume the obligations and rights under this Agreement and agree expressly to perform the obligations under this Agreement
Page 9 of 12

 
in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this Agreement, the term “Company” will include any successor to the Company’s business and/or assets that executes and delivers an agreement setting forth the assumption described above or that becomes bound by this Agreement by operation of law.
          (b) Executive’s Successors. This Agreement and all rights of Executive hereunder will inure to the benefit of, and be enforceable by, Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
     14. Notice.
          (a) General. Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of Executive, mailed notices will be addressed to him or her at the home address which he or she most recently communicated to the Company in writing. In the case of the Company, mailed notices will be addressed to its corporate headquarters, and all notices will be directed to the attention of its Chief Executive Officer (or, if Executive holds the position of Chief Executive Officer, then to the Company’s General Counsel).
          (b) Notice of Termination. Any termination by the Company for Cause or by Executive for Good Reason or as a result of a voluntary resignation will be communicated by a notice of termination to the other party hereto given in accordance with Section 14(a). Such notice will indicate the specific termination provision in this Agreement relied upon, will set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the termination date (which will be not more than thirty (30) days after the giving of such notice).
     15. Miscellaneous Provisions.
          (a) No Duty to Mitigate. Executive will not be required to mitigate the amount of any payment contemplated by this Agreement, nor, except as otherwise contemplated in this Agreement, will any such payment be reduced by any earnings that Executive may receive from any other source.
          (b) Waiver and Modification. No provision of this Agreement will be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by Executive and by an authorized officer of the Company (other than Executive). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of any other condition or provision or of the same condition or provision at another time.
          (c) Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.
          (d) Entire Agreement. This Agreement, the Invention Agreement and the Arbitration Agreement constitute the entire agreement of the parties hereto with respect to their
Page 10 of 12

 
respective subject matter, and supersede in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written and whether expressed or implied) of the parties with respect to such subject matter.
          (e) Choice of Law. The laws of the State of California (without reference to its choice of laws provisions that would lead to the application of the laws of another State) will govern the validity, interpretation, construction and performance of, and any disputes in connection with, this Agreement.
          (f) Severability. If any provisions herein are found to be unenforceable on the grounds that they conflict with applicable laws, the parties intend that such provisions be replaced, reformed or narrowed so that their original business purpose can be accomplished to the extent permitted by law, and that the remaining provisions will not in any way be affected or impaired thereby.
          (g) Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income and employment taxes.
          (h) Advice of Counsel; Understanding of Obligations. Each party acknowledges that, in executing this Agreement, such party has had the opportunity to seek the advice of independent legal counsel. This Agreement will not be construed against any party by reason of the drafting or preparation hereof. Executive represents that he or she has read and understood all of his or her obligations under this Agreement, the Invention Agreement and the Arbitration Agreement, and hereby confirms the reasonableness of the duration, scope and geographic coverage of such obligations.
          (i) Counterparts. This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument.
[The remainder of this page is intentionally left blank. The signature page follows.]
Page 11 of 12

 
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year set forth below, to be effective as of the Effective Date.
 	 	 	 	 	 	 	 	 	
COMPANY	 	 	 	CYTOKINETICS, INCORPORATED	 	 	
 	 	 	 	 	 	 	 	 	
 	 	 	 	By:	 	/s/ James H. Sabry	 	 	

 	 	 	 	Name:	 	James H. Sabry, M.D., Ph.D.	 	 	

 	 	 	 	Title:	 	Chairman of the Board	 	 	

EXECUTIVE	 	 	 	By:	 	/s/ Robert I. Blum	 	 	

 	 	 	 	Name:	 	Robert I. Blum	 	 	

 	 	 	 	Title:	 	President and Chief Executive Officer	 	 	
 	 	 	 	 	 	 	 	 	
Page 12 of 12

EXHIBIT 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
     I, Robert I. Blum, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q of Cytokinetics, Incorporated;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 5, 2008

 	By:  	/s/ Robert I. Blum  	 	
 	 	Robert I. Blum 	 	
 	 	President and Chief Executive Officer
(Principal Executive Officer) 	 	

EXHIBIT 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002
     I, Sharon Barbari, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q of Cytokinetics, Incorporated;
     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a(f) and 15d-15(f)) for the registrant and have:
     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
     5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: August 5, 2008

 	By:  	/s/ Sharon Barbari  	 	
 	 	Sharon Barbari 	 	
 	 	Senior Vice President, Finance and Chief Financial Officer
(Principal Financial Officer) 	 	

EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18. U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     I certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Cytokinetics, Incorporated on Form 10-Q for the quarterly period ended June 30, 2008 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Cytokinetics, Incorporated.
Dated: August 5, 2008
 	 	 	 	 	
 	 	/s/ Robert I. Blum	 	 	
 	 	  Robert I. Blum	 	 	
 	 	President and Chief Executive Officer	 	 	
 	 	(Principal Executive Officer)	 	 	
 	 	 	 	 	
 	 	/s/ Sharon Barbari	 	 	
 	 	  Sharon Barbari	 	 	
 	 	Senior Vice President, Finance and Chief Financial Officer
(Principal Financial Officer)