10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended: December 31, 2007

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number: 000-51967

NOVACEA, INC.

(Exact name of registrant as specified in its charter)

Delaware	33-0960223
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

400 Oyster Point Boulevard, Suite 200

South San Francisco, California 94080

(650) 228-1800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

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

Title of each class	Name of exchange on which registered
Common Stock, par value $0.01 per share	The NASDAQ Stock Market LLC

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

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

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

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

The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant on June 30, 2007, the last business day of the registrant’s second fiscal quarter was: $222,250,916.

As of March 6, 2008 there were 25,696,498 shares of the registrant’s common stock outstanding.

Documents incorporated by reference: Items 10, 11, 12, 13, and 14 of Part III incorporate information by reference from the Proxy Statement to be filed with the Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) to Form 10-K.

TABLE OF CONTENTS

	Item No.		Page No.
PART I
	1.	Business	2
	1A.	Risk Factors	25
	1B.	Unresolved Staff Comments	48
	2.	Properties	48
	3.	Legal Proceedings	48
	4.	Submission of Matters to a Vote of Security Holders	48
PART II
	5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	49
	6.	Selected Financial Data	51
	7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	53
	7A.	Quantitative and Qualitative Disclosures About Market Risk	65
	8.	Financial Statements and Supplementary Data	66
	9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	93
	9A.	Controls and Procedures	93
	9B.	Other Information	94
PART III
	10.	Directors, Executive Officers and Corporate Governance	95
	11.	Executive Compensation	95
	12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	95
	13.	Certain Relationships and Related Transactions	95
	14.	Principal Accountant Fees and Services	95
PART IV
	15.	Exhibits and Financial Statement Schedules	96
EXHIBIT INDEX			96
SIGNATURES			99

Special Note Regarding Forward-Looking Statements

We have made statements in this Annual Report on Form 10-K in Item 1—“Business”, Item 1A—“Risk Factors”, Item 3—“Legal Proceedings”, Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operation” and in other sections of this Annual Report on Form 10-K that are forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

• delays or unfavorable results from our current and planned clinical trials;

• our ability to enter into and maintain relationships with third parties who are conducting our clinical trials;

• our ability to enroll patients for our clinical trials;

• our ability to implement and manage our sales and commercialization initiatives;

• the impact of competition and technological change;

• our relationships under our collaboration agreement;

• our relationships with our licensors;

• our relationships with our key suppliers;

• the timing of necessary regulatory clearances;

• coverage and reimbursement policies of governmental and private third-party payors, including the Medicare and Medicaid programs;

• general economic and business conditions, both nationally and in our markets;

• our ability to manage our growth and development;

• our ability to attract and retain key management and scientific personnel;

• existing and future regulations that affect our business; and

• other risk factors included under “Risk Factors” in this prospectus.

In addition, in this Annual Report on Form 10-K, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” “predict,” “potential” and similar expressions, as they relate to Novacea, Inc., our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

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PART I

Item 1. Business

Overview

We are a biopharmaceutical company focused on in-licensing, developing and commercializing novel therapies for the treatment of cancer. Our product portfolio features two clinical-stage oncology product candidates with worldwide rights, Asentar^™ and AQ4N, each of which is a potential treatment for certain types of cancer.

In May 2007, we signed an exclusive worldwide License, Development and Commercialization Agreement, or the Collaboration Agreement, with Schering Corporation, a wholly-owned subsidiary of Schering-Plough Corporation (“Schering”), for the development and commercialization of Asentar^™ (the “Collaboration Agreement”) in androgen-independent prostate cancer, or AIPC, earlier stages of prostate cancer, and in other types of cancers, including pancreatic cancer. Until November 2007, Asentar^™ was in its ASCENT-2 Phase 3 clinical trial for the treatment of androgen-independent prostate cancer, or AIPC, which is very similar to hormone refractory prostate cancer. AIPC is the stage of prostate cancer when the disease is no longer controlled by deprivation of male hormones and tends to progress rather rapidly, uniformly leading to death. In November 2007, we ended our ASCENT-2 Phase 3 clinical trial of Asentar^™ due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, we also suspended enrollment in our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar^™. Together with Schering, we are reviewing and analyzing the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis, we intend to decide with Schering whether or not to continue our development efforts with respect to Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement are discontinued, we would no longer recognize revenue from Schering related to the reimbursement of our related development efforts other than for the costs incurred by us for the wind-down of activities for the then ongoing Asentar^™ development programs. Additionally, in this situation, the period over which we plan to recognize revenues from the upfront payments received from Schering, which is currently estimated to be six years and represents the estimated period for which we believe we have significant obligations under the Collaboration Agreement, may be shortened to reflect any reduced future development period.

Our second product candidate, AQ4N, is in a Phase 1/2 clinical trial in glioblastoma multiforme, the most aggressive form of brain cancer, in combination with radiation and chemotherapy.

Our experienced team uses its expertise in oncology product development to identify, license and develop novel therapeutics with the potential to improve clinical outcomes for cancer patients. We also seek to develop anti-cancer agents that may reduce the toxicities associated with current treatments. In addition, we attempt to mitigate development risks for our product candidates by licensing product candidates with well-characterized mechanisms of action and supportive pre-clinical or clinical data. We believe that our oncology development expertise enables our team to design efficient clinical development and commercialization programs that could provide cancer patients with improved treatment options over current standards of care.

We were incorporated in Delaware in 2001. The terms “Novacea,” “our,” “us” and “we” refer to Novacea, Inc.

Product Development Programs

The following chart shows our existing clinical trials, with the lead indication, program status and commercial rights for each of our product candidates:

Product Candidate	Lead Cancer Indication	Program Status	Our Commercial Rights
Asentar™	Androgen-independent prostate cancer	Phase 3—Terminated	Worldwide, with Schering
	Advanced pancreatic cancer	Phase 2b—On hold	Worldwide, with Schering
AQ4N	Glioblastoma multiforme	Phase 1b/2a	Worldwide

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Our total research and development expenses for the years ended December 31, 2007, 2006, 2005, 2004 and 2003 were $36.1 million, $21.8 million, $17.8 million, $14.7 million and $10.9 million, respectively.

Asentar^™

Asentar^™ Background

Asentar^™ is a proprietary, convenient-to-use, high-dose oral formulation of calcitriol designed for cancer therapy. Calcitriol is a naturally occurring hormone and the most biologically active form of vitamin D. At normal levels in the body, the primary role of calcitriol is to act on the intestine, bone and kidney to increase serum calcium and decrease phosphate levels. Commercially available low-dose formulations of calcitriol have been used systemically for the management of calcium levels in end-stage renal disease since 1978.

While calcitriol has been used primarily for its calcium regulatory activities, it is also involved in a variety of other physiological processes. Calcitriol acts by binding to the vitamin D receptor, or VDR, a member of the nuclear receptor super family of transcription factors. VDR is found in over 30 tissues, including intestine, kidney, bone, brain, stomach, heart, pancreas, skin, colon, ovary, breast, prostate and activated lymphocytes. Once activated by calcitriol, VDR regulates transcription of a wide variety of genes, including several responsible for the growth and differentiation of normal and malignant cells.

Accordingly, calcitriol has exhibited effective anti-cancer activity at high dosage levels in multiple pre-clinical tumor models. These anti-cancer effects appear to result from calcitriol’s ability to induce differentiation, anti-proliferative activity, cell cycle arrest, decreased invasiveness, decreased metastases, and apoptosis. In addition, pre-clinical data indicate that transient high plasma levels are sufficient to induce anti-cancer activities in multiple tumor cell lines and in animal models of cancer including prostate, breast, colon, head and neck, lymphoma and myeloma. Several in vitro and in vivo pre-clinical evaluations have also demonstrated that high doses of calcitriol can be effective alone or in combination with widely-used chemotherapeutic agents, including the taxanes, the platinums, dexamethasone, doxorubicin, mitoxantrone, and gemcitabine, as well as nonsteroidal anti-inflammatory drugs.

In spite of these encouraging pre-clinical observations, the known side effects of high doses of calcitriol, primarily life-threatening excessive levels of calcium in the blood, or hypercalcemia, have prevented investigators from studying calcitriol in humans at the high dosage levels that appear to be required to induce anti-cancer effects. For example, previous studies for the treatment of cancer evaluated daily dosing of a marketed formulation of calcitriol known as Rocaltrol^®, or Rocaltrol, which is used in the treatment of renal disease, but the dose of Rocaltrol could be escalated only modestly when administered on consecutive days before the development of hypercalcemia in patients was observed.

Investigators at Oregon Health & Science University, or OHSU, overcame this obstacle in 1998 with the discovery of a novel and proprietary dosing regimen capable of delivering the high concentrations of calcitriol necessary to achieve an anti-cancer effect without inducing hypercalcemia. The proprietary dosing regimen used high doses of calcitriol administered once a week in order to achieve the transient levels of calcitriol in plasma necessary for an anti-cancer effect. This dosing regimen allowed the body to clear calcitriol before inducing hypercalcemia. In one of OHSU’s Phase 2 clinical trials, high-dose calcitriol was administered weekly to 37 AIPC patients in combination with weekly Taxotere^® or Taxotere. This combination trial not only showed that transient high concentrations of calcitriol could be delivered in humans safely, but also that levels of Prostate Specific Antigen, or PSA, a biomarker of prostate cancer, declined by 50% or greater in 81% of the patients. Activity in measurable disease and survival also suggested that the high-dose calcitriol and Taxotere combination may be more active than Taxotere alone, with a comparable safety profile. OHSU has patented and has patent applications pending for methods relating to the treatment of hyperproliferative diseases, which are diseases characterized by abnormal proliferation of cells, with the dosing regimen for calcitriol and analogs using its novel and proprietary dosing regimen capable of administering high doses of calcitriol without inducing hypercalcemia, which we refer to as high-dose pulse administration technology for calcitriol, or HDPA. Additionally, we refer to this method as an intermittent, dose intense administration of calcitriol.

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The OHSU trials demonstrated that HDPA allows for the delivery of therapeutic doses of calcitriol. However, there are significant limitations with commercially available formulations of calcitriol, including lack of convenient administration, inconsistent absorption and gastric complications. For example, during the OHSU trials, AIPC patients were required to ingest a high number of Rocaltrol capsules (e.g. 60 to 90) to achieve therapeutic doses, resulting in gastric and absorption complications.

We licensed exclusive, worldwide rights from OHSU to HDPA for use with calcitriol and its analogs, and we subsequently developed Asentar^™ as our proprietary formulation that we believe is capable of delivering in a single pill a predictable therapeutic level of calcitriol without the gastrointestinal and absorption complications associated with delivering high-dose pulse administration of commercially available formulations. We filed an investigational new drug application, or IND, for Asentar^™ in February 2002.

Asentar^™ in the Treatment of AIPC

Market Opportunity

According to the American Cancer Society, prostate cancer is the second leading cause of cancer death in men with approximately 218,890 new cases and 27,050 deaths in the United States expected in 2007. The mortality from this disease is expected to rise significantly in the United States with the aging of the “baby boomer” generation.

We believe the annual deaths from prostate cancer is a reasonable estimate for the number of new AIPC patients each year as patients rarely die of prostate cancer in the early stages of the disease.

Current Treatment

Prostate cancer is usually diagnosed by a PSA blood test or a digital rectal exam, followed by a biopsy. PSA is a substance produced primarily, if not solely, in the prostate gland, a high level of which may indicate the presence of cancer. Primary treatment of prostate cancer is usually either surgical removal or ablation through radiation of the prostate. When the disease is diagnosed early, primary treatment is most often curative. After primary treatment, patients continue to be followed by their physicians. If high levels of PSA are detected in periodic blood tests, it is an indication that cancerous cells may have spread beyond the prostate and that the cancer is recurrent.

For recurrent prostate cancer, androgen ablation therapy by surgical castration or medical intervention is often prescribed to retard the growth of the cancer at this stage of the disease and is generally effective in reducing PSA to or near undetectable levels. Androgen ablation therapy is generally effective for 12 to 18 months of treatment, when patients may again experience a rise in their PSA levels indicating that the prostate cancer is progressing. Upon progression to this stage, the patient is considered androgen-independent, which is referred to as androgen-independent prostate cancer, or AIPC. At this stage, patients become eligible for their initial treatment or first-line chemotherapy with Taxotere. The mortality of prostate cancer is primarily associated with patients at the AIPC-stage of the disease, as AIPC is uniformly fatal.

A number of treatments have been approved for AIPC. In 1981, estramustine was approved for palliative treatment of patients with metastatic and/or progressive carcinoma of the prostate. Beginning in 1996, the combination of mitoxantrone and prednisone was used for the palliation of symptoms related to progressive castrate metastatic disease and zoledronic acid was approved in 2001 for the palliative treatment of patients with documented bone metastases from solid tumors, in conjunction with standard hormone therapy. However, none of these approved agents have been shown in prospective randomized comparisons to prolong life.

In May 2004, Taxotere became the first agent approved in the United States for the treatment of AIPC that demonstrated an improvement in survival in a randomized Phase 3 clinical trial. The combination of Taxotere and prednisone was approved based on the results of an international, multicenter, Phase 3 clinical trial called

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TAX327 sponsored by Sanofi-Aventis S.A., or Sanofi-Aventis, in subjects with metastatic AIPC. The regimen of Taxotere every three weeks resulted in an observed median survival of 18.9 months and an estimated 32% improvement in overall survival compared to the mitoxantrone regimen. With Taxotere now established as the standard of care for first-line treatment in AIPC, a key focus of clinical research is to identify new approaches to build on the clinical benefits of Taxotere in this patient population.

The Opportunity for Asentar^™

Based on the results of our ASCENT clinical trial described below, we believed that the use of Asentar^™ in combination with weekly Taxotere would provide AIPC patients with an innovative cancer therapy that would have a favorable risk-to-benefit profile, prolonging survival while mitigating the toxicities and complications normally associated with chemotherapy and the morbidity of the underlying disease. In our ASCENT-2 clinical trial, we sought to confirm the survival and safety benefits attributed to the addition of Asentar^™ to weekly Taxotere that were observed in our ASCENT clinical trial. However, in November 2007, we ended our ASCENT-2 Phase 3 clinical trial of Asentar^™ due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, we also suspended enrollment in our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing trials involving the use of Asentar^™. Together with Schering, we will review and analyze the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis we intend to decide with Schering whether or not to continue our development efforts with respect to Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement with Schering are discontinued, the development programs for our other potential products are not covered under the Collaboration Agreement.

Development Status and Strategy

Our ASCENT-2 clinical trial was designed to confirm the survival and safety benefits observed in our ASCENT clinical trial. Our ASCENT-2 clinical trial was a randomized, open-label, multicenter trial in which we expected to enroll approximately 1,200 patients, or 600 patients per arm, at centers in the United States, Canada and Europe. As of the termination date of the ASCENT-2 trial in November 2007, we had enrolled approximately 950 AIPC patients at nearly 200 clinical trial sites. Our ASCENT-2 clinical trial was comparing the weekly dosing regimen of Asentar^™ and Taxotere, used in our ASCENT clinical trial, with the currently approved regimen for Taxotere, dosed every three weeks in combination with prednisone.

The primary endpoint of our ASCENT-2 clinical trial was Overall Survival, which is defined as the time between the date of randomization and the date of death, regardless of cause. We believe an improvement in Overall Survival is recognized as the most meaningful outcome in AIPC and was the endpoint used as the basis for approval by the FDA in 2004 of Taxotere, which is the current chemotherapeutic standard of care for the first-line treatment of AIPC.

We believed that the similarity of the designs of our ASCENT-2 clinical trial, our ASCENT clinical trial and Sanofi-Aventis’s TAX327 trial allowed us to use the results of the latter two trials to estimate the size and statistical power of our terminated ASCENT-2 clinical trial with reasonable confidence. The ASCENT-2 clinical trial featured an asymmetrical design, given that the weekly dosing regimen of Asentar^™ and Taxotere was compared to an every three week dosing regimen of Taxotere in combination with prednisone. As we review and analyze the data from the ASCENT-2 Phase 3 clinical trial along with Schering, in an attempt to determine the reason for the higher number of deaths in the treatment arm, the asymmetric design of the ASCENT-2 trial may prove to be a complicating factor in our ability to isolate definitively the impact and effect of each component of the two regimens in the trial.

Our ASCENT Clinical Trial

Our ASCENT clinical trial evaluated Asentar^™ in combination with weekly administration of Taxotere for the treatment of AIPC. We reported the results of our 250-patient, double-blind, placebo-controlled, multicenter ASCENT clinical trial at the American Society of Clinical Oncology meeting in May 2005.

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The two trial treatment arms were:

• Asentar^™ Arm. Once weekly Asentar^™ in a combination regimen with weekly Taxotere.

• Placebo Arm. Once weekly placebo in a combination regimen with weekly Taxotere.

The primary endpoint for the ASCENT trial was a 50% reduction in PSA Response by six months. In patients with AIPC, many clinicians use increasing levels of PSA as an indicator of disease progression. The ASCENT trial was designed to detect an increase in the frequency of PSA Response from 45% of the patients in the placebo arm to 65% of the patients in the Asentar^™ arm. Although PSA Response rate may not be predictive of a clinical benefit for AIPC patients and has not been an acceptable registration endpoint for the FDA, we chose this as our primary endpoint in order to confirm and extend the results of OHSU’s Phase 2 clinical trial. However, we also included in our ASCENT clinical trial several clinically meaningful secondary endpoints that have been acceptable registration endpoints for the FDA, including Overall Survival and Duration of Skeletal Related Event-Free Survival. Other secondary endpoints included time to PSA Response, Tumor Response in patients with measurable disease, as well as safety and tolerability of the study treatment.

Results from Our ASCENT Clinical Trial

In July 2004, after the last randomized subject had been followed for six months, we conducted the primary efficacy analysis, which showed that a PSA Response was achieved by 58% of the subjects in the Asentar^™ arm compared to 49% in the placebo arm. This demonstrated a favorable trend toward the Asentar^™ arm, but this primary endpoint did not reach statistical significance, with a p-value equal to 0.160. A p-value is a statistical measure of significance, with a p-value of less than 0.050 indicating a statistically significant difference. The odds ratio for PSA Response was 0.70, supporting this favorable trend. An odds ratio of less than 1.0 favors the Asentar^™ arm as compared to the placebo arm. Based on the fact that we did not achieve statistical significance with our primary endpoint, the FDA has indicated to us that they consider all secondary endpoints from our ASCENT clinical trial to be exploratory.

In evaluating the meaning of these PSA Response data, we considered what has been learned about this endpoint since the ASCENT study was designed in 2001. Analyses of the results from TAX327 and another large clinical trial in AIPC patients where survival benefit was measured in treatment regimens containing Taxotere as compared to a mitoxantrone regimen demonstrated that PSA response was a strong correlate for survival, but did not explain all of the survival benefit. Thus, the limitations of the PSA Response as a predictor of a survival benefit have become more apparent.

In April 2005, we completed the final analysis of our secondary endpoints. In our ASCENT clinical trial we observed a trend in favor of the Asentar^™ group in comparison to the placebo group in all pre-specified endpoints. Overall Survival for the Asentar^™ group over the placebo group did show a statistically significant improvement. The hazard ratio is a statistical measure of the risk ratio of deaths between the Asentar^™ group and the placebo group of the ASCENT trial. A hazard ratio of less than 1.0 indicates a reduction in the risk of death in the Asentar^™ group relative to the placebo group. The multivariate hazard ratio included pre-specified adjustments for patients’ baseline measurements for hemoglobin and Eastern Cooperative Oncology Group performance status. The median survival in the placebo group was 16.4 months. The median survival in the Asentar^™ group was not reached, but was estimated to be 24.5 months using the multivariate hazard ratio. Serious adverse events (SAEs) were reported in 27% of subjects in the Asentar^™ group and 41% of subjects in the placebo group, with an odds ratio of 0.54 and a p-value of 0.023. In addition, from an exploratory analysis, there was a significant reduction in the frequency of both serious gastrointestinal events, with a p-value of 0.017, and serious thromboembolic events, with a p-value of 0.031.

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The data on the survival endpoint is summarized in the following table:

Overall Survival Endpoint (1)	Placebo + Taxotere (n = 125)	Asentar™ + Taxotere (n = 125)	p-value
Hazard ratio—multivariate		0.67	0.035
Median survival (in months)—observed, and estimated using multivariate hazard ratio	16.4 (observed)	24.5 (estimated)

(1) Based on final secondary endpoint analysis in April 2005

The Kaplan-Meier plot of the duration of overall survival is depicted in the figure below:

In the Kaplan-Meier plot above, the vertical axis reflects the probability of survival. The horizontal axis displays the number of months from randomization to death for the patients in the trial. The point at which either the Asentar^™ group or placebo group curve or line reaches median survival, i.e. the 0.50 probability of survival, corresponds to the time in months on the horizontal axis at which half of the subjects have died in either the Asentar^™ or placebo group. As was noted above, the observed median survival for the placebo group was 16.4 months, and an observed median survival was not reached for the Asentar^™ group. The hazard ratio compares the Overall Survival curve of the Asentar^™ group to that of the placebo group and assumes its consistency over time. It is a better representation than median survival of the overall risk of death of a patient on the Asentar^™ arm compared to the placebo arm.

Other efficacy results and findings from our analysis in April 2005 trended in favor of the Asentar^™ group as compared to the placebo group, including: skeletal morbidity-free survival, with a hazard ratio of 0.78, and a p-value equal to 0.130; and tumor response rates, with an odds ratio of 0.74, and a p-value equal to 0.510. Skeletal Morbidity-Free Survival was defined as the time between the date of first dose received and the date on which the skeletal-related event occurred or the date of death from any cause, whichever occurred first.

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Safety Observations of ASCENT Clinical Trial

We made the following overall safety observations about Asentar^™:

• produced only low grade, or mild, levels of elevated blood calcium or hypercalcemia that were asymptomatic in all patients;

• added no detectable toxicities to Taxotere; and

• appeared to mitigate the toxicities associated with Taxotere and the morbidity of the underlying disease.

	Placebo + Taxotere (n = 125)		Asentar™ + Taxotere (n = 125)		p-value (1)
Serious Adverse Event Class	%	#	%	#
Subjects reporting at least one event	41	51	27	34	0.023
Gastrointestinal	10	12	2	3	0.017
Thromboembolic	7	9	2	2	0.031
Pulmonary	6	7	2	3	0.200
Infection	10	12	6	7	0.230
Central Nervous System	0	0	1	1	0.310
Multifactorial (2)	24	30	17	21	0.160
Bleeding	3	4	5	6	0.520
Neuropathic	0	0	0	0	1.000

(1) The p-value is for the comparison of the % of patients experiencing one or more Severe Adverse Events in the two trial arms of the ASCENT trial

(2) Multifactorial consists of all SAEs not otherwise classified above

These safety differences were initially observed by an independent Data Safety Monitoring Board early in the trial and subsequently by us during our safety analysis. In order to analyze the potential safety benefit of Asentar^™ an exploratory analysis was conducted in which the adverse events were grouped into certain clinically relevant categories to assess potential differences in the two trial arms.

Although the mechanisms by which observed beneficial effects of Asentar^™ on safety have not been fully elucidated, the reduction in thromboembolic events may be explained through the modulation of the extrinsic coagulation pathway by calcitriol. Calcitriol has been shown to up-regulate thrombomodulin, an anticoagulant, and down-regulate tissue factor, a procoagulant. The biological rationale for this activity by calcitriol was first characterized by a study in 1998. In addition, in studies of vitamin D receptor deficient “knockout” mice, the animals were observed to have a predisposition to thrombosis. Thus, the actions of calcitriol might be expected to reduce the incidence of complications of coagulation in an at-risk patient population. Given this body of data, we postulate that the differences observed in the frequency of thromboembolic events in the Asentar^™ group as compared to placebo group could represent the pharmacological effects of Asentar^™ on vascular events associated with thrombosis.

Given that Taxotere is known to cause gastrointestinal, or GI, adverse events in many treated patients, we sought a rationale to explain how Asentar^™ might prevent or reduce the severity of Taxotere-induced GI adverse events. One mechanism whereby Asentar^™ may reduce or prevent the GI toxicity of Taxotere is to reduce the rate of growth or induce temporary cell cycle arrest in the rapidly proliferative cells of the gastrointestinal tract rendering them less sensitive to the cytotoxic effects of Taxotere chemotherapy. Epidemiological and other studies have shown that higher levels of vitamin D metabolites are associated with reduced proliferation of epithelial cells in the gastrointestinal system.

In our ASCENT-2 clinical trial, we were attempting to confirm the results of our ASCENT clinical trial.

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Asentar^™ in Other Cancer Indications

Beyond our terminated ASCENT-2 clinical trial in AIPC, we were seeking to develop Asentar^™ broadly as a non-toxic, oral anti-cancer therapy and to study its potential in multiple cancers and in combination with several chemotherapeutic agents. In September 2007, we initiated a Phase 2 clinical trial in advanced pancreatic cancer. Additionally, there were several investigator-sponsored trials for Asentar^™ ongoing in, or planned for 2007. As a precautionary measure related to the termination of our ASCENT-2 clinical trial of Asentar^™ in AIPC in November 2007, we suspended at that time the enrollment of our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and each of the other ongoing investigator-sponsored trials involving the use of Asentar^™, including investigator-sponsored trials in patients with: hormone refractory prostate cancer, in combination with every three week dosing of Taxotere; recurrent prostate cancer, in combination with Naprosyn^®, a non-steroidal anti-inflammatory drug; early prostate cancer, and: lung cancer, classified as high-risk.

AQ4N

We are developing AQ4N as a novel, tumor-selective prodrug with applicability to multiple tumor types, both in combination with a number of chemotherapeutic agents and as a monotherapy for hematological malignancies. AQ4N is an inert, oxidized derivative of AQ4, a well-characterized Topoisomerase II inhibitor which exhibits potent cytotoxicity comparable to other marketed Topoisomerase II inhibitors such as Novantrone^® mitoxantrone and Adriamycin^® doxorubicin.

AQ4N Background

The oxidation of, or presence of oxygen on, the two nitrogens within the chemical structure of AQ4N modifies the positive charge on the tertiary nitrogens causing AQ4 to be inert and inactive, as the positive charges are necessary for AQ4 binding to DNA and for the inhibition of Topoisomerase II activity. AQ4N remains inactive in the body unless it is in the presence of severely reduced oxygen levels called severe hypoxia. Hypoxia exists in some portions or regions in solid tumors that are greater than two millimeters in size. These hypoxic regions of solid tumors have distinctive characteristics that are associated with poor perfusion of oxygen and nutrients, increased production of lactic acid, poor growth, and resistance to the damaging effects of irradiation or chemotherapy. These characteristics stem from the disordered vasculature, or arrangement of the blood vessels, and blood flow that is characteristic of solid tumors. When AQ4N encounters a severely hypoxic region in a tumor, the oxygens of AQ4N are enzymatically removed, releasing AQ4 that subsequently produces cytotoxic effects at the site of activation.

Since normal tissues in the body do not exhibit severe hypoxia, AQ4N does not undergo appreciable activation in normal tissues, thereby enabling it to potentially behave as a “tumor selective” prodrug. For reasons that are not completely understood, certain cells derived from malignant hematological malignancies also appear to activate AQ4N, even in the absence of severe hypoxia. These malignant cells are much more sensitive to the cytotoxic effects of AQ4 and other Topoisomerase II inhibitors than cells derived from solid tumors.

The Opportunity for AQ4N

We believe AQ4N may offer the following therapeutic and commercial benefits:

• novel, proprietary anti-cancer agent with tumor-selective activation at the cellular level in hypoxic tumor cells and lymphoid tissues to yield cytotoxic concentrations of AQ4;

• minimizes systemic toxicity by selectively activating only in hypoxic tumors;

• potent Topoisomerase II inhibitor and DNA intercalator;

• long half-life and schedule independence;

• demonstrated in vivo anti-tumor activity as monotherapy in solid tumor and lymphoma models;

• clinical data demonstrating additive benefit to radiation and chemotherapy regimens; and

• superior safety profile to conventional cytotoxics in humans and animals due to AQ4N’s activation only in tumor cells.

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We believe that AQ4N has the potential to work on multiple solid tumor types as a monotherapy and in combination with other chemotherapies and radiation treatments. We are pursuing a development strategy that we believe may provide the quickest regulatory pathway for AQ4N.

AQ4N is a Tumor Targeting Prodrug. AQ4N is designed to be an intravenously-administered, tumor-selective, prodrug that is activated preferentially in hypoxic cells or some hematological cells. Data collected to date shows that AQ4N is soluble in water and fat and diffuses into most, if not all, of the various tissues and cells in the body, effectively delivering the prodrug to all tissues, normal and malignant, even crossing the blood brain barrier.

AQ4N Targets Hypoxic Tumors. Hypoxia is an important distinguishing characteristic of tumors that limits the effectiveness of radiation and chemotherapy treatments. In vitro data indicate that the level of response to radiation and/or chemotherapy in hypoxic cells is one-third that of normally oxygenated, or normoxic, cells, thus limiting the effectiveness of these therapies. This lower response can be attributed to the fact that hypoxic cells replicate slower than normoxic cells making them less vulnerable to the chemotherapeutic agents that target rapidly dividing cells. In addition, oxygen plays a key role in the response of tumors to radiation and/or chemotherapy by facilitating the free radical damage that kills cells after radiation and some chemotherapies. Given that normal levels of oxygen play an important role in killing malignant cells, hypoxic cells are more likely to survive and then regrow, leading to treatment failure. AQ4N potentially addresses a significant unmet medical need, as few treatments effectively target the hypoxic cell populations of tumors.

AQ4N Appears to Have a Favorable Safety Profile. We believe that an important differentiating feature of AQ4N is that, since its activation is primarily intracellular, the opportunity for systemic toxicity should be reduced significantly in comparison to most cytotoxic chemotherapies. When not activated, AQ4N diffuses out of the tissues and is excreted as the inactive agent in the bile and urine. In clinical trials to date, AQ4N has demonstrated a relatively safe profile. The most notable side effect observed to date is a transient blue discoloration to patients’ skin.

AQ4, the Potent Cytotoxic Agent of AQ4N. When AQ4N is converted into its active form, AQ4 is designed to act as a Topoisomerase II inhibitor, a class of anti-cancer agents that have been used for many years for the treatment of tumors. Topoisomerase II inhibitors act as chemotherapies by inhibiting Topoisomerase II, a DNA processing enzyme crucial to cell division. Many malignancies, such as breast cancer, ovarian cancer, non-Hodgkin’s lymphoma, acute myeloid leukemia, non-small cell lung cancer and colorectal cancer, have been found to over express Topoisomerase II and should be appropriate indications for AQ4N treatment. While Topoisomerase II inhibitors such as doxorubicin, daunorubicin, and mitoxantrone are commonly used to treat breast cancer, leukemia, and lymphoma, their use is limited by toxicities such as myelosuppression.

AQ4N Appears to Enhance the Effect of Radiation and Chemotherapy. Pre-clinical experiments have demonstrated in hypoxic conditions that adding AQ4N to radiation or platinum chemotherapy treatment doubled the time it takes for a fixed number of cells to increase by two fold as compared to applying either treatment modality alone.

In addition, because AQ4 has a relatively long half-life, which is the time required for half the amount of AQ4 in the system to be eliminated naturally, we believe that AQ4 should produce long-lasting anti-cancer effects in those cells in which AQ4N has become activated. This should lead to a favorable pharmacological property known as “schedule independence”, which means that physicians would have flexibility in administering AQ4N in combination with other therapies, including radiation and chemotherapy.

AQ4N Development Status and Strategy

We are responsible for the development and commercialization of AQ4N worldwide. In December 2003, we entered into a license agreement with KuDOS Pharmaceuticals Limited, or KuDOS, which was acquired in early 2006 by AstraZeneca PLC. Under this license agreement, we obtained exclusive, royalty-bearing licenses to certain KuDOS patents and know-how acquired or to be acquired by KuDOS from a third party to our AQ4N product candidate for all human therapeutic, prophylactic and diagnostic uses in the United States, Canada and Mexico. In April 2007, we entered into an assignment of KuDOS’ ownership of rights, title and interests in

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patents and know-how related to AQ4N. Relatedly, in April 2007, we entered into a novation and license agreement with BTG International Limited, or BTG, the primary licensor to KuDOS regarding AQ4N. Under the novation and license agreement, we acquired the worldwide exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases. Together with KuDOS and later, AstraZeneca PLC, we have completed several Phase 1 clinical trials. We have demonstrated that both weekly and every three week dosing has been well tolerated in advanced solid tumor malignancies and in patients with refractory B-cell malignancies, some of whom have a decreased bone marrow reserve. KuDOS has completed a Phase 1 two-dose, dose escalation clinical trial in combination with fractionated radiation in esophageal carcinoma at two sites in the United Kingdom. KuDOS has completed several biopsy studies in patients with a variety of tumor types and has also conducted safety and activity seeking studies with AQ4N in combination with chemotherapy. We believe that, based on the combined studies to date, the safety and dosing of AQ4N have been confirmed.

Based on these findings, the severity of the unmet medical need and the potential for a rapid route to approval, we started a Phase 1/2 clinical trial in the fourth quarter of 2006 that will evaluate AQ4N in the treatment of glioblastoma multiforme. This trial will combine AQ4N with radiation and temozolomide chemotherapy. In October 2007, we initiated a Phase 2 clinical trial of AQ4N for the treatment of acute lymphobastic leukemia, or ALL, however, this trial was discontinued in January 2008 in connection with our decision to scale back clinical development activities for AQ4N in order to preserve capital resources.

Prior and Ongoing Phase 1 Studies of AQ4N

We are studying AQ4N as a monotherapy and in combination with other chemotherapy agents and/or radiation. We and our collaborator, AstraZeneca, have conducted safety and dosing studies of AQ4N both as a monotherapy and in combination with chemotherapy and/or radiation. To date, three Phase 1 studies of AQ4N alone and one Phase 1 study of AQ4N in combination with irradiation are complete. There are two ongoing studies in patients with bladder cancer: one with AQ4N in combination with cisplatin chemotherapy, and; one with AQ4N in combination with radiation therapy. The results of the four completed Phase 1 studies were presented at scientific meetings in 2005 and 2006.

One of the Phase 1 studies noted above was a pharmacodynamic study in which the purpose was to assess the amount of tumor-selective activation of AQ4N to AQ4 and also to assess the degree of activation and deposition of AQ4 within malignant tissue. In this study, a single dose of 200 milligrams per meter squared of AQ4N was administered on the day before patients were scheduled to undergo a surgical resection, or removal, of their primary tumor for medical reasons. At the time of the surgical procedure, samples of the tumors, adjacent normal organs, and skin were obtained to assess the amounts of AQ4 and AQ4N that were present in the tissues, as determined by quantitative validated assays. In addition, the location of AQ4 was assessed by immunofluorescence in the tumor tissue and correlated with the presence or absence of immunochemical determinations of markers indicative of hypoxia such as Glucose transporter-1, or GLUT-1, protein expression and carbonic anhydrase IX expression.

The quantitative analyses for AQ4N and AQ4 from samples from eight patients with brain tumors demonstrated the tumor selective activation of AQ4N, producing several fold greater amounts of AQ4 in the brain tumor samples, as compared to the adjacent normal brain tissues. The amounts of AQ4 in the brain tumor samples approached or exceeded those that produced cytotoxicity in a variety of solid tumor cell lines in tissue culture assays. The immunofluorescence studies of the brain tumors showed that AQ4 fluorescence was heterogeneous or “patchy” and occurred primarily in regions that were also characterized by the expression of GLUT-1.

Our Ongoing AQ4N Clinical Trial in Glioblastoma Multiforme, or GBM

The study described above provides evidence that AQ4N appears to cross the blood brain barrier, to penetrate into the brain tumor, and to undergo bioreduction to the active form AQ4. Previous preclinical studies show that AQ4N can combine with radiation or chemotherapy to enhance the antitumor effects of these treatment

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modalities. Glioblastoma multiforme is one of the most aggressive and rapidly progressing tumors, with the median survival of less than one year for newly diagnosed cases despite intensive treatment with radiation and chemotherapy with temozolomide, which is a chemotherapy.

We believe that AQ4N may add significantly to the standard treatment of patients with GBM and we initiated in late 2006 a multicenter, Phase1b/2a open-label clinical trial of AQ4N, in combination with radiotherapy and temozolomide, for safety, tolerability and activity in patients with newly diagnosed GBM. The primary objective of the first part of the trial will be to evaluate safety and tolerability of three dose levels: 200, 450 and 750 milligrams per meter squared. The second part of the trial will further evaluate safety and tolerability as well as efficacy at the highest safe and tolerated dose of the AQ4N treatment determined in the first part of the trial.

We have completed the first two cohorts of the Phase 1b/2a GBM study without any dose limiting toxicities, or DLTs, dosing patients at 200 milligrams per meter squared and 450 milligrams per meter squared of AQ4N once-weekly for six weeks in combination with a standard regimen of radiation therapy and temozolomide. Seven subjects have been treated in the protocol-defined final dose cohort of 750 milligrams per meter squared without any DLTs to date. Assuming no DLTs are found in this cohort, 750 milligrams per meter squared will be the dose taken forward in the Phase 2a portion of the study. In the Phase 1b portion of the study, six patients received 200 milligrams per meter squared of AQ4N and one patient has not experienced disease progression after approximately 11 months of treatment and follow-up. At the 450 milligrams per meter squared dose level, three of seven patients have not experienced disease progression after approximately six to nine months of treatment and follow-up. At the 750 milligrams per meter squared dose level, six of seven patients have not experienced disease progression after approximately one to five months of treatment and follow-up.

Our Potential AQ4N Clinical Trials in Hematological Malignancies

We are currently investigating why some malignant cells obtained from leukemias or lymphoid organs activate AQ4N to AQ4 in the absence of severe hypoxia. These cells are also relatively sensitive to AQ4 as compared to cells derived from solid tumors. Additionally, a completed Phase 1 study of AQ4N in patients with refractory B-cell malignancies showed that AQ4N appears well-tolerated, with one patient achieving a partial response. Taken together, preclinical studies and the limited human experience provide rationale for the future evaluation of AQ4N as therapy in patients with hematological malignancies.

Market Opportunity

The large majority of solid tumors have hypoxic areas, which are relatively resistant to standard anti-cancer treatment, including radiation therapy and chemotherapy. An agent that treats the hypoxic areas of tumors and effectively combines with other agents to enhance their anti-cancer activities should increase the overall efficiency of cancer cell killing, reduce tumor recurrence and improve the prognosis for a significant number of patients with cancer.

According to the American Cancer Society, an estimated 20,500 new cases and 12,740 deaths from brain and other nervous system tumors will occur in the United States in 2007. Brain tumors account for 85% to 90% of all primary central nervous system tumors and GBM is the most commonly diagnosed brain tumor. GBM is one of the most aggressive and rapidly progressing tumors, with the median survival for newly diagnosed cases of less than one year. Given the aggressive nature of GBM, the relatively small patient population and the lack of effective therapies, we believe that AQ4N may provide us with an accelerated development path as a first-line therapy in an orphan drug indication.

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Corporate Strategy

Our goal is to reduce death and suffering of cancer patients through treatment with our novel, proprietary product candidates. Key elements of our strategy include:

• Assess the viability of future clinical development of Asentar^™  In November 2007, we ended our ASCENT-2 Phase 3 clinical trial of Asentar^™ in AIPC due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, we also suspended enrollment in our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing trials involving the use of Asentar^™. Together with Schering, we are reviewing and analyzing the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis, we intend to decide with Schering whether or not to continue our development efforts with respect to Asentar^™.

• Advance the clinical development of AQ4N. We will seek to develop AQ4N as an adjunct to standard radiation and chemotherapy in the treatment of cancer.

• Identify new opportunities and evaluate strategic alternatives to acquire products and product candidates that complement our existing portfolio.

• Expand our proprietary technology and intellectual property position. Our patent portfolio, on a worldwide basis, includes 67 issued patents and approximately 183 pending patent applications.

• Manage carefully our capital resources as we evaluate strategic alternatives.

Sales and Marketing

We have worldwide rights to Asentar^™ and to AQ4N. Initially, we believe that our products can be effectively marketed in North America with an adequately sized marketing and sales organization that would specifically target medical oncologists, the primary prescribers for each of our product candidates. We currently have limited marketing, sales or distribution capabilities. In order to commercialize any of our product candidates, we plan to develop these capabilities internally or through collaborations with third parties.

Outside of North America, we will evaluate whether to establish our own sales and marketing organization or collaborate with third parties to market and sell our products that receive regulatory approval.

License and Collaboration Agreements

Schering Corporation

In May 2007, we entered into an exclusive worldwide License, Development and Commercialization Agreement, or the Collaboration Agreement, with Schering Corporation, a wholly-owned subsidiary of Schering-Plough Corporation, or Schering, for the development and commercialization of Asentar^™ in androgen-independent prostate cancer, or AIPC, earlier stages of prostate cancer, and in other types of cancers, including pancreatic cancer.

The Collaboration Agreement became effective on June 26, 2007, following clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In July 2007, we received non-refundable upfront payments from Schering totaling $60 million, of which $35 million was reimbursement for past research and development expenses and $25 million was a license fee. We will recognize revenues from the upfront payments ratably over an estimated six-year development period starting on June 26, 2007 and ending on June 30, 2013. We believe that this period for revenue recognition represents substantially the entire period for which we have significant participatory obligations for Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement are discontinued, we would no longer recognize revenue from Schering related to the reimbursement of our related development efforts other than for the costs incurred by us for the wind-down of activities for the then ongoing Asentar^™ development programs. Additionally, in this situation, the period over which we plan to recognize revenues from the upfront payments received from Schering, which is currently estimated to be six

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years and represents the estimated period for which we believe we have significant obligations under the Collaboration Agreement, may be shortened to reflect any reduced future development period. The revenue recognized in connection with the upfront payment for the period from the effective date of June 26, 2007 through December 31, 2007 was $5.2 million. Revenue from reimbursement for our R&D efforts on Asentar^™ is recognized as the related costs are incurred. The revenue from reimbursement for our R&D efforts on Asentar^™ during the year ended December 31, 2007 was $11.5 million, which amount is recorded as a receivable from Schering as of December 31, 2007. The balance includes $6.1 million related to our R&D effects in the third quarter of 2007, for which payment was received in January 2008, and $5.4 million related to the fourth quarter of 2007. All payments received from Schering are nonrefundable. We are also eligible to receive up to $380 million in pre-commercial milestone payments, as well as royalties on worldwide sales of Asentar^™ based on tiered royalty percentage rates that range from the high teens to the mid-twenties, depending on annual product sales levels. In addition to customary termination provisions for breach or bankruptcy, Schering may terminate the Collaboration Agreement if Schering reasonably determines (i) that there is a significant issue related to the safety or efficacy of the use of Asentar^™ in humans, (ii) that further development and commercialization of Asentar^™ in the United States or Europe is not commercially reasonable due to technical problems related to Asentar^™ or (iii) for any or no reason after the second anniversary of the effective date of the agreement. Additionally, under certain specified circumstances we may be required to pay royalties to Schering following the termination of our agreement with Schering.

Under the terms of the Collaboration Agreement, Schering and we have established a joint development committee and joint commercialization committee, which are responsible for reviewing the development and commercialization activities, respectively, of the collaboration. Schering and we have agreed on an initial development plan, or the Core Development Plan, and a Forward Development Plan governing the development of the products licensed under the Collaboration Agreement. Schering has final decision-making authority with respect to the development and commercialization of Asentar^™. In November 2007, we ended our ASCENT-2 Phase 3 clinical trial of Asentar^™ due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, we also suspended enrollment in our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar^™. Together with Schering, we are reviewing and analyzing the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis, we intend to decide with Schering whether or not to continue our development efforts with respect to Asentar^™.

In July 2007, pursuant to the terms of the Collaboration Agreement, we sold to Schering 1,490,868 shares of our common stock for cash of $8.05 per share, for an aggregate purchase price of $12.0 million under a Common Stock Purchase Agreement.

In connection with the Collaboration Agreement, we amended and restated our supply agreement with Plantex USA Inc., our exclusive license agreement with Oregon Health & Science University, and our license agreement with the University of Pittsburgh of the Commonwealth System of Higher Education. Each agreement was revised to align with our sublicensing of Asentar^™ to Schering and to better facilitate the commercialization of licensed products under the Collaboration Agreement.

Under the amended and restated supply agreement, we are allowed to maintain, and may purchase a certain amount of calcitriol from, a qualified second source manufacturer of calcitriol in any calendar year. Additionally, we have the right to commit Plantex to manufacture calcitriol over a certain period at a premium price over the manufacturing cost.

Aventis Pharmaceuticals, Inc.

In each of August 2002 and 2003, we entered into agreements with Aventis Pharmaceuticals, Inc., or Aventis, under which Aventis agreed to provide grant revenue payments to us totaling up to $3.0 million and up

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to $0.4 million, respectively. The grant revenues provide for partial reimbursement of approved costs incurred, as defined in the agreements, and are contingent upon the achievement of milestones regarding the progress of two clinical trials involving Asentar^™ and Aventis’ Taxotere^® oncology product. We are required to provide Aventis with a final report for both of the clinical trials upon their completion. Under the agreements, Aventis has no product rights to Asentar^™. However, Aventis does have co-ownership rights to certain inventions that arose from our Phase 2 clinical trial involving the use of Asentar^™ and Taxotere in the treatment of patients with androgen-independent prostate cancer. Approximately $0.1 million remained available for grant under these agreements as of December 31, 2007, which amount we expect to receive upon achievement of a final milestone under one of the two agreements with Aventis.

We recorded revenue under the two agreements with Aventis of nil, $0.4 million, $0.1 million, $1.1 million, and $1.3 million for the years ended December 31, 2007, 2006, 2005, 2004 and 2003. In each of the periods noted, the costs incurred under the collaboration agreements have exceeded the revenues recognized.

Oregon Health & Science University

In June 2001, we entered into an exclusive, worldwide license with Oregon Health & Science University, or OHSU, to utilize specific technology under patent rights and know-how related to the use of calcitriol and its analogs. In connection with entering into this license, we issued 228,571 shares of our common stock to OHSU. Because the technology licensed related to a patent application for a method of use utilized in research and development and there was no alternative future use for the technology, we recorded the fair value of the licensed technology as $120,000, based on the fair value of the shares issued, as research and development expense. As of December 31, 2007 and under the terms of the agreement, we may be obligated in the future to make certain milestone payments to OHSU of up to an aggregate of $0.6 million, which milestone payments are contingent upon the occurrence of certain clinical development and regulatory events related to Asentar™. Payments to OHSU that relate to pre-approval development milestones are recorded as research and development expense when incurred. We are obligated to pay to OHSU certain royalties on net sales of Asentar™, which royalty rate may be reduced in the event that we must pay certain additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell Asentar™. We have agreed to pay OHSU a certain percentage of any sub-license revenues that we receive. We have also agreed to reimburse OHSU for all reasonable fees and costs related to the preparation, filing, prosecution and maintenance of the patent rights underlying the agreement, and we have agreed to indemnify OHSU and certain of its affiliates against liability arising out of the exercise of patent rights under the agreement. Furthermore, in addition to customary termination provisions for breach or bankruptcy, OHSU may also terminate the license agreement if we do not proceed reasonably with the development and practical application of the products and processes covered under the license or does not keep the products and processes covered under the license reasonably available to the public after commencing commercial use.

In connection with the Collaboration Agreement with Schering, we amended and restated our exclusive, worldwide license agreement with OHSU in May 2007 to align with our sublicensing of Asentar^™ to Schering and to better facilitate the commercialization of licensed products under the Collaboration Agreement. In September 2007, we paid OHSU a sublicensing fee of $3.8 million, equal to 15% of the $25 million license fee received under the Collaboration Agreement with Schering, effective in June 2007, which was a provision under the original license agreement with OHSU. This amount was recorded as research and development expense during the year ended December 31, 2007, because the technology rights are being utilized in research and development, and it is not clear that an alternative future use exists for such technology.

University of Pittsburgh

In July 2002, we acquired an exclusive, worldwide license from the University of Pittsburgh of the Commonwealth System of Higher Education, or University of Pittsburgh, to utilize specific technology under certain patent rights and know-how related to the use of calcitriol, and its derivatives and analogs, with certain chemotherapies. In exchange for this license, we issued 14,285 shares of common stock and paid cash

consideration of $100,000 to the University of Pittsburgh. We recorded the value of the issuance of the common

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stock as $9,000, based on the fair value of the shares on the date of issuance. In addition, we are obligated to issue an additional 14,285 shares of our common stock to the University of Pittsburgh upon the issuance of certain claims included in one of several U.S. patents that are subject to this license. Under the terms of the agreement, we are obligated to pay the University of Pittsburgh certain royalties on net sales of Asentar^™ when used in combination with certain chemotherapies. The royalty rate may be reduced in the event that we must pay certain additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell Asentar^™. As of December 31, 2007 and under the terms of the agreement, we may be obligated to make certain minimum royalty payments to the University of Pittsburgh of up to an aggregate of $1.2 million through 2012, which royalty payments are contingent upon continuation of the license agreement and are creditable against our royalty obligations that are actually due in any calendar year. This minimum royalty payment obligation began in July 2003. Minimum royalty payments to the University of Pittsburgh in advance of Asentar^™ marketing approval are recorded as research and development expense when incurred. We have agreed to pay the University of Pittsburgh a certain percentage of any sub-license revenues that we receive. We have also agreed to reimburse the University of Pittsburgh for all reasonable fees and costs related to the filing prosecution and maintenance of the patent rights underlying the agreement. This agreement will terminate in the United States on the expiration date of the last-to-expire U.S. patent subject to the license. Currently, the last-to-expire U.S. patent under the agreement is scheduled to expire in August 2017, absent an extension of the expiration date of any patent under the agreement past such date. We have patent applications pending which, if issued and not invalidated, may extend the expiration date of the last-to-expire patent. Furthermore, on a country-by-country basis outside of the United States, the term of this agreement continues until the expiration in the applicable country of the last-to-expire of the patents licensed to us under the agreement. In addition, we may terminate the agreement by giving three months prior written notice to the University of Pittsburgh and paying all amounts due under the agreement through the effective date of termination.

In connection with the Collaboration Agreement with Schering, we amended and restated our exclusive, worldwide license agreement with the University of Pittsburgh in May 2007 to align with our sublicensing of Asentar^™ to Schering and to better facilitate the commercialization of licensed products under the Collaboration Agreement. In August 2007, we paid a sublicensing fee of $1.3 million, equal to 5% of the $25 million license fee received under the Collaboration Agreement with Schering, effective in June 2007, which was a provision under the original University of Pittsburgh License Agreement. Although the initial license payment of $0.1 million made to the University of Pittsburgh in July 2002 was capitalized and is being amortized, the sublicensing fee was recorded as research and development expense during the year ended December 31, 2007, because the technology rights are being utilized in research and development, and it is not clear that an alternative future use exists for such technology.

KuDOS Pharmaceuticals Limited

In December 2003, we entered into a license agreement with KuDOS Pharmaceuticals Limited, or KuDOS, which was acquired in early 2006 by AstraZeneca PLC. Under this license agreement, we obtained exclusive, royalty-bearing licenses to certain KuDOS patents and know-how acquired or to be acquired by KuDOS from a third party to our AQ4N product candidate for all human therapeutic, prophylactic and diagnostic uses in the United States, Canada and Mexico. We also received a sub-license to certain patents relating to AQ4N from a third party licensor to KuDOS. Upon signing the agreement in December 2003, we paid KuDOS an up-front fee of $1.0 million. Additionally, we made a $1.0 million milestone payment to KuDOS in 2004. Each of the two payments was recorded as research and development expense in the period because the licensed technology was incomplete and had no alternative future use.

In April 2007, we entered into an assignment of KuDOS’ ownership of rights, title and interests in patents and know-how related to AQ4N. Under the terms and conditions of the agreement, we may be obligated in the future to make a payment to KuDOS of $5.0 million upon achievement of a certain milestone tied to our AQ4N sales reaching a specified dollar level. No future pre-approval development milestones or royalties will be due to KuDOS under this agreement.

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BTG International Limited

In April 2007, we entered into a novation and license agreement with BTG International Limited, or BTG, the primary licensor to KuDOS regarding AQ4N. We acquired the worldwide exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases. In May 2007, we paid BTG £700,000 (approximately $1.4 million) as an up-front payment, which was recorded as research and development expense during the year ended December 31, 2007. Under the terms and conditions of the agreement, we are obligated to pay BTG £50,000 (approximately $0.1 million) per year beginning in 2008 until we receive regulatory approval for AQ4N. Further, under the agreement, we may be obligated in the future to make certain milestone payments to BTG of up to £6.0 million (approximately $11.9 million), which are contingent upon the occurrence of certain clinical development and regulatory events related to AQ4N. Payments to BTG that relate to pre-approval development milestones are recorded as research and development expense when incurred. In addition, we are obligated to pay BTG certain annual royalties based on net sales of AQ4N, which are subject to annual minimum royalty payment amounts, and which royalty rate may be reduced in the event that we must pay certain additional royalties under patent licenses to third parties in order to manufacture, use or sell AQ4N. We have also agreed to pay BTG a certain percentage of any sub-license revenues that we receive. The license agreement will terminate on a country-by-country basis on the expiration date in the applicable country of the last-to-expire patent licensed to us under the agreement. In addition to customary termination provisions, including breach of the agreement and bankruptcy, BTG may terminate the license agreement if we directly or indirectly opposes or assists any third party in opposing BTG’s patents. We may terminate the agreement by giving notice to BTG at any time, which termination shall be effective six months after such notice and upon transfer of ownership to BTG or its designee of certain rights as required by the agreement, subject to certain payments.

Intellectual Property

Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates, technology and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights. We actively seek to protect the proprietary technology that we consider important to our business, including chemical species, compositions and forms, their methods of use and processes for their manufacture. Our policy is to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

Individual patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, patents issued in the United States are effective for:

• the longer of 17 years from the issue date or 20 years from the earliest non-provisional filing date, if the patent application was filed prior to June 8, 1995; and

• 20 years from the earliest non-provisional filing date, if the non-provisional patent application was filed on or after June 8, 1995.

The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is 20 years from the earliest foreign filing date. Under the Hatch-Waxman Act in the United States, and similar laws in Europe, in certain instances, a patent term can be extended for up to five years to recapture a portion of the term effectively lost as a result of the FDA regulatory review period. Although we believe that our product candidates will meet the criteria for patent term extensions, there can be no assurance that we will obtain such extensions. Our patent estate, based on patents existing now and expected by us to issue based on pending applications, will expire on dates ranging from 2010 to 2028.

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Asentar^™

We own or have rights to three issued U.S. patents and nine pending U.S. patent applications related to Asentar^™ and its use in the United States and applications and patents in 37 foreign countries as well as patent application filings under the Patent Cooperation Treaty, the European Patent Convention and the Eurasian Patent Convention.

In June 2001, we entered into a license agreement with OHSU, whereby we acquired exclusive worldwide rights to OHSU’s patents, applications and know-how claiming methods for the treatment of hyperproliferative diseases, such as cancer, utilizing HDPA with calcitriol and its analogs. We are the exclusive licensee from OHSU of one issued U.S. patent, one pending U.S. patent application, one foreign patent and four foreign pending patent applications. The issued U.S. patent covers methods of treating hyperproliferative diseases by high-dose pulse administration of calcitriol in doses from about 0.12 micrograms per kilogram of patient weight (or 9 micrograms per day for a 75kg patient) to about 2.8 micrograms per kilogram of patient weight (or 210 micrograms per day for a 75kg patient), and expires in March 2019.

In July 2002, we acquired an exclusive, worldwide license from the University of Pittsburgh to utilize specific technology under certain patent rights and know-how related to methods of using calcitriol, and its derivatives and analogs, with certain chemotherapies. We are the exclusive licensee from the University of Pittsburgh of two issued U.S. patents, two pending U.S. patent applications, 18 foreign patents (under the European Patent Convention), and eight pending foreign applications. One of the issued U.S. patents claims a method of killing cells such as cancer cells with any vitamin D derivative together with paclitaxel or cyclophosphamide, and expires in August 2017. The second issued patent claims a method of killing neoplastic cells with any vitamin D derivative together with carboplatin, cisplatin, paclitaxel or Taxotere, and expires in August 2017.

We also own six pending U.S. patent applications; six issued foreign patents and 31 pending foreign applications related to our formulation for calcitriol and other active vitamin D compounds. The six pending patent applications, if issued, should expire in December 2022.

In addition, we have 14 pending U.S. patent applications, 68 foreign applications and two patent application filings under the Patent Cooperation Treaty related to our use of Asentar^™ in the treatment of cancer and other diseases and medical conditions.

AQ4N

We own or have rights to 38 issued patents and 39 pending patent applications related to AQ4N in the United States, foreign countries and under the Patent Cooperation Treaty.

In December 2003, we entered into a license with KuDOS related to AQ4N. Pursuant to this license agreement, we obtained exclusive, royalty-bearing licenses to certain KuDOS patents and know-how and an exclusive license to certain patents and know-how acquired or to be acquired by KuDOS from a third party to our AQ4N product candidate for all human therapeutic, prophylactic and diagnostic uses in the United States, Canada and Mexico. In April 2007, we entered into an assignment of KuDOS’ ownership of rights, title and interests in patents and know-how related to AQ4N. Relatedly, in April 2007, we entered into a novation and license agreement with BTG International Limited, or BTG, the primary licensor to KuDOS regarding AQ4N. Under the novation and license agreement, we acquired the worldwide exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases.

Competition

The development and commercialization of new drugs are highly competitive. Our major competitors are large pharmaceutical, specialty pharmaceutical and biotechnology companies, both in the United States and abroad. Any product candidates that we successfully develop and commercialize will compete with existing and

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new drugs and therapies in the field of cancer. Many of these entities developing and marketing potentially competing products have substantially greater financial resources and expertise in the areas of manufacturing, product development, clinical trials, regulatory submissions, and marketing. These entities also compete with us in recruiting and retaining qualified scientific and management personnel, as well as in acquiring products and technologies complementary to, our programs.

Our ability to compete successfully will depend largely on our ability to:

• advance the development of our lead programs, including the enrollment of patients for our clinical trials;

• gain regulatory approval for our product candidates in their respective first indications as well as expand into additional indications;

• commercialize our lead products successfully, including convincing physicians, insurers and other third-party payors of the advantages of our products over current standard therapies;

• obtain intellectual property protection and protect the exclusivity for our products; and

• acquire other product candidates to expand our pipeline.

Noted below is some of the existing and potential competition for each of our products under development.

Asentar^™

The main treatment options for advanced prostate cancer are hormonal therapy, chemotherapy, palliative treatments for cancer that has spread to the bones or other organs and palliative local radiation therapy.

Other marketed products that are used in the treatment of advanced prostate cancer include Emcyt^®; Novantrone^®, Paraplatin^®, Taxol^®, and Thalomid^®. We believe the potentially competitive products, including those in clinical development, can be categorized broadly as follows: (a) agents potentially useful in combination therapy with Taxotere, such as Avastin^®, Thalomid, Velcade^®, GVAX^® GM-CSF immuno-therapy, Provenge^® immuno-therapy, Eloxatin^®, VEGF-Trap, (b) other formulations of calcitriol, calcitriol analogs, such as Zemplar^®, Hectorol^®, inecalcitol and seocalcitol, cytotoxic monotherapies such as satraplatin, and (c) non-cytotoxic monotherapies.

Although a composition of matter patent protection claim is not available for calcitriol, the active ingredient in Asentar^™, our issued and pending patents relating to the methods of use and pharmaceutical compositions should provide broad intellectual property rights that should help mitigate or deter competition in AIPC from other calcitriol and related analog formulations, such as currently marketed low-dose formulations for the treatment of chronic renal disease and psoriasis.

In addition, we believe that the currently marketed low-dose oral formulations of calcitriol for the treatment of chronic renal disease, such as Rocaltrol, are not viable substitutes for high-dose administration in AIPC due to some of the following reasons: lack of clinically-demonstrated survival benefit or safety profile; limited bioavailability; non-linear dose-related increase in maximum plasma concentration, and cumulative exposure; inter-patient variability; and lack of convenience due to the number of pills required to achieve such high-dose levels.

Similarly, there are several compounds and regimens currently in development or already on the market that are being used for the treatment of metastatic pancreatic cancer. Treatments currently used include chemoradiation, Gemzar^®, Tarceva^®, 5-Flourouracil, or 5FU, chemotherapy-based regimens and best supportive care. It is likely that the competitive position of Asentar^™ will be dictated by how rapidly future studies could commence in these settings as well as results obtained from competitive trials.

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AQ4N

In the United States, most physicians have been treating GBM patients with surgery followed by radiation therapy and often chemotherapy, such as temozolomide or procarbazine, or a combination of these therapies. Cintredekin besudotox has received orphan drug designation in the US and Europe and fast track drug development program status from the FDA. In addition, cintredekin besudotox has been selected to participate in the FDA’s Continuous Marketing Application Pilot 2 program. Several agents and approaches remain in various stages of investigation and include Avastin ^®, which is currently undergoing phase 3 trial in combination with chemotherapy.

Government Regulation

The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon the clinical development, pre-market approval, manufacture, marketing and distribution of pharmaceutical and biological products. These agencies and other federal, state and local entities regulate research and development activities and the testing, approval, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, advertising and promotion of our product candidates. Failure to comply with applicable FDA or other requirements may result in civil or criminal penalties, recall or seizure of products, partial or total suspension of production or withdrawal of a product from the market.

In the United States, the FDA regulates drug products under the Federal Food, Drug, and Cosmetic Act, or FFDCA, its implementing regulations. The process required by the FDA before our drug and biologic product candidates may be marketed in the United States generally involves the following:

• completion of extensive pre-clinical laboratory tests, pre-clinical animal studies and formulation studies all performed in accordance with FDA’s current Good Laboratory Practice, or cGLP, regulations;

• submission to the FDA of an IND which must become effective before human clinical trials may begin;

• performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;

• submission to the FDA of a new drug application, or NDA;

• satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the product is produced to assess compliance with current Good Manufacturing Practice, or cGMP, regulations; and

• FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug.

The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that any approvals for our product candidates will be granted on a timely basis, if at all.

Pre-clinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of pre-clinical tests, together with manufacturing information and analytical data, are submitted as part of an IND to the FDA. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30 day time period, raises concerns or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. Our IND submissions, or those of our collaborators, may not result in FDA authorization to commence a clinical trial. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development, and the FDA must grant permission before each clinical trial can begin. Further, an independent institutional review board, or IRB, for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the study until completed. The FDA, the IRB, or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive good clinical practices, or GCPs, regulations and regulations for informed consent.

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Clinical Trials

For purposes of NDA submission and approval, human clinical trials are typically conducted in the following three sequential phases, which may overlap:

• Phase 1 Clinical Trials. Studies are initially conducted in a limited population to test the product candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients. In some cases, particularly in clinical trials assessing a product candidate for the treatment of cancer, a sponsor may decide to conduct what is referred to as a “Phase 1b” evaluation, which is a second, safety-focused Phase 1 clinical trial typically designed to evaluate the impact of the drug candidate in combination with currently approved drugs;

• Phase 2 Clinical Trials. Studies are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. In some cases, a sponsor may decide to run what is referred to as a “Phase 2b” evaluation, which is a second, confirmatory Phase 2 clinical trial that could, if positive and accepted by the FDA, serve as a pivotal trial in the approval of a product candidate;

• Phase 3 Clinical Trials. These are commonly referred to as pivotal studies or registration studies or registration trials, when designed to provide the principal basis for approval. When Phase 2 evaluations demonstrate that a dose range of the product is effective and has an acceptable safety profile, Phase 3 clinical trials are undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically-dispersed clinical trial sites; and

• Phase 4 Clinical Trials. In some cases, the FDA may condition approval of an NDA for a product candidate on the sponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety and effectiveness after NDA approval. Such post approval trials are typically referred to as Phase 4 studies.

New Drug Applications

The results of product development, pre-clinical studies and clinical trials are submitted to the FDA as part of an NDA. NDAs also must contain extensive manufacturing information. Once the submission has been accepted for filing, the FDA targets 10 months to review the application and respond to the applicant. This 10 month review time from the date of the receipt of the application is in accordance with the Prescription Drug User Fee Act. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the application to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied, or it may require additional clinical data and/or an additional pivotal Phase 3 clinical trial. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than we or our collaborators interpret data. Once issued, the FDA may withdraw product approval if ongoing regulatory requirements are not met or if safety problems occur after the product reaches the market. In addition, the FDA may require testing, including Phase 4 studies, and surveillance programs to monitor the safety effects of approved products which have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post marketing programs or other information.

As an alternate path to FDA approval for modifications to formulations of products previously approved by the FDA, or new indications for use of previously approved products, an applicant may file an NDA under Section 505(b)(2) of the FFDCA. Section 505(b)(2) was enacted as part of the Drug Price Competition and

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Patent Term Restoration Act of 1984 (also known as the Hatch-Waxman Act), and permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference. The Hatch-Waxman Act permits the applicant to rely upon certain pre-clinical or clinical studies conducted for an approved product. The FDA typically requires companies to perform additional, sometimes extensive, clinical studies and analyses to support the change from the approved product. The FDA may then approve the new product candidate for all or some of the label indications for which the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant. We may seek approval of some of our product candidates under Section 505(b)(2) of the FFDCA.

We may also seek approval of our product candidates under programs designed to accelerate the FDA’s review and approval of NDAs. For instance, we may seek FDA designation of a product candidate as a “fast track product.” Fast track products are those products intended for the treatment of a serious or life-threatening condition and which demonstrate the potential to address unmet medical needs for such conditions. If fast track designation is obtained, FDA may initiate review of sections of an NDA before the application is complete. This “rolling review” is available if the applicant provides and the FDA approves a schedule for the remaining information. In some cases, a fast track product may be approved on the basis of either a clinical endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit under the FDA’s accelerated approval regulations. Approvals of this kind typically include requirements for appropriate post-approval Phase 4 studies to validate the surrogate endpoint or otherwise confirm the effect of the clinical endpoint. In addition, our product candidates may be eligible for “priority review,” or review within a six month timeframe from the date a complete NDA is accepted for filing, if we show that our product candidate provides a significant improvement compared to marketed drugs. Because we are studying our product candidates for the treatment of serious and life-threatening conditions, we regularly assess the potential for using these programs. However, there can be no assurance that any of our products in development will receive designation as fast track products or that our products will be reviewed or approved more expeditiously than would otherwise have been the case

Other Regulatory Requirements

Any products manufactured or distributed by us or our collaborators pursuant to FDA approvals are subject to continuing regulation by the FDA, including recordkeeping and reporting requirements. Adverse event experience with the product must be reported to the FDA in a timely fashion and pharmacovigilance programs to proactively look for these adverse events may be mandated by the FDA. Drug manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with ongoing regulatory requirements, including cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Failure to comply with the statutory and regulatory requirements can subject a manufacturer to possible legal or regulatory action, such as Warning Letters, suspension of manufacturing, seizure of product, injunctive action or possible civil penalties. We cannot be certain that we or our present or future third-party manufacturers or suppliers will be able to comply with the cGMP regulations and other ongoing FDA regulatory requirements. If our present or future third party manufacturers or suppliers are not able to comply with these requirements, the FDA may halt our clinical trials, require us to recall a drug from distribution, or withdraw approval of the NDA for that drug.

The FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet. Drugs and biologics may be marketed only for the approved indications and in accordance with the provisions of the approved label. Further, if there are any modifications to the drug, including changes in indications, labeling, or manufacturing processes or facilities, we may be required to submit and obtain FDA approval of a new or supplemental NDA, which may require us to develop additional data or conduct additional pre-clinical studies and clinical trials. Failure to comply with these requirements can result in adverse publicity, Warning Letters, corrective advertising and potential civil and

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criminal penalties. Physicians may prescribe legally available drugs for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, impose stringent restrictions on manufacturers’ communications regarding off-label use.

International Regulation

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our future product candidates. Whether or not we obtain FDA approval for a product, we must obtain approval of a product by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

Under European Union regulatory systems, marketing authorizations may be submitted either under a centralized or mutual recognition procedure. The centralized procedure provides for the grant of a single marking authorization that is valid for all European Union member states. The mutual recognition procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marking authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessment report, each member state must decide whether to recognize approval.

In Canada, applications for marketing authorizations are submitted to Health Canada, which is a centralized regulatory body overseeing prescription drug approval for all of Canada. At present, Health Canada targets 355 days for application review and approvals. Once approved, the sponsor has the right to sell the drug in Canada; however, placement on the reimbursement formularies in the various Canadian provinces may take an unspecified amount of time.

In addition to regulations in Europe and the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial distribution of our future product candidates.

Reimbursement

Sales of pharmaceutical products depend in significant part on the availability of coverage and adequate reimbursement from government and other third-party payors, including the Medicare and Medicaid programs. Third-party payors are increasingly challenging the pricing of pharmaceutical products and may not consider our future product candidates cost-effective or may not provide coverage of and adequate reimbursement for our future product candidates, in whole or in part. In the United States, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. For instance, on December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003, or MMA, which, among other things, established a new prescription drug benefit policy beginning January 1, 2006 and changed the reimbursement for certain oncology drugs under existing benefits. It remains difficult to predict the impact of the MMA on us and our industry. Furthermore, we cannot predict the impact of any new legislations or regulations that may be enacted or adopted in the future on our business.

Manufacturing

We do not own facilities for the manufacture of materials for clinical or commercial use. We rely and expect to continue to rely on contract manufacturers with whom we have agreements directly, or indirectly through our product licensors, for process development as well as manufacturing of our products in accordance with current cGMP for use in clinical trials. We will ultimately depend on contract manufacturers for the manufacture of our products for commercial sale. Contract manufacturers are subject to extensive governmental regulation.

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In December 2001, we entered into a supply agreement with Plantex USA, under which Plantex will supply calcitriol, the active ingredient in Asentar^™, for our use in clinical trials and other development activities and for commercial sale. Except in limited circumstances, we are obligated to purchase all of our calcitriol product requirements from Plantex. Without our consent, during the term of the agreement, Plantex may not supply calcitriol to any other entity for use in the treatment or prevention of cancer. Following FDA marketing approval of Asentar^™, Plantex must maintain in its inventory a six-month supply of calcitriol, based on our then forecasted amounts. If we receive FDA approval to market Asentar^™, Plantex will have the right to re-evaluate the price for calcitriol, subject to certain limitations on price increases if our purchases of calcitriol exceed a specified amount. Either Plantex or we may terminate the agreement upon two years prior written notice to the other party, but not before the third anniversary after we receive marketing approval for Asentar^™ from the FDA.

In January 2006, we entered into an amendment to our supply agreement with Plantex. Pursuant to the amendment, Plantex may terminate the supply agreement, with one year notice, in the event that we do not receive marketing approval for Asentar^™ from the FDA before December 2011. The supply agreement with Plantex was further amended in March 2006 to obligate us to purchase up to 80% of our annual requirement of calcitriol from Plantex for its manufacture, sale and distribution of Finished Products, as defined in the agreement, provided that we, together with any of our affiliates, will not purchase more than five (5) grams of calcitriol from any other source in a calendar year. In February 2007, the agreement was amended to permit us to evaluate alternate sources of supply, so that the qualified alternative source supplier will be available as needed per the original agreement. In connection with the Collaboration Agreement, we amended and restated our supply agreement with Plantex to align with our sublicensing of Asentar^™ to Schering and to better facilitate the commercialization of licensed products under the Collaboration Agreement. Under the amended and restated supply agreement, we are allowed to maintain, and may purchase a certain amount of calcitriol from, a qualified second source manufacturer of calcitriol in any calendar year. Additionally, we have the right to commit Plantex to manufacture calcitriol over a certain period at a premium price over the manufacturing cost.

Insurance

We maintain liability insurance for our clinical trials, and intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for any of our products. Insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against product liabilities.

Trademark

Novacea is our registered trademark. We have also applied for registration of the Novacea trademark outside the United States.

Employees

As of December 31, 2007, we had 64 full-time employees, 10 of whom hold Ph.D., M.D. or comparable degrees and 17 of whom hold other advanced degrees. There are 43 employees engaged in development activities and 21 employees in business development, finance and other administrative functions. Our employees are not represented by any collective bargaining unit. We have never experienced any employment-related work stoppages and we believe our relationship with our employees is good.

Facilities

As of December 31, 2007, we leased approximately 25,288 square feet of space in South San Francisco, California from an independent party for our headquarters and as the base for our operational activities, with average annual lease payments totaling approximately $725,000. The lease expires in September 2012. In the future, we may lease or sublease additional space that we believe will be available on commercially reasonable terms.

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Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings.

Available Information

Availability of Reports. We are a reporting company under the Securities Exchange Act of 1934, as amended, and we file reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). The public may read and copy any of our filings at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we make filings to the SEC electronically, you may access this information at the SEC’s Internet site: www.sec.gov. This site contains reports, proxies and information statements and other information regarding issuers that file electronically with the SEC.

Web Site Access. Our Internet web site address is www.novacea.com. We make available, free of charge at the “Investor Relations” portion of this web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the 1934 Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Act are also available on our web site. Information in, or that can be accessed through, our web site is not part of this annual report on Form 10-K.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below and all information contained in this report before you decide to purchase our common stock. If any of the possible adverse events described below actually occurs, we may be unable to conduct our business as currently planned and our financial condition and operating results could be harmed. In addition, the trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment.

Risks Related to Our Business

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We may never achieve or sustain profitability.

We are a clinical-stage biopharmaceutical company with a limited operating history. We are not profitable and have incurred losses in each year since our inception in 2001. We have only generated a limited amount of grant revenue and revenue from our collaboration agreement, and we have not generated any revenue from product sales. We do not anticipate that we will generate revenue from the sale of products for the foreseeable future. We have not yet submitted any products for approval by regulatory authorities and we do not currently have rights to any products that have been approved for marketing in our territory. We continue to incur research and development and general and administrative expenses related to our operations. Our net loss for the years ended December 31, 2007, 2006 and 2005 was $32.5 million, $29.6 million, and $23.8 million, respectively. We expect to continue to incur losses for the foreseeable future, and we expect these losses to increase if we continue our research activities and conduct development of, and seek regulatory approvals for, our product candidates, and prepare for and begin to commercialize any approved products. If our product candidates fail in clinical trials or do not gain regulatory approval, or if our product candidates do not achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

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We ended and have suspended enrollment in clinical trials for our lead product candidate, Asentar^™, and we cannot give any assurance that it will receive regulatory approval or be successfully developed or commercialized.

In November 2007, we ended our Phase 3 clinical trial of Asentar^™ for the treatment of androgen-independent prostate cancer, or AIPC, due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, we have also suspended enrollment in our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in other trials involving the use of Asentar^™. We are analyzing data from the ASCENT-2 Phase 3 clinical trial along with our collaborator, Schering, in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis, may decide to stop all development efforts with respect to Asentar^™. If we continue to seek approval for Asentar^™, we do not know whether we will be able to enroll another clinical trial, and Asentar^™ may never receive regulatory approval or be successfully commercialized. The clinical development program for Asentar^™ may not receive regulatory approval from the U.S. Food and Drug Administration, or FDA, or similar non-U.S. regulatory agencies either if we and our collaborator fail to determine the causes of the imbalance in death rates and demonstrate that it is safe and effective in clinical trials, or if there are inadequate financial or other resources to advance Asentar^™ through the clinical trial process. Even if Asentar^™ receives regulatory approval, we and our collaborator may not be successful in marketing it for a number of reasons, including concerns raised by the results of the ASCENT-2 Phase 3 clinical trial, the introduction by our competitors of more clinically-effective or cost-effective alternatives or failure in sales and marketing efforts. Any failure to obtain approval of Asentar^™ and to successfully commercialize it would have a material and adverse impact on our business.

We ended the ASCENT-2 Phase 3 clinical confirmatory trial without confirming the previously observed safety and efficacy trends of Asentar^™.

The ASCENT-2 Phase 3 clinical confirmatory trial was designed based on observations about secondary endpoints from our completed Phase 2 clinical trial, referred to as our ASCENT clinical trial, which enrolled 250 patients. In addition, while our ASCENT clinical trial evaluated the weekly administration of Asentar^™ in combination with weekly Taxotere^® versus once weekly placebo in combination with weekly Taxotere, the ASCENT-2 Phase 3 clinical confirmatory trial evaluated this Asentar^™ and Taxotere regimen versus the currently approved regimen for Taxotere, which is dosed every three weeks in combination with prednisone. We ended the ASCENT-2 Phase 3 clinical trial in November 2007 due to an unexplained imbalance of deaths between the treatment and control arms of the trial and were not able to demonstrate the levels of safety and efficacy observed in our earlier clinical trials, including our ASCENT clinical trial. We have not yet determined the cause of the higher death rate in the treatment group. If, after analyzing the data from both the completed ASCENT clinical trial and the ASCENT-2 Phase 3 clinical trial, we determine that the higher death rate is related to Asentar^™, or if we are unable to determine the cause, we may discontinue our studies of Asentar^™ or we may be unable to enroll or complete an additional Phase 3 study which would support regulatory approval.

While the FDA regards our ASCENT clinical trial of Asentar^™ as completed, patients remained on study following the protocol specified analysis that had been previously reported. We cannot assure you that these patients have not subsequently experienced safety or efficacy issues that might alter the reported data.

Although the patients in our ASCENT clinical trial of Asentar^™ have been analyzed with a median follow-up time of 18.3 months as of the date of our reported analysis, approximately 8% of patients enrolled in our ASCENT clinical trial continued to undergo treatment with Taxotere and either placebo or Asentar^™ on a blinded basis. This study has now been terminated and we have not fully evaluated the complete dataset. Although the number of patients undergoing continuing treatment in our ASCENT clinical trial beyond the time of the original analysis was small, these patients may have experienced clinically relevant safety or efficacy issues attributable to Asentar^™ of which we are unaware and may be borne out in any future analysis of the dataset from the ASCENT study. Any significant safety or efficacy issue that may have been experienced by these patients or contained in the final dataset could entirely undermine our conclusions regarding our ASCENT clinical trial and negatively impact our previously reported findings.

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Non-U.S. regulatory authorities may request that we update our analysis from our ASCENT clinical trial, and we cannot guarantee that the results of the analysis will be the same.

While the FDA regards our ASCENT clinical trial of Asentar^™ as completed, non-U.S. regulatory authorities may request that we analyze the overall survival or other secondary endpoints at a later date or perform other analyses not contemplated by our original clinical trial design. We cannot guarantee that the trends we observed with respect to secondary endpoints in our ASCENT clinical trial will be observed in any subsequent analyses, which may delay or prevent Asentar^™ from achieving regulatory approval.

We have tested the efficacy of Asentar^™ in combination with Taxotere in AIPC patients at a single dosing level. We do not currently know the minimum efficacious dose of Asentar^™ or whether alternative formulations of calcitriol, the active ingredient in Asentar^™, could be substituted.

Our ASCENT clinical trial tested a single dose of 45 micrograms of Asentar^™ administered once a week in combination with Taxotere in AIPC patients. We selected this dose because it approximated the dose used by investigators at Oregon Health & Science University, or OHSU, in their small Phase 2 study of calcitriol, the active ingredient in Asentar^™, from which favorable efficacy results were reported. We used this dose in our development of Asentar^™ based on the survival and safety benefits observed in the ASCENT clinical trial.

If a different dosage level of calcitriol is demonstrated to be equally or more effective than Asentar^™, physicians might be able to prescribe commercially available formulations of calcitriol to AIPC patients as an alternative to Asentar^™. While this may infringe our issued and pending patents, we may be limited in our ability to prevent any such product substitution.

We do not hold and cannot license composition of matter patents covering the active ingredient in Asentar^™, calcitriol, and our competitors may be able to develop cancer therapies that are similar to Asentar^™ using calcitriol.

We do not hold and we cannot license patents covering the composition of matter of calcitriol, which is the active ingredient for our lead product candidate, Asentar^™. Although we have, or have licensed, issued and pending patents related to the use of calcitriol with a novel and proprietary dosing regimen capable of administering calcitriol in high doses without inducing its common side effects, which we refer to as high-dose pulse administration technology, or HDPA, as well as patents and pending patents related to using calcitriol in combination with certain chemotherapy treatments, our competitors are free to conduct their own research and development with respect to calcitriol and they may develop similar cancer therapies that compete with Asentar^™, which could harm our future operating results.

We cannot guarantee that lack of composition of matter protection for calcitriol will not adversely impact our proprietary position with respect to Asentar^™, or that third parties will not infringe any of our issued patent claims, or that these patents will be found valid and enforceable. There can be no assurance that any of our patent applications will issue in any jurisdiction. Moreover, we cannot predict the breadth of claims that may be allowed or the actual enforceable scope of the Asentar^™ patents that we hold. Furthermore, while our patent claims cover the treatment of hyperproliferative diseases, which are diseases characterized by abnormal proliferation of cells, by monotherapy with Asentar^™, we cannot guarantee that our existing patent applications will provide protection for all monotherapeutic uses of Asentar^™ that we may seek to pursue. Furthermore, we may not be able to obtain patent protection for any such uses even if they prove commercially valuable.

There are currently clinical trials ongoing which seek to use other agents with Taxotere for the treatment of AIPC. If these clinical trials are completed before we are able to enroll and complete another clinical confirmatory trial establishing the safety and efficacy of Asentar^™, our ability to commercialize Asentar^™ may suffer.

Other companies, such as Genentech, Inc., are seeking to commercialize other agents to add to the benefits of Taxotere in the first-line treatment of AIPC. For example, a major oncology cooperative group of investigators

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is currently conducting a three-year clinical trial studying the use of Genentech’s Avastin^® in combination with Taxotere in the first-line treatment of AIPC patients. If this trial, or any similar trial, is completed before we enroll and complete another clinical confirmatory trial which establishes the safety and efficacy of Asentar^™ in combination with Taxotere for treatment of AIPC, or if the results of this trial, or any similar trial, are superior to the results of our clinical confirmatory trial, it may cause a delay in the approval of Asentar^™ or reduce the market opportunity for our lead product candidate.

We and our collaborator will be required to expend significant additional resources to fully develop and commercialize Asentar^™ for any other indications with other chemotherapies or as a monotherapy.

We and our collaborator have been primarily developing Asentar^™ for use as a combination therapy with Taxotere for the treatment of AIPC. In 2007, we initiated a Phase 2 clinical trial of Asentar for the treatment of advanced pancreatic cancer, and several investigator-sponsored trials using Asentar were underway. Due to the unexplained higher number of deaths in the treatment arm over the control arm of our ASCENT-2 Phase 3 clinical trial, we have suspended enrollment in these trials until we can determine the cause of this imbalance. We do not know when, or if, we will continue enrollment for these trials.

Our drug development activities could be delayed or stopped.

We do not know whether our other trials for Asentar^™ and AQ4N will be completed on schedule, or at all, and we cannot guarantee that our planned clinical trials will begin on time or at all. The commencement of our planned clinical trials could be substantially delayed or prevented by several factors, including:

• our suspension of enrollment in other trials involving Asentar^™ until we can evaluate the data from our ASCENT-2 Phase 3 clinical trial;

• limited number of, and competition for, suitable patients with the particular types of cancer required for enrollment in our clinical trials;

• limited number of, and competition for, suitable sites to conduct our clinical trials;

• delay or failure to obtain FDA approval or agreement to commence a clinical trial;

• delay or failure to obtain sufficient supplies of the product candidate for our clinical trials;

• requirements to provide the drugs required in our clinical trial protocols at no cost, which may require significant expenditures that we or our partners are unable or unwilling to make;

• delay or failure to reach agreement on acceptable clinical trial agreement terms or clinical trial protocols with prospective sites or investigators; and

• delay or failure to obtain institutional review board, or IRB, approval to conduct a clinical trial at a prospective site.

The completion of our clinical trials could also be substantially delayed or prevented by several factors, including:

• slower than expected rates of patient recruitment and enrollment;

• failure of patients to complete the clinical trial;

• unforeseen safety issues;

• lack of efficacy evidenced during clinical trials;

• termination of our clinical trials by one or more clinical trial sites;

• inability or unwillingness of patients or medical investigators to follow our clinical trial protocols; and

• inability to monitor patients adequately during or after treatment.

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Clinical trials for our product candidates may be suspended or terminated at any time by the Data Safety and Monitoring Board, the FDA, other regulatory authorities, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or us. For example, in November 2007, we ended our Phase 3 clinical trial of Asentar^™ for the treatment of androgen-independent prostate cancer, or AIPC, due to an unexplained imbalance of deaths between the treatment and control arms of the trial as reported to us by the Data Safety and Monitoring Board, and in November 2007, the FDA indicated that they would place a hold on any investigational new drug applications for Asentar. Any failure or significant delay in completing clinical trials for our product candidates could materially harm our financial results and the commercial prospects for our product candidates.

There is a high risk that our drug development activities will not result in commercial products.

Our product candidates are in various stages of development and are prone to the risks of failure inherent in drug development. We will need to complete significant additional clinical trials before we can demonstrate that our product candidates are safe and effective to the satisfaction of the FDA and other non-U.S. regulatory authorities. Clinical trials are expensive and uncertain processes that take years to complete. Failure can occur at any stage of the process, and successful early clinical trials do not ensure that later clinical trials will be successful. Product candidates in later-stage trials may fail to show desired efficacy and safety traits despite having progressed through initial clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. In addition, a clinical trial may prove successful with respect to a secondary endpoint, but fail to demonstrate clinically significant benefits with respect to a primary endpoint, as we experienced in our ASCENT clinical trial of Asentar^™. Failure to satisfy a primary endpoint in a Phase 3 clinical trial would generally mean that a product candidate would not receive regulatory approval without a further successful Phase 3 clinical trial, which we may not be able to complete.

The results of previous clinical trials may not be predictive of future results, and our current and planned clinical trials may not satisfy the requirements of the FDA or other non-U.S. regulatory authorities.

Positive results from pre-clinical studies and early clinical trials should not be relied upon as evidence that later-stage or large-scale clinical trials will succeed. We will be required to demonstrate with substantial evidence through well-controlled clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. Success in early clinical trials does not mean that future clinical trials will be successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety and efficacy to the satisfaction of the FDA and other non-U.S. regulatory authorities despite having progressed through initial clinical trials.

Further, our product candidates may not be approved even if they achieve their primary endpoints in Phase 3 clinical trials. The FDA or other non-U.S. regulatory authorities may disagree with our trial design and our interpretation of data from pre-clinical studies and clinical trials. In addition, any of these regulatory authorities may change requirements for the approval of a product candidate even after reviewing and providing comment on a protocol for a pivotal Phase 3 clinical trial that has the potential to result in FDA approval. Any of these regulatory authorities may also approve a product candidate for fewer or more limited indications than we request or may grant approval contingent on the performance of costly post-marketing clinical trials. In addition, the FDA or other non-U.S. regulatory authorities may not approve the labeling claims necessary or desirable for the successful commercialization of our product candidates.

Our product candidates may cause undesirable side effects during clinical trials that could delay or prevent their regulatory approval or commercialization.

Common side effects of Asentar^™ include mild hypercalcemia, a significant and unhealthy level of calcium in the blood, hypercalciuria, a significant and unhealthy level of calcium in the urine, fatigue and nausea. Common side effects of AQ4N include cosmetic blue discoloration of the skin and urine, along with a decrease

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in lymphocytes and neutrophils, fatigue and anorexia. Because our product candidates have been tested in relatively small patient populations and for limited durations, additional side effects may be observed as their development progresses.

Undesirable side effects caused by any of our product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other non-U.S. regulatory authorities for any or all targeted indications. This, in turn, could prevent us from commercializing our product candidates and generating revenues from their sale. In addition, if our product candidates receive marketing approval and we or others later identify undesirable side effects caused by the product:

• regulatory authorities may withdraw their approval of the product;

• we may be required to recall the product, change the way the product is administered, conduct additional clinical trials or change the labeling of the product;

• a product may become less competitive and product sales may decrease; or

• our reputation may suffer.

Any one or a combination of these events could prevent us from achieving or maintaining market acceptance of the affected product or could substantially increase the costs and expenses of commercializing the product, which in turn could delay or prevent us from generating significant revenues from the sale of the product.

We depend on our collaborator, Schering-Plough Corporation, to work with us to develop, manufacture and commercialize Asentar^™.

We have granted exclusive, worldwide rights for the development and commercialization of Asentar^™ to Schering-Plough Corporation, or Schering. We expect to receive significant financial support under our collaboration agreement with Schering, as well as meaningful technical and manufacturing contributions to the Asentar^™ program. The success of our Asentar^™ program is dependent upon the continued financial and other support that Schering has agreed to provide.

The success of our collaboration depends on the efforts and activities of our collaborator. Schering has significant discretion in determining the efforts and resources that it will apply to the collaboration. Our existing collaborations may not be scientifically or commercially successful.

The risks that we face in connection with our existing collaborations and any future collaborations include the following:

• our collaboration agreements are subject to termination under various circumstances, including, as in the case of our agreement with Schering, termination by Schering if Schering reasonably determines (i) that there is a significant issue related to the safety or efficacy of the use of Asentar^™ in humans, (ii) that further development and commercialization of Asentar^™ in the United States or Europe is not commercially reasonable due to technical problems related to Asentar^™ or (iii) for any or no reason after the second anniversary of the effective date of the agreement. Depending on the results of our review and analysis of the ASCENT-2 clinical data, Schering may have a right to terminate the collaboration agreement. Any such termination could have an adverse material effect on our financial condition and/or delay the development and commercial sale of our drug candidates, including Asentar^™. Additionally, under certain specified circumstances we may be required to pay royalties to Schering following the termination of our agreement with Schering;

• Schering may engage in certain business relationships, including mergers and acquisitions.

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• Schering has a right to change the focus of its development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their development and commercialization priorities based on multiple factors following mergers and consolidations, which have been common in recent years in these industries. The ability of Asentar^™ to reach its potential could be limited if our collaborator decreases or fails to increase development or commercialization efforts related to Asentar^™;

• our collaboration agreement with Schering may have the effect of limiting the areas of research and development that we may pursue, either alone or in collaboration with third parties; and

• Schering may develop and commercialize, either alone or with others, drugs that are similar to or competitive with the drugs or drug candidates that are the subject of the collaboration with us.

Our existing collaboration and any collaborations we enter into in the future may not be successful.

Schering has agreed to fund our Asentar^™ research and development programs and/or to conduct the development and commercialization of specified drug candidates and, if they are approved, drugs. In exchange, we have given Schering technology, sales and marketing rights relating to those Asentar^™ drugs and drug candidates. Schering has rights to control the planning and execution of drug development and clinical programs for our drug candidate, Asentar^™. Our collaborator may exercise its control rights in ways that may negatively affect the timing and success of those programs. Our collaboration is also subject to termination rights by the collaborator. For example, if Schering reasonably determines that there is a significant issue related to the safety or efficacy of the use of Asentar^™ in humans or that further development and commercialization of Asentar^™ in the United States or Europe is not commercially reasonably due to technical problems related to Asentar^™, they have a right to terminate the collaboration agreement. If Schering was to terminate its relationship with us, or fail to meet its contractual obligations, that action could have a material adverse effect on our ability to undertake research, to fund related and other programs and to develop, manufacture and market any drugs that may have resulted from the collaboration. We may also incur significant costs in the return of any rights to us due to any such termination; however, under the collaboration agreement, Schering must conduct an orderly wind-down of all then on-going Asentar^™ development programs.

In addition, we expect to seek additional collaborative arrangements, which may not be available to us, to develop and commercialize our drug candidates in the future. Even if we are able to establish acceptable collaborative arrangements in the future, they may not be successful. The success of our collaboration arrangements, if any, will depend heavily on the efforts and activities of our collaborators. Possible future collaborations have risks, including the following:

• disputes may arise in the future with respect to the ownership of rights to technology developed with future collaborators;

• disagreements with future collaborators could delay or terminate the research, development or commercialization of products, or result in litigation or arbitration;

• future collaboration agreements are likely to be for fixed terms and subject to termination by our collaborators in the event of a material breach or lack of scientific progress by us;

• future collaborators are likely to have the first right to maintain or defend our intellectual property rights and, although we would likely have the right to assume the maintenance and defense of our intellectual property rights if our collaborators do not, our ability to do so may be compromised by our collaborators’ acts or omissions;

• future collaborators may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential liability;

• future collaborators may change the focus of their development and commercialization efforts. As previously noted, pharmaceutical and biotechnology companies historically have re-evaluated their

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priorities following mergers and consolidations, which have been common in recent years in these industries. The ability of our products to reach their potential could be limited if future collaborators decrease or fail to increase spending relating to such products;

• future collaborators may underfund or not commit sufficient resources to the testing, marketing, distribution or development of our products; and

• future collaborators may develop alternative products either on their own or in collaboration with others, or encounter conflicts of interest or changes in business strategy or other business issues, which could adversely affect their willingness or ability to fulfill their obligations to us.

Given these risks, it is possible that any collaborative arrangements into which we enter may not be successful.

We will require substantial additional funding which may not be available to us on acceptable terms, or at all.

We are advancing multiple product candidates through clinical development. We will need to raise substantial additional capital to continue our clinical development and commercialization activities.

Our future funding requirements will depend on many factors, including but not limited to:

• our need to expand our research and development activities;

• the rate of progress and cost of our clinical trials;

• the costs associated with establishing a sales force and commercialization capabilities;

• the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;

• the costs and timing of seeking and obtaining FDA and other non-U.S. regulatory approvals;

• our ability to maintain, defend and expand the scope of our intellectual property portfolio;

• our need and ability to hire additional management and scientific and medical personnel;

• the effect of competing technological and market developments;

• our need to implement additional internal systems and infrastructure, including financial and reporting systems; and

• the economic and other terms and timing of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future.

Until we can generate a sufficient amount of product revenue to finance our cash requirements, which we may never do, we expect to finance future cash needs primarily through public or private equity offerings, debt financings or strategic collaborations. We do not know whether 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.

If our competitors develop and market products that are more effective, safer or less expensive than our current and future product candidates, our commercial opportunities will be negatively impacted.

The life sciences industry is highly competitive, and we face significant competition from many pharmaceutical, biopharmaceutical and biotechnology companies that are researching and marketing products designed to address prostate cancer and other indications. We are currently developing two cancer therapeutics

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that will compete with other drugs and therapies that currently exist or are being developed. Products we may develop in the future are also likely to face competition from other drugs and therapies. Many of our competitors have significantly greater financial, manufacturing, marketing and drug development resources than we do. Large pharmaceutical companies, in particular, have extensive experience in clinical testing and in obtaining regulatory approvals for drugs. These companies also have significantly greater research and marketing capabilities than we do. Some of the large pharmaceutical companies with which we expect to compete include Genentech, Inc., Sanofi-Aventis, S.A., AstraZeneca PLC, Novartis AG, Roche and Celgene Corporation. In addition, many universities and private and public research institutes may become active in cancer research, some of which are in direct competition with us.

Our product candidates will compete with a number of drugs that are currently marketed or in development that also target proliferating cells. We expect that Asentar^™ will compete with products that have been marketed or are in advanced stages of development, including Emcyt^®, Novantrone^®, Paraplatin^®, Taxol^®, VEGF-Trap, Thalomid^®, Avastin^®, Satraplatin^®, Provenge^® vaccine and the like. We expect that AQ4N will compete with products that have been marketed or are in advanced stages of development, including cintredekin besudotox, Avastin, and radiation therapy.

In many instances, the drugs that will compete with our product candidates are generic, widely available and/or established, existing standards of care. To compete effectively with these drugs, our product candidates will need to demonstrate advantages that lead to improved clinical safety or efficacy compared to these products.

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

• the results of our clinical trials;

• our ability to recruit and enroll patients for our clinical trials;

• the efficacy, safety and reliability of our product candidates;

• the speed at which we develop our product candidates;

• our ability to commercialize and market any of our product candidates that may receive regulatory approval;

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

• our ability to maintain a good relationship with regulatory authorities;

• the timing and scope of regulatory approvals;

• adequate levels of reimbursement under private and governmental health insurance plans, including Medicare;

• our ability to protect intellectual property rights related to our products;

• our ability to have our partners manufacture and sell commercial quantities of any approved products to the market; and

• acceptance of future product candidates by physicians and other health care providers.

If our competitors market products that are more effective, safer or less expensive than our future product candidates, if any, or that reach the market sooner than our future product candidates, if any, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by 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. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete or less competitive.

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Vitamin D analogs, which are chemically-designed compounds that mimic natural vitamin D compounds, have been, or may be in the future, evaluated systemically in clinical trials for the treatment of diseases where the objective of therapy is to decrease or normalize the growth rate of cells. While the developers of some of these product candidates claim their compounds have increased benefits relative to their effects on the blood levels of calcium, we are unaware of any clinical data for these compounds that demonstrate significant therapeutic benefits to date in oncology. If vitamin D analogs demonstrate significant therapeutic benefits, they may be a cost-effective alternative to Asentar^™.

If we fail to attract and retain key management and scientific personnel, we may be unable to successfully develop or commercialize our product candidates.

We will need to expand and effectively manage our managerial, operational, financial, development and other resources in order to successfully pursue our research, development and commercialization efforts for our existing and future product candidates. Our success depends on our continued ability to attract, retain and motivate highly qualified management and pre-clinical and clinical personnel. The loss of the services of any of our senior management could delay or prevent the commercialization of our product candidates. We do not maintain “key man” insurance policies on the lives of these individuals or the lives of any of our other employees. We employ these individuals on an at-will basis and their employment can be terminated by us or them at any time, for any reason and with or without notice. We will need to hire additional personnel as we continue to expand our research and development activities and build a sales and marketing function.

We have scientific and clinical advisors who assist us in formulating our research, development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco, California area. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will impede significantly the achievement of our research and development objectives, our ability to raise additional capital and our ability to implement our business strategy. In particular, if we lose any members of our senior management team, we may not be able to find suitable replacements in a timely fashion or at all and our business may be harmed as a result.

As we evolve from a company primarily involved in development to a company also involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations successfully.

As we advance our product candidates through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with such third parties, as well as additional collaborators and suppliers. Maintaining these relationships and managing our future growth will impose significant added responsibilities on members of our management. We must be able to: manage our development efforts effectively; manage our clinical trials effectively; hire, train and integrate additional management, development, administrative and sales and marketing personnel; improve our managerial, development, operational and finance systems and expand our facilities, all of which may impose a strain on our administrative and operational infrastructure.

Furthermore, we may acquire additional businesses, products or product candidates that complement or augment our existing business. To date, we have no experience in acquiring and integrating other businesses. Integrating any newly acquired business or product could be expensive and time-consuming. We may not be able

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to integrate any acquired business or product successfully or operate any acquired business profitably. Our future financial performance will depend, in part, on our ability to manage any future growth effectively and our ability to integrate any acquired businesses. We may not be able to accomplish these tasks, and our failure to accomplish any of them could prevent us from successfully growing our company.

If we fail to acquire and develop other products or product candidates at all or on commercially reasonable terms, we may be unable to grow our business.

We intend to continue to rely on in-licensing as the source of any of our future product candidates for development and commercialization. Because we do not currently have nor do we intend to establish internal research capabilities, we are dependent upon pharmaceutical and biotechnology companies and other researchers to sell or license products to us. The success of this strategy depends upon our ability to identify, select and acquire pharmaceutical product candidates. Proposing, negotiating and implementing an economically viable product acquisition or license are lengthy and complex processes. We compete for partnering arrangements and license agreements with pharmaceutical and biotechnology companies and academic research institutions. Our competitors may have stronger relationships with third parties with whom we are interested in collaborating, greater financial, development and commercialization resources and/or may have more established histories of developing and commercializing products than we do. As a result, our competitors may have a competitive advantage in entering into partnering arrangements with such third parties. In addition, even if we find promising product candidates, and generate interest in a partnering or strategic arrangement to acquire such product candidates, we may not be able to acquire rights to additional product candidates or approved products on commercially reasonable terms that we find acceptable, or at all. If we are unable to in-license or develop product candidates necessary to grow our business, we may consider other strategic alternatives, such as a sale of the Company.

We expect that any product candidate to which we acquire rights will require additional development efforts prior to commercial sale, including extensive clinical testing and approval by the FDA and other non-U.S. regulatory authorities. All product candidates are subject to the risks of failure inherent in pharmaceutical product development, including the possibility that the product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities and the possibility that, due to strategic considerations, we will discontinue research or development with respect to a product candidate for which we have already incurred significant expense. Even if the product candidates are approved, we cannot be sure that they would be capable of economically feasible production or commercial success.

We rely on third parties to conduct clinical trials for our product candidates and plan to rely on third parties to conduct future clinical trials. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be unable to obtain regulatory approval for or commercialize our current and future product candidates.

We do not have the ability to independently conduct clinical trials for Asentar^™, AQ4N or any other product candidate. We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct some or all of our clinical trials of our product candidates. Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol. Moreover, the FDA and other non-U.S. regulatory authorities require us to comply with regulations and standards, commonly referred to as Good Clinical Practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials. Our reliance on third parties does not relieve us of these responsibilities and requirements. If the third parties conducting our clinical trials do not perform their contractual duties or obligations, do not meet expected deadlines or need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to GCPs or for any other reason, we may need to enter into new arrangements with alternative third parties and our clinical trials

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may be extended, delayed or terminated. In addition, a failure by such third parties to perform their obligations in compliance with GCPs may cause our clinical trials to fail to meet regulatory requirements, which may require us to repeat our clinical trials.

We rely on third parties to manufacture and supply our product candidates.

We do not own or operate manufacturing facilities for clinical or commercial production of our product candidates. We have no experience in drug formulation or manufacturing, and we lack the resources and the capability to manufacture any of our product candidates on a clinical or commercial scale. We obtain calcitriol, which is the active ingredient in Asentar^™, through an agreement with a single supplier, Plantex, Inc. Except in limited circumstances, we are obligated to purchase the majority of our calcitriol product requirements from Plantex. Plantex has the capacity to manufacture calcitriol in the quantities that our development and future commercialization efforts, if any, require. If Plantex is unable to produce calcitriol in the amounts that we require, we may not be able to establish a contract and obtain a sufficient alternative supply from another supplier on a timely basis or for the quantities we require. We expect to continue to depend on third-party contract manufacturers for the foreseeable future.

We may not be able to start our clinical trials as planned and obtain regulatory approvals if we do not receive materials or drug products from our manufacturers.

Our product candidates require precise, high quality manufacturing. Any of our contract manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and other non-U.S. regulatory authorities to ensure strict compliance with current Good Manufacturing Practice, or cGMP, and other applicable government regulations and corresponding standards. If our contract manufacturers fail to achieve and maintain high manufacturing standards in compliance with cGMP regulations, we may experience manufacturing errors resulting in patient injury or death, product recalls or withdrawals, delays or interruptions of production, failures in product testing or delivery, delay or prevention of filing or approval of marketing applications for our products, cost overruns or other problems that could seriously harm our business.

To date, our product candidates have been manufactured in small quantities for pre-clinical studies and clinical trials, although calcitriol is manufactured in bulk form by Plantex for commercial use in the chronic kidney disease market. If in the future one of our product candidates is approved for commercial sale, we will need to manufacture that product candidate in larger quantities. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. Additionally, any third party manufacturer we retain to manufacture our product candidates on a commercial scale must pass an FDA pre-approval inspection for conformance to the cGMPs before we can obtain approval of our product candidates. If we are unable to successfully increase the manufacturing capacity for a product candidate in conformance with cGMPs, the regulatory approval or commercial launch of any related products may be delayed or there may be a shortage in supply.

Any performance failure on the part of our contract manufacturers could delay clinical development or regulatory approval of our product candidates or commercialization of our future product candidates, depriving us of potential product revenue and resulting in additional losses. In addition, our dependence on a third party for manufacturing may adversely affect our future profit margins. Our ability to replace an existing manufacturer may be difficult because the number of potential manufacturers is limited and the FDA must approve any replacement manufacturer before it can begin manufacturing our product candidates. Such approval would require new testing and compliance inspections. It may be difficult or impossible for us to identify and engage a replacement manufacturer on acceptable terms in a timely manner, or at all.

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We currently have limited marketing staff and no sales or distribution organization. If we are unable to develop our sales and marketing and distribution capability on our own or through collaborations with marketing partners, we will not be successful in commercializing our product candidates.

We currently have limited marketing and no sales or distribution capabilities. If any of our product candidates are approved, we intend to establish our sales and marketing organization with technical expertise and supporting distribution capabilities to commercialize our product candidates, which will be expensive and time consuming. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. With respect to our existing and future product candidates, we may choose to collaborate with third parties that have direct sales forces and established distribution systems, either to augment our own sales force and distribution systems or in lieu of our own sales force and distribution systems. To the extent that we enter into co-promotion or other licensing arrangements, our product revenue is likely to be lower than if we directly marketed or sold our products. In addition, any revenue we receive will depend in whole or in part upon the efforts of such third parties, which may not be successful and are generally not within our control. If we are unable to enter into such arrangements on acceptable terms or at all, we may not be able to successfully commercialize our existing and future product candidates. If we are not successful in commercializing our existing and future product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant additional losses.

Our proprietary rights may not adequately protect our technologies and product candidates.

Our commercial success will depend on our ability to obtain patents and/or regulatory exclusivity and maintain adequate protection for our technologies and product candidates in the United States and other countries. As of December 31, 2007, we owned or had exclusive rights to 62 issued U.S. and foreign patents and 172 pending U.S. and foreign patent applications. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies and future product candidates are covered by valid and enforceable patents or are effectively maintained as trade secrets.

We apply for patents covering both our technologies and product candidates, as we deem appropriate. However, we may fail to apply for patents covering important technologies or product candidates in a timely fashion, or at all. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and technologies. In addition, we generally do not control the patent prosecution of subject matter that we license from others. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over our own. Moreover, the patent positions of biopharmaceutical companies are highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. As a result, the validity and enforceability of patents cannot be predicted with certainty. In addition, we do not know whether:

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

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

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

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

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

• any patents issued to us or our licensors and collaboration partners will provide us with any competitive advantages, or will be challenged by third parties;

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

• the patents of others will have an adverse effect on our business.

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The actual protection afforded by a patent varies on a product-by-product basis, from country to country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory-related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents under existing and future laws. Our ability to maintain and solidify our proprietary position for our products will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

Protection afforded by U.S. patents may be adversely affected by proposed changes to patent-related U.S. statutes and to U.S. Patent and Trademark Office, or USPTO, rules, especially changes to rules concerning the filing of continuation applications and other rules affecting the prosecution of our patent applications in the U.S, which were enacted August 22, 2007 and were to be effective November 1, 2007 but were successfully challenged by a third party. While the rules have not been interpreted or implemented at this time and it is unknown when and if the rules would apply to our current patent applications, the rules require that third or subsequent continuing application filings be supported by a showing as to why the new amendments or claims, argument or evidence presented could not have been previously submitted. In addition, the rules limit the numbers of Requests for Continuing Examination (RCEs) to one per application family. Other rules limit consideration by the USPTO of up to only 5 independent claims and 25 total claims per application. It is common practice to file multiple patent applications with many claims and file multiple RCEs in an effort to maximize patent protection. The USPTO rules as implemented and interpreted may limit our ability to file RCEs and continuing applications directed to our products and methods and related competing products and methods. In addition, the USPTO rules may limit our ability to patent a number of claims sufficient to cover our products and methods and related competing products and methods. Other changes to the patent statutes may adversely affect the protection afforded by U.S. patents and/or open up U.S. patents to third party attack in non-litigation settings.

We also rely on trade secrets to protect some of our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain. While we use reasonable efforts to protect our trade secrets, our or our collaboration partners’ employees, consultants, contractors or scientific and other advisors may unintentionally or willfully disclose our proprietary information to competitors. Enforcement of claims that a third party has illegally obtained and is using trade secrets is expensive, time consuming and uncertain. In addition, non-U.S. courts are sometimes less willing than U.S. courts to protect trade secrets. If our competitors independently develop equivalent knowledge, methods and know-how, we would not be able to assert our trade secrets against them and our business could be harmed.

The intellectual property protection for our product candidates is dependent on third parties.

With respect to Asentar^™, OHSU and the University of Pittsburgh of the Commonwealth System of Higher Education, or UPitt, retain the right to prosecute and maintain the patents and patent applications covered by our license agreements. We only have the right to select patent counsel and provide comments and suggestions under our OHSU license agreement. We only have the right to consult in the selection of counsel and advise in the prosecution, filing and maintenance of patent applications under our UPitt license agreement. Generally, we only have right to prosecute and maintain certain patents for AQ4N in our territory and rely on our licensing partner to prosecute and maintain the remainder of our AQ4N patents. We would need to determine, with our partners, who would be responsible for the prosecution of patents relating to any joint inventions. If any of our licensing partners fail to appropriately prosecute and maintain patent protection for any of our product candidates, our ability to develop and commercialize those product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. In addition, OHSU retains an initial right to bring any infringement actions

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related to the intellectual property we license from these parties. Any failure by OHSU, or any other licensing partner of ours, to properly protect the intellectual property rights relating to our product candidates could have a material adverse effect on our financial condition and results of operation.

If we breach any of the agreements under which we license commercialization rights to our product candidates or technology from third parties, we could lose license rights that are important to our business.

We license the development and commercialization rights for each of our product candidates, and we expect to enter into similar licenses in the future. For instance, we licensed exclusive worldwide rights from OHSU and the University of Pittsburgh, pursuant to two separate license agreements, that enable us to use and administer calcitriol, the active ingredient in Asentar^™, in the treatment of cancer. In 2003, we licensed exclusive rights in the United States, Canada and Mexico to AQ4N from KuDOS, which was acquired by AstraZeneca. In April 2007, we terminated the December 2003 license agreement with KuDOS, in favor of an agreement concluded directly with the primary licensor to KuDOS, BTG International Limited, under which we acquired the worldwide exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases. Under these licenses we are subject to commercialization and development, sublicensing, royalty and milestone payments, insurance and other obligations. If we fail to comply with any of these obligations or otherwise breach these license agreements, our licensing partners may have the right to terminate the license in whole or in part or to terminate the exclusive nature of the license. Loss of any of these licenses or the exclusivity rights provided therein could harm our financial condition and operating results, including by resulting in the termination or delay of, or a reduction in the scope of our development efforts with respect to, any of our current or future product candidates, or by resulting in increased competition with respect to any of our current or future product candidates. In addition, to the extent that we receive benefits from collaborative provisions under any of our license agreements, we may lose those benefits, which could result in significant increases to our product development expenditures, and the need to hire additional employees or otherwise develop expertise for which we have not budgeted.

If conflicts of interest arise between our licensing partners and us, any of them may act in their self-interest, which may be adverse to our interests.

We license the development and commercialization rights for each of our product candidates, and we expect to enter into similar licenses in the future. If a conflict of interest arises between us and one or more of our licensing partners, they may act in their own self-interest and not in our interest or in the interest of our stockholders. For example, even after entering into licensing agreements, our licensors may seek to renegotiate or terminate their relationships with us for a variety of reasons, including unsatisfactory clinical results or timing, a change in our or their business strategy on either our or their part or for other reasons. If one or more of our licensing partners were to breach their licensing agreement with us, or seek to renegotiate such agreement, the business attention and focus of our management team would be diverted and the development and commercialization of our product candidates may be delayed or terminated.

The patent protection for our product candidates or products may expire before we are able to maximize their commercial value which may subject us to increased competition and reduce or eliminate our opportunity to generate product revenue.

The patents for our product candidates have varying expiration dates and, if these patents expire, we may be subject to increased competition and we may not be able to recover our development costs. For example, one of our U.S. patent claims for AQ4N is due to expire in 2010 and our other U.S. patent for a process of producing AQ4N is due to expire in 2019. Our U.S. patents for use of Asentar^™ are due to expire in 2017 and 2019. In some of the larger economic territories, such as the United States and Europe, patent term extension/restoration may be available to compensate for time taken during aspects of the product’s regulatory review. However, we cannot be certain that an extension will be granted, or if granted, what the applicable time period or the scope of patent protection afforded during any extended period will be. In addition, even though some regulatory agencies may provide some other exclusivity for a product under its own laws and regulations, we may not be able to qualify

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the product or obtain the exclusive time period. If we are unable to obtain patent term extension/restoration or some other exclusivity, we could be subject to increased competition and our opportunity to establish or maintain product revenue could be substantially reduced or eliminated. Furthermore, we may not have sufficient time to recover our development costs prior to the expiration of our U.S. and non-U.S. patents.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on all of our products or product candidates throughout the world would be prohibitively expensive. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products. These products may compete with our products and may not be covered by any of our patent claims or other intellectual property rights. Additionally, the intellectual property laws throughout the world, including the United States, are subject to change from time to time which could affect our patent and other intellectual property rights.

The laws of some non-U.S. countries do not protect intellectual property rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or pharmaceuticals, which could make it difficult for us to stop the infringement of our patents. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

If we are sued for infringing intellectual property rights of third parties, litigation will be costly and time consuming and could prevent us from developing or commercializing our future product candidates.

Our commercial success depends, in part, on our not infringing the patents and proprietary rights of other parties and not breaching any collaboration or other agreements we have entered into with regard to our technologies and product candidates. Numerous third-party U.S. and non-U.S. issued patents and pending applications exist in the areas of cancer chemotherapy with vitamin D compounds and formulations comprising vitamin D compounds.

For example, we are aware of a pending U.S. patent application owned by a competitor with claims that, as originally filed, would have presented potential infringement issues if a patent had issued. The claims have since been narrowed so that they do not cover the use of Asentar^™ for the treatment of cancer; however, this competitor has filed a continuation application with the original claims, which if successful, could result in an issued patent that covers the use of Asentar^™ for the treatment of cancer. While we are aware of issued U.S. patents which claim formulations similar to Asentar^™, we believe that Asentar^™ does not infringe the claims of these issued patents. In addition, we are aware of a patent that appears to be broad enough to cover Sanofi-Aventis’ Taxotere^® formulation and use thereof to treat cancer. We believe that the use of Asentar^™ together with Sanofi-Aventis’ Taxotere^® formulation to treat cancer does not infringe any valid claim of this patent.

Because patent applications can take several years to issue, if they are issued at all, there may currently be pending applications, unknown to us, that may result in issued patents that cover our technologies or product candidates. It is uncertain whether the issuance of any third party patent would require us to alter our products or processes, obtain licenses or cease certain activities. If we wish to use the technology or compound claimed in issued and unexpired patents owned by others, we will need to obtain a license from the owner, enter into litigation to challenge the validity of the patents or incur the risk of litigation in the event that the owner asserts that we infringe its patents. The failure to obtain a license to technology or the failure to challenge an issued patent that we may require to discover, develop or commercialize our products may have a material adverse impact on us.

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If a third party asserts that we infringe its patents or other proprietary rights, we could face a number of risks that could seriously harm our results of operations, financial condition and competitive position, including:

• infringement and other intellectual property claims, which would be costly and time consuming to defend, whether or not the claims have merit, and which could delay the regulatory approval process and divert management’s attention from our business;

• substantial damages for past infringement, which we may have to pay if a court determines that our product candidates or technologies infringe a competitor’s patent or other proprietary rights;

• a court prohibiting us from selling or licensing our technologies or future drugs unless the third party licenses its patents or other proprietary rights to us on commercially reasonable terms, which it is not required to do; and

• if a license is available from a third party, we may have to pay substantial royalties or lump sum payments or grant cross licenses to our patents or other proprietary rights to obtain that license.

Although we are not currently a party to any legal proceedings relating to our intellectual property, in the future, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert these claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against these claims, whether they are with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigation and diversion of management’s attention and resources. As a result of these disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, if at all, could seriously harm our business or financial condition.

One or more third-party patents or patent applications may conflict with patent applications to which we have rights. Any such conflict may substantially reduce the coverage of any rights that may issue from the patent applications to which we have rights. If third parties file patent applications in the United States that also claim technology to which we have rights, we may have to participate in interference proceedings in the USPTO to determine priority of invention.

We may be subject to damages resulting from claims that we, or our employees, have wrongfully used or disclosed alleged trade secrets of our employees’ former employers.

Many of our employees were previously employed at universities or biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we have not received any claim to date, we may be subject to claims that these employees through their employment 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.

We expect that the price of our common stock may be volatile.

Prior to our initial public offering of common stock, there was no public market for our common stock. The price of our common stock may be volatile as a result of changes in our operating performance or prospects. From the date of our initial public offering in May 2006 through December 31, 2007, the price of our common stock has ranged from a high of $17.25 to a low of $2.21. Factors that could cause volatility in the market price of our common stock include, but are not limited to:

• results from, and any delays in, our clinical trial programs, including current and planned clinical trials for Asentar^™ and AQ4N; including our announcement in November 2007 to end our ASCENT-2 Phase 3 clinical trial for Asentar^™ for the treatment of AIPC and to suspend enrollment for our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and each of our other ongoing trials involving the use of Asentar^™;

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• announcements of FDA non-approval of our product candidates, including Asentar^™ and AQ4N, or delays in FDA or other non-U.S. regulatory agency review processes;

• FDA or other U.S. or non-U.S. regulatory actions affecting us or our industry;

• litigation or public concern about the safety of our product candidates or future drugs;

• failure or discontinuation of any of our research or clinical trial programs;

• delays in the commercialization of our future product candidates;

• the costs of in-licensing additional product candidates;

• market conditions in the pharmaceutical, biopharmaceutical and biotechnology sectors and issuance of new or changed securities analysts’ reports or recommendations;

• actual and anticipated fluctuations in our quarterly operating results;

• developments or disputes concerning our intellectual property or other proprietary rights;

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

• issues in manufacturing our product candidates or future product candidates;

• market acceptance of our future product candidates;

• deviations in our operating results from the estimates of analysts;

• coverage and reimbursement policies of government and other third-party payors;

• sales of our common stock by our officers, directors or significant stockholders;

• developments relating to our licensing and collaboration agreements; and

• additions or departures of key personnel.

In addition, the stock markets in general, and the markets for pharmaceutical, biopharmaceutical and biotechnology stocks in particular, have experienced extreme volatility that has been often unrelated to the operating performance of the issuer. These broad market fluctuations may adversely affect the trading price or liquidity of our common stock. In the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the issuer. If any of our stockholders were to bring such a lawsuit against us, we could incur substantial costs defending the lawsuit and the attention of our management would be diverted from the operation of our business.

The ownership of our common stock may continue to be highly concentrated.

As of December 31, 2007, we believe that our executive officers and directors and their affiliates, together with our current significant stockholders, beneficially owned significant amounts of our outstanding common stock. Based on required securities filings, we do not believe that any substantial change has occurred in this ownership concentration. Accordingly, these stockholders, acting as a group, will continue to have significant influence over 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 transaction. These stockholders could delay or prevent a change of control of our company, 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.

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Provisions of our charter documents or Delaware law could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for our stockholders to change management.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:

• a classified board of directors so that not all directors are elected at one time;

• a prohibition on stockholder action through written consent;

• limitation of our stockholders entitled to call special meetings of stockholders;

• an advance notice requirement for stockholder proposals and nominations; and

• the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine.

In addition, Delaware law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of our company.

Provisions in our charter and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.

We may incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the Securities and Exchange Commission and by the NASDAQ Global Market, will result in increased costs to us as we respond to these requirements. These laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements.

A significant portion of our outstanding common stock may be sold into the market. Substantial sales of our common stock, or the perception such sales are likely to occur, could cause the price of our common stock to decline.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of our common stock, the market price of our common stock could decline significantly.

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Risks Related to Our Industry

The regulatory approval process is expensive, time consuming and uncertain and may prevent us or our collaboration partners from obtaining approvals for the commercialization of some or all of our product candidates.

The research, testing, manufacturing, labeling, approval, selling, marketing and distribution of drug products are subject to extensive regulation by the FDA and other non-U.S. regulatory authorities, which regulations differ from country to country. We are not permitted to market our product candidates in the United States until we receive approval of an NDA from the FDA. We have not submitted an application for or received marketing approval for any of our product candidates. Obtaining approval of an NDA can be a lengthy, expensive and uncertain process. In addition, failure to comply with FDA, non-U.S. regulatory authorities or other applicable U.S. and non-U.S. regulatory requirements may, either before or after product approval, if any, subject our company to administrative or judicially imposed sanctions, including:

• restrictions on the products, manufacturers or manufacturing process;

• warning letters;

• civil and criminal penalties;

• injunctions;

• suspension or withdrawal of regulatory approvals;

• product seizures, detentions or import bans;

• voluntary or mandatory product recalls and publicity requirements;

• total or partial suspension of production;

• imposition of restrictions on operations, including costly new manufacturing requirements; and

• refusal to approve pending NDAs or supplements to approved NDAs.

Regulatory approval of an NDA or NDA supplement is not guaranteed, and the approval process is expensive and may take several years. The FDA also has 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 pre-clinical studies and clinical trials. The number of pre-clinical studies and clinical trials that will be required for FDA approval 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 can delay, limit or deny approval of a drug candidate for many reasons, including:

• a drug candidate may not be deemed safe or effective;

• FDA officials may not find the data from pre-clinical studies and clinical trials sufficient;

• the FDA might not approve our third-party manufacturer’s processes or facilities; or

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

Even if we obtain regulatory approvals for our product candidates, the terms of approvals and ongoing regulation of our products may limit how we manufacture and market our product candidates, which could materially impair our ability to commercialize and generate revenue.

Once regulatory approval has been granted, the approved product and its manufacturer are subject to continual review. Any regulatory approval that we receive for a product candidate is likely to be subject to limitations on the indicated uses for which the product may be marketed, or include requirements for potentially costly post-approval follow-up clinical trials. In addition, if the FDA and/or other non-U.S. regulatory authorities

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approve any of our product candidates, the labeling, packaging, adverse event reporting, storage, advertising and promotion for the product will be subject to extensive regulatory requirements. We and the manufacturers of our products are also required to comply with cGMP regulations, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture our products, and these facilities are subject to ongoing regulatory inspection. If we fail to comply with the regulatory requirements of the FDA and other non-U.S. regulatory authorities, or if previously unknown problems with our products, manufacturers or manufacturing processes are discovered, we could be subject to administrative or judicially imposed sanctions, including:

• restrictions on the products, manufacturers or manufacturing process;

• warning letters;

• civil or criminal penalties or fines;

• injunctions;

• product seizures, detentions or import bans;

• voluntary or mandatory product recalls and publicity requirements;

• suspension or withdrawal of regulatory approvals;

• total or partial suspension of production;

• imposition of restrictions on operations, including costly new manufacturing requirements; and

• refusal to approve pending NDAs or supplements to approved NDAs.

In addition, the FDA and other non-U.S. regulatory authorities may change their policies and additional regulations may be enacted that could prevent or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of 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 would likely not be permitted to market our future product candidates and we may not achieve or sustain profitability.

Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our products.

Even if our product candidates obtain regulatory approval, resulting products may not gain market acceptance among physicians, patients, health care payors and/or the medical community. We believe that the degree of market acceptance will depend on a number of factors, including:

• timing of market introduction of competitive products;

• potential changes in the standard of care for treating patients;

• safety and efficacy of our product;

• prevalence and severity of any side effects;

• potential advantages or disadvantages over alternative treatments;

• strength of marketing and distribution support;

• price of our products, both in absolute terms and relative to alternative treatments; and

• availability of coverage and reimbursement from government and other third-party payors.

If our future product candidates fail to achieve market acceptance, we may not be able to generate significant revenue or achieve or sustain profitability.

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The coverage and reimbursement status of newly approved drugs is uncertain, and failure to obtain adequate coverage and adequate reimbursement could limit our ability to market any future product candidates we may develop and decrease our ability to generate revenue from any of our existing and future product candidates that may be approved.

There is significant uncertainty related to the third-party coverage and reimbursement of newly approved drugs. The commercial success of our existing and future product candidates in both domestic and international markets will depend in part on the availability of coverage and adequate reimbursement from third-party payors, including government payors, such as the Medicare and Medicaid programs, managed care organizations, and other third-party payors. Government and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new drugs and, as a result, they may not cover or provide adequate payment for our existing and future product candidates. These payors may conclude that our future product candidates are less safe, less effective or less cost-effective than existing or later introduced products, and they may not approve our future product candidates for coverage and reimbursement. The failure to obtain coverage and adequate reimbursement for our existing and future product candidates or health care cost containment initiatives that limit or restrict reimbursement for our existing and future product candidates may reduce any future product revenue.

Current health care laws and regulations and future legislative or regulatory changes to the health care system may affect our ability to sell our future product candidates profitably.

In the United States, there have been and we expect there will continue to be a number of legislative and regulatory proposals to change the health care system in ways that could significantly affect our business. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the health care system, some of which are intended to contain or reduce the costs of medical products and services. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, which, among other things, established a new Part D prescription drug benefit beginning January 1, 2006 and changed coverage and reimbursement for drugs and devices under existing benefits. It remains difficult to predict the full impact that the MMA will have on us and our industry.

There have also been federal legislative proposals to change pharmaceutical importation laws that could affect our business. Many current proposals seek to expand consumers’ ability to import lower priced versions of products from Canada and other foreign countries where there are government price controls on medical products and services. In addition, the MMA contains provisions that may change U.S. importation laws and broaden permissible imports. Even if the MMA changes do not take effect, and other legislative proposals are not enacted, imports from Canada and elsewhere may continue to increase due to market and political forces, and the limited enforcement resources of the FDA, the U.S. Customs Service, and other government agencies.

We are unable to predict what additional legislation or regulation, if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such legislation or regulation would have on our business. Any cost containment measures or other health care system reforms that are adopted could have a material adverse effect on our ability to commercialize our existing and future product candidates successfully.

Failure to obtain regulatory approval outside the United States will prevent us from marketing our product candidates abroad.

We intend to market certain of our existing and future product candidates in non-U.S. markets. In order to market our existing and future product candidates in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals. We have had limited interactions with non-U.S. regulatory authorities, and the approval procedures vary among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one or more non-U.S. regulatory

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authorities does not ensure approval by regulatory authorities in other countries or by the FDA. The non-U.S. regulatory approval process may include all of the risks associated with obtaining FDA approval as well as other risks specific to the jurisdictions in which we may seek approval. We may not obtain non-U.S. regulatory approvals on a timely basis, if at all. We may not be able to file for non-U.S. regulatory approvals and may not receive necessary approvals to commercialize our existing and future product candidates in any market.

Non-U.S. governments often impose strict price controls, which may adversely affect our future profitability.

We intend to seek approval to market certain of our existing and future product candidates in both the United States and in non-U.S. jurisdictions. If we obtain approval in one or more non-U.S. jurisdictions, we will be subject to rules and regulations in those jurisdictions relating to our product. In some countries, particularly in the European Union, prescription drug pricing is subject to negotiation and governmental control. In these countries, price negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a drug candidate. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our existing and future product candidates to other available therapies. If reimbursement of our future product candidates is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

We may be subject to costly claims related to our clinical trials and may not be able to obtain adequate insurance.

Because we conduct clinical trials in humans, we face the risk that the use of our product candidates will result in adverse side effects. We cannot predict the possible harms or side effects that may result from our clinical trials. Although we have clinical trial liability insurance for up to $10 million, our insurance may be insufficient to cover any such events. We do not know whether we will be able to continue to obtain clinical trial coverage on acceptable terms, or at all. 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. There is also a risk that third parties that we have agreed to indemnify could incur liability. Any litigation arising from our clinical trials, even if we were ultimately successful, would consume substantial amounts of our financial and managerial resources and may create adverse publicity.

Our business may become subject to economic, political, regulatory and other risks associated with international operations.

Our business is subject to risks associated with conducting business internationally, in part due to a number of our suppliers being located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:

• difficulties in compliance with non-U.S. laws and regulations;

• changes in non-U.S. regulations and customs;

• changes in non-U.S. currency exchange rates and currency controls;

• changes in a specific country’s or region’s political or economic environment;

• trade protection measures, import or export licensing requirements or other restrictive actions by U.S. or non-U.S. governments;

• negative consequences from changes in tax laws; and

• difficulties associated with staffing and managing foreign operations, including differing labor relations.

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Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

As of December 31, 2007, we subleased approximately 25,288 square feet of space in South San Francisco, California from an independent party for our headquarters and as the base for our operational activities, with average annual lease payments totaling approximately $725,000. The lease expires in September 2012. In the future, we may lease or sublease additional space that we believe will be available on commercially reasonable terms.

Item 3. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings.

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

There were no matters submitted to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2007.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Use of Proceeds From Registered Securities

On May 15, 2006, the Company completed its initial public offering, or IPO, of 6,250,000 shares of its common stock at the public offering price of $6.50 per share for gross proceeds of approximately $40.6 million. We paid the underwriters a commission of approximately $2,843,750 and incurred additional offering expenses of approximately $2,505,364. On June 9, 2006, the underwriters of the Company’s initial public offering purchased an additional 657,500 shares of the Company’s common stock pursuant to their over-allotment option at the public offering price of $6.50 per share for gross proceeds of approximately $4.3 million. Net proceeds from the initial public offering and the subsequent exercise of the underwriters’ over-allotment option to purchase additional shares of the Company’s common stock were approximately $39.2 million, after deducting underwriting discounts and commissions and other offering expenses. The managing underwriters of our initial public offering were Bear, Stearns & Co., Inc. and Cowen and Company, LLC. In connection with the closing of the initial public offering, all of the Company’s shares of convertible preferred stock outstanding at the time of the offering were automatically converted into 14,239,571 shares of common stock.

No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

The net proceeds from our initial public offering have been invested into short-term investment grade securities and money market accounts. We have begun, and intend to continue to use, our net proceeds from our initial public offering to fund clinical development of our product candidates, Asentar^™ and AQ4N. We intend to use the remaining net proceeds from our initial public offering, if any, to, among other things, fund pre-launch marketing preparations for our product candidates, to identify new product candidates which we may in-license and for general corporate purposes and working capital.

Market Information

Our common stock is traded on The NASDAQ Global Market under the symbol “NOVC”. The following table sets forth, for the period indicated (which begins on the first day our common stock was publicly traded), the high and low sales prices per share of our common stock for each full quarterly period since our initial public offering, as reported on The NASDAQ Global Market.

	Sales Price
	High		Low
Year Ended December 31, 2006
Second Quarter (beginning May 10, 2006)	$	9.94	$	6.01
Third Quarter	$	12.25	$	5.45
Fourth Quarter	$	7.77	$	5.62
Year Ended December 31, 2007
First Quarter	$	7.78	$	5.60
Second Quarter	$	17.25	$	6.57
Third Quarter	$	11.09	$	7.30
Fourth Quarter	$	8.96	$	2.21

The closing price of our common shares as reported by the NASDAQ Stock Exchange on March 6, 2008 was $2.71 per share. As of March 6, 2008 there were approximately 94 holders of record of our common stock.

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Dividend Policy

No dividends have been declared or paid on our common stock. We do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future.

Issuer Purchases of Equity Securities

The following table sets forth information with respect to repurchases of our common stock during the fourth quarter of fiscal 2007.

Period	Total number of shares purchased (1)	Average price paid per share		Total number of shares purchased as part of publicly announced programs	Approximate total dollar value of shares that may yet be purchased under the program
					(in thousands)
October 1, 2007 – October 31, 2007	5,089	$	1.31	—	$	—
November 1, 2007 – November 30, 2007	11,786		1.93	—		—
December 1, 2007 – December 31, 2007	1		1.30	—		—
Total	16,876	$	1.74	—	$	—

(1) None of the repurchases of common stock noted above were made pursuant to a publicly announced plan. The shares repurchased were related to the early exercise of options that had not yet vested upon termination of the purchaser’s employment. The repurchase price paid was the exercise price paid by the option holder.

Securities Authorized For Issuance Under Equity Compensation Plans

Information relating to compensation plans under which equity securities are authorized for issuance is set forth under Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.

Performance Graph

The following graph and table compare:

• the performance of an investment in our common stock over the period of May 10, 2006 through December 31, 2007, beginning with an investment at the closing market price on May 10, 2006, the end of the first day our common stock traded on the Nasdaq Global Market following our initial public offering, and thereafter, based on the closing price of our common stock on the Nasdaq Global Market; with

• an investment in the Amex Biotechnology Index, an investment in the NASDAQ Composite Index and an investment in the NASDAQ Biotech Index, in each case, beginning with an investment at the closing price on May 10, 2006 and thereafter, based on the closing price of the index.

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The graph and table assume $100 was invested on the starting date at the price indicated above and that dividends, if any, were reinvested on the date of payment without payment of any commissions. The performance shown in the graph and table represents past performance and should not be considered an indication of future performance.

The information provided above under the heading “Performance Graph” is not “soliciting material” and shall not be considered “filed” with the Securities and Exchange Commission or incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

Item 6. Selected Financial Data

Set forth below is selected financial data of Novacea, Inc. as of and for the years ended December 31, 2003, 2004, 2005, 2006, and 2007. The financial data has been obtained or derived from our records. Our historical results are not necessarily indicative of results to be expected in any future period.

	As of December 31,
	2007			2006			2005			2004			2003
	(in thousands)
Balance sheet data
Cash, cash equivalents and marketable securities	$	94,607		$	64,579		$	50,522		$	46,641		$	63,883
Accounts receivable		11,522	*		—			—			—			—
Working capital		88,613			59,438			47,047			44,909			62,873
Total assets		109,820			66,064			52,264			48,030			65,231
Convertible preferred stock		—			—			108,024			82,944			82,944
Common stock and additional paid-in capital		169,718			152,451			3,507			460			328
Deferred stock-based employee compensation		(270	)		(1,268	)		(2,162	)		—			—
Accumulated deficit		(123,908	)		(91,377	)		(61,749	)		(37,944	)		(19,992	)
Total stockholders’ equity (net capital deficiency)		45,748			59,824			(60,442	)		(37,613	)		(19,673	)

(*) Represents amounts receivable from Schering under an exclusive worldwide License, Development and Commercialization Agreement (the “Collaboration Agreement”), including $6.1 million for reimbursement for our research & development (R&D) efforts performed in the third quarter of 2007, for which payment was received in January 2008, and $5.4 million for reimbursement for our R&D efforts performed in the fourth quarter of 2007.

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	Years ended December 31,
	2007			2006			2005			2004			2003
	(in thousands, except per share data)
Statements of operations data
Collaboration revenue	$	16,683	*	$	371	**	$	56	**	$	1,120	**	$	1,330	**
Operating expenses:
Research and development		36,055			21,809			17,808			14,687			10,930
General and administrative		17,279			11,306			7,112			5,212			3,691
Total operating expenses		53,334			33,115			24,920			19,899			14,621
Loss from operations		(36,651	)		(32,744	)		(24,864	)		(18,779	)		(13,291	)
Interest and other income, net		4,120			3,116			1,059			827			516
Net loss	$	(32,531	)	$	(29,628	)	$	(23,805	)	$	(17,952	)	$	(12,775	)
Net loss per share, basic and diluted	$	(1.35	)	$	(1.98	)	$	(17.03	)	$	(16.56	)	$	(14.15	)
Shares used in computing basic and diluted net loss per share		24,158			14,991			1,398			1,084			903

(*) Represents revenue from the collaboration agreement with Schering.

(**) Represents revenue earned under our agreements with Aventis Pharmaceuticals, Inc. upon achievement of milestones associated with two clinical trials sponsored by us.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following is a discussion of our financial condition and results of operations for the years ended December 31, 2007, 2006 and 2005. Unless the context indicates otherwise, as used herein, the terms “we,” “us” and “our” refer to Novacea, Inc.

The following discussion should be read in conjunction with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data” included elsewhere in this Annual Report on Form 10-K. The information in this Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking. Actual results and the timing of events may differ significantly from those projected in forward-looking statements due to a number of factors, including those set forth in Item 1A—“Risk Factors” of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements after the date of this Annual Report.

Overview

We are a biopharmaceutical company focused on in-licensing, developing and commercializing novel therapies for the treatment of cancer. We currently have two clinical-stage oncology product candidates. Our lead product candidate, Asentar^™, had been in a Phase 3 clinical trial for the treatment of androgen-independent prostate cancer, or AIPC, and had been in a Phase 2 clinical trial for the treatment of advanced pancreatic cancer, initiated in September 2007. In November 2006, we initiated a Phase 1b/2a clinical trial of our second product candidate, AQ4N, in combination with radiation and chemotherapy, for the treatment of glioblastoma multiforme. In October 2007, we initiated a Phase 2 clinical trial of AQ4N for the treatment of acute lymphoblastic leukemia, or ALL; however, this trial was discontinued in January 2008 in connection with our decision to scale back clinical development activities for AQ4N in order to preserve capital resources. In May 2007, we signed an exclusive worldwide License, Development and Commercialization Agreement with Schering Corporation, a wholly-owned subsidiary of Schering-Plough Corporation (“Schering”), for the development and commercialization of Asentar^™ (the “Collaboration Agreement”) in AIPC, earlier stages of prostate cancer, and in other types of cancers, including pancreatic cancer.

In November 2007, we ended our ASCENT-2 Phase 3 clinical trial of Asentar^™ due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, we also suspended enrollment in our Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar^™. Together with Schering, we are reviewing and analyzing the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis we intend to decide with Schering whether or not to continue our development efforts with respect to Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement are discontinued, we would no longer recognize revenue from Schering related to the reimbursement of our related development efforts other than for the costs incurred by us for the wind-down of activities for the then ongoing Asentar^™ development programs. Additionally, in this situation, the period over which we plan to recognize revenues from the upfront payments received from Schering, which is currently estimated to be six years and represents the estimated period for which we believe we have significant obligations under the Collaboration Agreement, may be shortened to reflect any reduced future development period. The deferred revenue related to the upfront payments from Schering as of December 31, 2007 was $54.8 million.

We incorporated in February 2001 and have devoted substantially all of our resources to the licensure and clinical development of our product candidates. Until we completed our initial public offering in May 2006, we funded our operations primarily through the private placement of equity securities. In our initial public offering, we sold 6,250,000 shares of our common stock and in June 2006, the underwriters of our initial public offering purchased an additional 657,500 shares of our common stock pursuant to their over-allotment option. Net proceeds from the initial public offering and the subsequent exercise of the underwriters’ over-allotment option and purchase

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of additional shares of our common stock were approximately $39.2 million, after deducting underwriting discounts and commissions and other offering expenses. Our net loss for the years ended December 31, 2007, 2006 and 2005 was $32.5 million, $29.6 million and $23.8 million respectively. As of December 31, 2007, we had an accumulated deficit of $123.9 million. We expect our net losses to continue primarily due to our anticipated clinical trial activities. Clinical trials are costly, and as we continue to advance our product candidates through development, we expect our research and development expenses to increase significantly. As compared to Phase 1 and Phase 2 clinical trials, Phase 3 clinical trials are typically more expensive as they involve a greater number of patients, are conducted at multiple sites and sometimes in several countries, are conducted over a longer period of time and require greater quantities of drug product. In addition, we may expand our infrastructure and facilities and hire additional personnel, including clinical development, administrative, sales and marketing personnel. We are unable to predict when, if ever, we will be able to commence the sale of, or generate any other type of revenue for, any of our product candidates.

Research and Development Expenses. Research and development expenses consist primarily of costs for: personnel, including salaries and benefits; regulatory activities; pre-clinical studies; clinical trials; materials and supplies; and allocations of other research and development-related costs including costs incurred in connection with our collaboration with Schering. External research and development expenses include fees paid to other entities that manufacture our products for use in our clinical trials and that conduct certain research and development activities on our behalf. We recognize research and development expenses as they are incurred. The costs to acquire technologies to be used in research and development activities, but which have not reached technological feasibility and have no alternative future use, are expensed when incurred. Payments to licensors that relate to the achievement of pre-approval development milestones are recorded as research and development expense when incurred. Clinical trial costs are a significant component of our research and development expenses. Currently, we manage our clinical trials through independent medical investigators at their sites and at hospitals. We accrue research and development expenses for clinical trials based on estimates from our ongoing monitoring of the levels of patient enrollment and other activities at the investigator sites.

We expect that research and development expenses will increase significantly in the future if we progress our product candidates through the more expensive Phase 2 and Phase 3 clinical trials, start additional clinical trials, file for regulatory approvals, hire more employees and expand our infrastructure and facilities. Completion of clinical trials may take several years, although the length of these trials varies substantially according to the nature and complexity of the particular product candidate.

The following table provides a general estimated completion period for each phase of the clinical trials that we typically conduct:

Clinical Phase	Estimated Completion Period
Phase 1 / 2	0.5-2.0 Years
Phase 2	1.5-3.0 Years
Phase 3	3.0-5.0 Years

The clinical development and regulatory approval processes inherently contain significant risks and uncertainties. Therefore, it is difficult to estimate the costs necessary to complete development projects. For example: we may experience delays or fail to obtain institutional review board approval to conduct clinical trials at a prospective site; we may experience delays or fail to reach agreement on acceptable clinical trial terms or clinical trial protocols with prospective sites or investigators; patient enrollment may be slower than expected at trial sites due to factors including the limited number of, and substantial competition for, suitable patients with the particular types of cancer required for enrollment in our clinical trials; there is a limited number of, and substantial competition for, suitable sites to conduct our clinical trials; clinical trial sites may terminate our clinical trials; patients and medical investigators may be unwilling or unable to follow our clinical trial protocols; patients may fail to complete our clinical trials once enrolled; results from clinical trials may be unfavorable; and

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unforeseen safety issues may arise or regulatory agencies may deem data from clinical trials insufficient for marketing approval and may require additional clinical trials. Additionally, risks related to the timing and results of our clinical trials add to the difficulty of estimating the costs necessary to complete development projects. For example: failure to recruit and enroll patients for clinical trials may cause the development of our product candidates to be delayed; the results of previous clinical trials may not be predictive of future results, which might delay regulatory approval, and our current and planned clinical trials may not satisfy the requirements of the FDA or other non-U.S. regulatory authorities or our product candidates may cause undesirable side effects during clinical trials that could delay or prevent their regulatory approval or commercialization. Because of these risks, and the other risks set forth more fully in Item 1A, Risk Factors, to this Annual Report on Form 10-K, the cost projections and development timelines related to our clinical development and regulatory programs may be materially impacted. Any failure or significant delay in completing clinical trials for our product candidates could materially harm our financial results and the commercial prospects for our product candidates.

General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related costs for our personnel in executive, business development, marketing, human resources, external communications, finance and other administrative functions, as well as consulting costs, including market research and business consulting. Other costs include professional fees for legal and accounting services, insurance and facility costs. We anticipate that general and administrative expenses will increase significantly in the future if we continue to expand our operating activities and as a result of costs associated with being a public company.

Results of Operations

The following table reflects year over year changes in selected line items from our statements of operations (in thousands, except percentages).

	Years ended December 31,
	2007		2006		Change Year Over Year				2005		Change Year Over Year
Collaboration Revenue	$	16,683	$	371	$	16,312	4,397	%	$	56	$	315	563	%
Research and Development Expenses		36,055		21,809		14,246	65	%		17,808		4,001	22	%
General and Administrative Expenses		17,279		11,306		5,973	53	%		7,112		4,194	59	%
Interest and Other Income, Net		4,120		3,116		1,004	32	%		1,059		2,057	194	%

Years ended December 31, 2007, 2006 and 2005

We have a limited operating history. We present below our results of operations for the year ended December 31, 2007 compared to the year ended December 31, 2006 and for the year ended December 31, 2006 compared to the year ended December 31, 2005.

Collaboration Revenue

The Collaboration Agreement with Schering became effective on June 26, 2007, following clearance under the Hart Scott-Rodino Antitrust Improvements Act of 1976, as amended. In July 2007, we received non-refundable upfront payments from Schering totaling $60 million, including $35 million as reimbursement for past research and development (R&D) expenses and a license fee of $25 million. We recognize revenues from the upfront payments ratably over an estimated six-year development period starting on June 26, 2007 and ending on June 30, 2013. We believe that this period for revenue recognition represents substantially the entire period for which we would have significant participatory obligations for Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement are discontinued, we would no longer recognize revenue from Schering related to the reimbursement of our related development efforts other than for the costs incurred by us for the wind-down of activities for the then ongoing Asentar^™ development programs. Additionally, in this situation,

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the period over which we plan to recognize revenues from the upfront payments received from Schering, which is currently estimated to be six years and represents the estimated period for which we believe we have significant obligations under the Collaboration Agreement, may be shortened to reflect any reduced future development period. The deferred revenue related to the upfront payments from Schering as of December 31, 2007, was $54.8 million. Revenue from reimbursement for our R&D efforts on Asentar^™ is recognized as the related costs are incurred. We are also eligible to receive up to $380 million in pre-commercial milestone payments, as well as royalties on worldwide sales of Asentar^™ based on tiered royalty percentage rates that range from the high teens to the mid-twenties depending on annual product sales levels.

Collaboration revenue for the year ended December 31, 2007 was $16.7 million compared to $0.4 million for the year ended December 31, 2006 compared to $56,000 for the year ended December 31, 2005. The increase of $16.3 million in collaboration revenue from 2006 to 2007 was due to $11.5 million in reimbursement for our R&D efforts on Asentar^™ and $5.2 million related to the amortization of upfront payments under the Collaboration Agreement with Schering. The $11.5 million in revenue from reimbursement for our R&D efforts is recorded as a receivable from Schering as of December 31, 2007, with a related payment of $6.1 million received by us from Schering in January 2008. All payments received from Schering are non-refundable. The increase of $0.3 million in collaboration revenue from 2005 to 2006 was attributable to a development milestone achieved in 2006 for one of our two agreements with Aventis Pharmaceuticals, Inc. related to our Asentar^™ clinical studies. Approximately $0.1 million remained available for grant under these agreements as of December 31, 2007, which amount we expect to receive upon achievement of a final milestone under one of the two agreements with Aventis Pharmaceuticals, Inc.

Research and Development Expenses

The following table summarizes our research and development expenses:

	Years ended December 31,
	2007		2006		2005
	(in thousands)
Research and development expenses
Asentar™	$	25,371	$	12,920	$	7,298
Vinorelbine oral		—		3,201		3,502
AQ4N		5,796		1,990		4,314
Other projects		3,743		3,294		2,556
Stock-based compensation		1,145		404		138
Total research and development expenses	$	36,055	$	21,809	$	17,808

Research and development expenses for the year ended December 31, 2007 were $36.1 million compared to $21.8 million for the year ended December 31, 2006, an increase of $14.3 million, or 65%. Research and development expenses associated with Asentar^™ were $25.4 million for the year ended December 31, 2007 compared to $12.9 million for the year ended December 31, 2006. The $12.5 million increase was due in part to a sublicensing fee of $3.8 million paid to Oregon Health & Science University and a sublicensing fee of $1.3 million paid to the University of Pittsburgh, equal to 15% and 5%, respectively, of the $25 million license fee received from Schering under the Collaboration Agreement, the clinical development activities in our ASCENT-2 Phase 3 clinical trial for Asentar^™, which began in the first quarter of 2006 and was terminated in November 2007, combined with the costs of preparing for our Phase 2 clinical trial in advanced pancreatic cancer initiated in September 2007, and placed on hold in November 2007 related to the termination of the ASCENT-2 Phase 3 clinical trial. Research and development expenses associated with vinorelbine oral for the year ended December 31, 2007 were nil compared to $3.2 million for the year ended December 31, 2006. Vinorelbine oral research and development expenses in 2006 primarily reflect development activities on the product candidate and the expenses associated with our achievement of a development milestone in the first quarter of 2006. During the fourth quarter of 2006, we exercised our right to terminate our existing agreements related to vinorelbine oral and

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to return to the licensor all product rights in the United States and Canada. Research and development expenses associated with AQ4N were $5.8 million for the year ended December 31, 2007 compared to $2.0 million for the year ended December 31, 2006. The $3.8 million increase was due primarily to a $1.4 million up-front payment made under a novation and license agreement with BTG International Limited, or BTG, entered into in 2007, the clinical development activities and product manufacturing expenses for AQ4N, currently in a Phase 1b/2a clinical trial that began in the fourth quarter of 2006, in combination with radiation and chemotherapy, for the treatment of glioblastoma multiforme, and the costs of preparing for the planned initiation of additional AQ4N clinical trials in leukemia and lymphoma. In October 2007, we initiated a Phase 2 clinical trial of AQ4N for the treatment of acute lymphobastic leukemia, or ALL, however, this trial was discontinued in January 2008 in connection with our decision to scale back clinical development activities for AQ4N in order to preserve capital resources. Other research and development expenses were approximately $3.7 million for the year ended December 31, 2007 compared to $3.3 million for the year ended December 31, 2006. This $0.4 million increase resulted primarily from costs associated with higher internal and related external activities associated with advancing our general research and development efforts. Research and development expenses associated with stock-based compensation were $1.1 million for the year ended December 31, 2007 compared to $0.4 million for the year ended December 31, 2006 and accounted for approximately $0.7 million of the increase in research and development expenses. The increase in stock-based compensation resulted primarily from additional stock options and restricted stock units granted to employees during 2007.

Our research and development expenses may increase significantly in the future if we advance our product candidates through Phase 2 and Phase 3 clinical trials and registration trials, start additional clinical trials, file for regulatory approvals, hire more employees and expand our infrastructure and facilities.

Research and development expenses for the year ended December 31, 2006 were $21.8 million compared to $17.8 million for the year ended December 31, 2005, an increase of $4.0 million, or 22%. Research and development expenses associated with Asentar^™ were $12.9 million for the year ended December 31, 2006 compared to $7.3 million for the year ended December 31, 2005. The $5.6 million increase was due primarily to the clinical development activities in our ASCENT-2 Phase 3 clinical trial for Asentar^™, which began in the first quarter of 2006. Research and development expenses associated with AQ4N were $2.0 million for the year ended December 31, 2006 compared to $4.3 million for the year ended December 31, 2005. This $2.3 million decrease resulted primarily from a wind down of clinical activity and related expenditures on the Phase 1 portions of two prior AQ4N clinical trials, partially offset by the costs associated with the initiation of our AQ4N Phase 1b/2a clinical trial in the fourth quarter of 2006, in combination with radiation and chemotherapy, for the treatment of glioblastoma multiforme. Other research and development expenses were approximately $3.3 million for the year ended December 31, 2006 compared to $2.6 million for the year ended December 31, 2005. This $0.7 million increase resulted primarily from costs associated with higher internal and related external activities associated with advancing our general research and development efforts. Research and development expenses associated with vinorelbine oral for the year ended December 31, 2006 were $3.2 million compared to $3.5 million for the year ended December 31, 2005, which in 2005 primarily reflects our acquiring development and commercialization rights in July 2005 and the expense of a pre-approval development milestone for, and commencing development activities on, vinorelbine oral. Vinorelbine oral research and development expenses in 2006 primarily reflect development activities on the product candidate and the expenses associated with our achievement of a development milestone in the first quarter of 2006. During the fourth quarter of 2006, we exercised our right to terminate our existing agreements related to vinorelbine oral, and to return to the licensor all product rights in the United States and Canada. Research and development expenses associated with stock-based compensation were $0.4 million for the year ended December 31, 2006 compared to $0.1 million for the year ended December 31, 2005 and accounted for approximately $0.3 million of the increase in research and development expenses. The increase in stock-based compensation resulted primarily from additional stock options and restricted stock units granted to employees during 2007.

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General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2007 were $17.3 million compared to $11.3 million for the year ended December 31, 2006. The $6.0 million, or 53%, increase in general and administrative expenses was mainly due to a $2.2 million increase in stock-based compensation, resulting primarily from additional stock options and restricted stock units granted to our employees during 2007, a $1.6 million increase in consulting, legal and audit fees, including legal and other fees related to entering the Collaboration Agreement with Schering, a $1.0 million increase in compensation and benefits, a $0.5 million increase in facilities-related costs, and a $0.4 million increase in recruiting expenses. These increases in expenses were due partially to higher administrative and corporate support of our research and development activities for our ASCENT-2 Phase 3 clinical trial and additional clinical and other development activities for Asentar^™ and AQ4N.

General and administrative expenses for the year ended December 31, 2006 were $11.3 million compared to $7.1 million for the year ended December 31, 2005. The $4.2 million, or 59%, increase in general and administrative expenses was mainly due to higher spending in compensation, insurance, intellectual property, audit, legal, marketing, consulting services and stock-based compensation, as we became a public entity during the year ended December 31, 2006.

We anticipate that general and administrative expenses will increase significantly in the future if we expand our operating activities, continue to file and prosecute new and existing patents, and as a result of costs associated with being a public company.

Interest and Other Income, Net

Interest and other income, net, for the year ended December 31, 2007 was $4.1 million compared to $3.1 million for the year ended December 31, 2006. The 2007 increase of $1.0 million, or 32%, resulted primarily from higher investment balances resulting from the availability of the net proceeds from our Collaboration agreement with Schering completed in the second quarter of 2007 and higher investment yields.

Interest and other income, net, for the year ended December 31, 2006 was $3.1 million compared to $1.1 million for the year ended December 31, 2005. The 2006 increase of $2.0 million, or 194%, resulted primarily from higher investment balances resulting from the availability of the net proceeds from our initial public offering completed in the second quarter of 2006 and higher investment yields.

Income Taxes

We have incurred net losses for the years ended December 31, 2007, 2006, and 2005 and, accordingly, we did not pay or record any federal or state income taxes. As of December 31, 2007, we had net operating loss carry-forwards for federal income tax purposes of approximately $83.1 million and research credits of approximately $2.3 million, which will expire beginning in the year 2021. We also had a state net operating loss carry-forward of approximately $82.5 million, which expires beginning in 2013. We also had state research credits of approximately $2.2 million, which have no expiration date.

We have not recorded a benefit from our net operating loss carry forwards because we believe that it is uncertain that we will have sufficient income from future operations to realize the carry-forwards prior to their expiration. Accordingly, we have established a valuation allowance against the deferred tax asset arising from the carry-forwards.

Utilization of the net operating loss carry-forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating loss carry-forwards and credits before utilization.

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Liquidity and Capital Resources

We have generated a limited amount of revenue, and do not expect to generate revenue from product candidates for several years. Since inception, we have funded our operations significantly through the private placement of our preferred stock, with total net proceeds of $108.3 million. We raised net proceeds of $25.1 million through the sale of our Series C convertible preferred stock in December 2005 and $0.3 million through an additional sale of our Series C convertible preferred stock in January 2006.

In May 2006, we completed our initial public offering of 6,250,000 shares of our common stock and in June 2006, the underwriters of our initial public offering purchased an additional 657,500 shares of our common stock pursuant to their over-allotment option. Net proceeds to us from the initial public offering and the subsequent exercise of the underwriters’ over-allotment option to purchase additional shares of our common stock were approximately $39.2 million, after deducting underwriting discounts and commissions and other offering expenses.

In May 2007, we signed a Collaboration Agreement with Schering. In July 2007, we received upfront payments from Schering totaling $60 million, including $35 million as reimbursement for past research and development expenses and a license fee of $25 million. Revenue from reimbursement for our R&D efforts on Asentar^™ is recognized as the related costs are incurred. The revenue from reimbursement for our R&D efforts on Asentar^™ during the six months ended December 31, 2007 was $11.5 million, which amount is recorded as receivable from Schering as of December 31, 2007 with a related payment of $6.1 million received by us from Schering in January 2008 and the remaining amount expected to be received by us from Schering later in the first quarter of 2008. We are also eligible to receive up to $380 million in pre-commercial milestone payments, as well as royalties on worldwide sales of Asentar^™ based on tiered royalty percentage rates that range from the high teens to the mid-twenties depending on annual product sales levels. In July 2007, pursuant to the terms of the Collaboration Agreement, we sold to Schering 1,490,868 shares of our common stock for cash of $8.05 per share, for an aggregate purchase price of $12.0 million under a Common Stock Purchase Agreement. All payments received from Schering are non-refundable.

In November 2007, the Company ended its ASCENT-2 Phase 3 clinical trial of Asentar^™ for treatment of AIPC due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, the Company also suspended enrollment in its Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar^™. Together with Schering, the Company is reviewing and analyzing the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis the Company intends to decide with Schering whether or not to continue development efforts with respect to Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement are discontinued, the Company would no longer recognize revenue from Schering related to the reimbursement of its related development efforts other than for the costs incurred by the Company for the wind-down of activities for the then ongoing Asentar^™ development programs. Additionally, in this situation, the period over which the Company is currently recognizing revenues from the upfront payments received from Schering, which is currently estimated to be six years and represents the estimated period for which the Company believes it has significant obligations under the Collaboration Agreement, may be shortened to reflect any reduced future development period.

At December 31, 2007, we had cash, cash equivalents and marketable securities of $94.6 million. At December 31, 2006 and 2005, cash, cash equivalents and marketable securities were $64.6 million and $50.5 million respectively.

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The following table summarizes cash provided by (used in) our operating, investing and financing activities:

	Years ended December 31,
	2007			2006			2005
	(in thousands)
Cash provided by (used in) operating activities	$	17,747		$	(25,910	)	$	(21,934	)
Cash provided by (used in) investing activities		(20,646	)		(35,630	)		23,903
Cash provided by financing activities	$	13,190		$	39,930		$	25,876

Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities was $17.7 million for the year ended December 31, 2007 primarily attributable to deferred revenue resulting from the $60.0 million in upfront payments received from Schering under the Collaboration Agreement, non-cash charges related to stock-based compensation, and an increase in accounts payable and accrued liabilities resulting principally from increased research and development activities, offset partially by our net loss and an increase in accounts receivable of $11.5 million due from Schering under the Collaboration Agreement. Net cash used in operating activities for the years ended 2006, and 2005 was $25.9 million, and $21.9 million, respectively. For the year ended December 31, 2006, cash used in operations was primarily attributable to our net loss, partially offset by an increase in accrued liabilities resulting principally from increased research and development activities and non-cash charges related to the amortization of deferred stock-based compensation. For the year ended December 31, 2005, cash used in operations was primarily attributable to our net loss, partially offset by an increase in accounts payable and accrued liabilities resulting principally from increased research and development activities.

Cash Provided by (Used in) Investing Activities

Net cash used in investing activities was $20.6 million for the year ended December 31, 2007 primarily due to net purchases of short-term investments, and purchases of property and equipment. Net cash used in investing activities was $35.6 million for the year ended December 31, 2006 primarily due to net purchases of short-term investments. Net cash provided by investing activities was $23.9 million for the year ended December 31, 2005 due primarily to maturities of short-term investments, partially offset by purchases of property and equipment.

Cash Provided by Financing Activities

Net cash provided by financing activities for the years ended December 31, 2007, 2006 and 2005 was $13.2 million, $39.9 million, and $25.9 million, respectively. Net cash provided by financing activities for the year ended December 31, 2007 was due primarily to proceeds from our sale to Schering of 1,490,868 shares of our common stock for an aggregate purchase price of $12.0 million under a Common Stock Purchase Agreement, pursuant to the terms of the Collaboration Agreement, and the issuance of our common stock from the exercise of outstanding stock options. Net cash provided by financing activities for the year ended December 31, 2006 was primarily related to net proceeds from the sale of common stock in our initial public offering, the sale of convertible preferred stock and the issuance of our common stock from the exercise of outstanding stock options. Net cash provided by financing activities for the year ended December 31, 2005 was primarily related to the sale of convertible preferred stock.

Liquidity Sources and Cash Requirements and Commitments

Developing drugs, conducting clinical trials, and commercializing products are expensive. Our future funding requirements will depend on many factors, including:

• the progress and costs of our clinical trials and other research and development activities;

• the costs of in-licensing additional product candidates;

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• the costs and timing of obtaining regulatory approval;

• the costs of filing, prosecuting, defending and enforcing any patent applications, claims, patents and other intellectual property rights;

• the costs and timing of securing manufacturing capabilities for our clinical product candidates and commercial products, if any;

• the costs of establishing sales, marketing and distribution capabilities; and

• the terms and timing of any of our current collaborative, licensing and other arrangements or those that we may establish in the future.

We expect to incur losses from operations in the future. We may incur increasing research and development expenses, including expenses related to clinical trials and additional personnel. Our general and administrative expenses may increase in the future if we expand our staff, add infrastructure and incur additional expenses related to being a public company, including directors’ and officers’ insurance, investor relations and increased professional fees, including costs associated with maintaining compliance with the Sarbanes-Oxley Act of 2002. Based on our current operating plans, including the estimated future reimbursement by Schering of our Asentar development costs, we project that in 2008 our usage of operating capital, comprised of cash and cash equivalents, marketable securities and accounts receivable, will be in the range of $17 million to $19 million.

Contractual Obligations and Commitments

Our contractual obligations and commitments as of December 31, 2007 include potential purchase commitments and future minimum lease payments under an operating lease, as shown in the following table:

Total Contractual Obligations⁽³⁾

(in millions)

	2008		2009		2010		2011		2012		2013 and Thereafter		Total Future Minimum Payments
Operating leases (1)	$	0.7	$	0.7	$	0.7	$	0.8	$	0.6	$	—	$	3.5
Purchase obligations (2)		0.7		0.9		0.8		—		—		—		2.4
Total	$	1.4	$	1.6	$	1.5	$	0.8	$	0.6	$	—	$	5.9

(1) Includes obligations under operating leases for our current corporate facilities. In June 2007, we entered into a new operating lease for new corporate facilities, located at 400 Oyster Point Boulevard, South San Francisco, CA 94080. Our lease for the new corporate facilities is non-cancelable and has a five year term. We moved into the new corporate facilities in October 2007. We may extend the lease term for an additional five year period following expiration of the original five year term. The lease provides for periodic rent increases based upon previously negotiated or consumer price indexed adjustments, or in the case of an extension, market adjusted rates.

(2) Pursuant to the terms of our agreement with Plantex USA Inc., under certain circumstances we may incur annual purchase obligations in connection with Plantex’s obligation to supply us with calcitriol, the active ingredient in Asentar^™, for our use in clinical trials and other development activities and for commercial sale.

(3) The obligations in the table above do not include obligations under key product candidate license agreements that are listed in the table below.

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Under the terms of the above license agreements, we have made as of December 31, 2007 and may be obligated in the future to make payments as follows:

Total Obligations under Key Product Candidate License Agreements

(in millions)

	Payments through December 31, 2007		Pre-approval Estimates *				Approval and Post- approval Estimates **		Total
			2008		After 2008
Initiation fees and milestone payments (1)	$	12.70	$	—	$	4.30	$	13.25	$	30.25
Minimum royalty obligations (1)		0.75		0.33		1.20		—		2.28
Total	$	13.45	$	0.33	$	5.50	$	13.25	$	32.53

* The amounts listed in “Pre-approval” represent estimated cash payments to be made by us prior to the receipt of marketing approval from the FDA or appropriate regulatory agency.

** The amounts listed under “Approval and Post-approval” represent estimated cash payments to be made by us after we receive FDA approval for a particular product.

(1) The specific timing of each of the estimated payments reflected in the table above cannot be predicted given the timing and other uncertainties associated with: the progress of our clinical development activities; regulatory events, including delays in, or failures to receive, marketing approvals; and the level of commercial acceptance, if any, for our product candidates.

Off-Balance Sheet Arrangements and Contingencies

As of December 31, 2007, we had no off-balance sheet arrangements (as defined in Item 303(a)(4)(ii) of Regulation S-K).

From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business. There are no matters as of December 31, 2007 that, in the opinion of management, are expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). In September 2006, the FASB issued SFAS No. 157. The statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the impact of adopting FAS No. 157 on our financial statements.

Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (SFAS No. 141R). In December 2007, the FASB issued SFAS No. 141R. SFAS No. 141R establishes principles and requirements for recognizing and measuring assets acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. SFAS No. 141R also provides guidance for recognizing and measuring goodwill acquired in a business combination and requires the acquirer to disclose information it needs to evaluate and understand the financial effect of the business combination. As SFAS No. 141R is effective for business combinations for which the acquisition date is on or after December 15, 2008, we have not yet evaluated whether SFAS 141R will have a material impact to our prospective financial statements.

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Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenue and expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Therefore, actual results could differ materially from those estimates under different assumptions or conditions.

Revenue Recognition. We apply the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective and reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their respective fair values. Applicable revenue recognition criteria are then applied to each of the units.

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.

For each source of revenue, we comply with the above revenue recognition criteria in the following manner:

• Non-refundable upfront reimbursement for past research and development (R&D) expenses and license fees received with separable stand-alone values are recognized when the technology is transferred, provided that the technology transfer is not dependent upon continued efforts by us with respect to the agreement. If the delivered technology does not have stand-alone value, or if objective and reliable evidence of the fair value of the undelivered products or services does not exist, the amount of revenue allocable to the delivered technology is deferred and amortized ratably over the related estimated period over which the remaining products or services are provided.

• Revenue from reimbursement for our R&D efforts and commercialization-related services is recognized as the related costs are incurred. Such reimbursement is based upon direct costs incurred by us and negotiated rates for full time equivalent employees that are intended to approximate our anticipated costs. Differences between actual reimbursement and estimated reimbursement are reconciled and adjusted in the period which they become known, typically the following quarter. Our costs associated with these R&D efforts are included in research and development expenses.

• Payments received that are related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of the milestone or event specified in the underlying contracts, which represents the culmination of the earnings process. Amounts received in advance, if any, are recorded as deferred revenue until the milestone is reached.

Research and Development Cost. Research and development expenditures are charged to operations as incurred, pursuant to SFAS No. 2, Accounting for Research and Development Costs. The costs to acquire technologies to be

63

used in research and development, but which have not reached technological feasibility and have no alternative future use are expensed when incurred. Payments to licensors that relate to the achievement of pre-approval development milestones are recorded as research and development expense when incurred. Research and development costs for activities conducted through third parties with whom we contract are expensed as the costs are incurred. To the extent we make a payment to a third party vendor representing a refundable deposit, such payment is recorded as a prepaid expense. These third party vendors may include contract research organizations, third-party manufacturers of drug material and clinical supplies and other vendors. Investigator costs related to patient enrollment are accrued as patients enter the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews and correspondence and discussions with external vendors in order to estimate our incurred expenses. Due to the possibility of incomplete or inaccurate information, we may underestimate or overestimate activity levels and related expenses associated with any of our clinical trials at a given point in time. In such an event, we would record adjustments to research and development expenses in future periods when the actual activity level becomes known. In the past, we have not had to make any material adjustments to research and development expenses due to deviations between the estimates used in determining our accruals for clinical trial expenses and the actual clinical trial expenses incurred. Additionally, we do not expect material adjustments to research and development expenses to result from changes in the nature and level of clinical trial activity and related expenses that are currently subject to estimation. In the future, as we expand our clinical trial activities for our product candidates, we expect to have increased levels of research and development costs that will be subject to estimation. Our processes pertaining to those estimates may need to be enhanced in order to continue to adequately determine our accruals for those costs.

Stock-Based Compensation. On January 1, 2006, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment—An Amendment of FASB Statements No. 123 and 95. We adopted SFAS No. 123R using the prospective transition method. Under the prospective transition method, beginning January 1, 2006, compensation cost recognized includes: (a) compensation cost for all stock-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the intrinsic value in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and (b) compensation cost for all stock-based payment awards granted or modified subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates and expected dividends.

We estimate the expected term of options using the “simplified” method, as illustrated in Staff Accounting Bulletin (“SAB”) No. 107. As we have been operating as a public company for a period of time that is shorter than our estimated expected option term, we are unable to use actual price volatility data. Therefore, we estimate the volatility of our common stock based on volatility of similar entities. We base the risk-free interest rate that we use in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

Calculating stock-based compensation expense requires the input of highly subjective assumptions, which represent our best estimates and involve inherent uncertainties and the application of management judgment.

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Estimates of stock-based compensation expenses are significant to our financial statements, but these expenses are based on the Black-Scholes option valuation model and will never result in the payment of cash by us.

If factors change and we employ different assumptions in the application of SFAS No. 123R in future periods, or if we decide to use a different valuation model, the compensation expense that we record in the future under SFAS No. 123R may differ significantly from what we have recorded in the current period and could materially affect our operating loss, net loss and net loss per share. As of December 31, 2007, there was $2.4 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested restricted stock units granted to employees after January 1, 2006, which are expected to be recognized over a weighted average period of 1 year.

See Note 1 to our Financial Statements included in this Annual Report on Form 10-K for further information regarding SFAS No. 123R.

Income Taxes. We have incurred net operating losses for the years ended December 31, 2007, 2006, and 2005 and, accordingly, we did not pay or record any federal or state income taxes. As of December 31, 2007, we had net operating loss carry-forwards for federal income tax purposes of approximately $83.1 million and research credits of approximately $2.3 million, which expire beginning in the year 2021. We also had a state net operating loss carry-forward of approximately $82.5 million, which expires beginning in 2013. We also had state research credits of approximately $2.2 million, which have no expiration date.

We have not recorded a benefit from our net operating loss carry forwards because we believe that it is uncertain that we will have sufficient income from future operations to realize the carry-forwards prior to their expiration. Accordingly, we have established a valuation allowance against the deferred tax asset arising from the carry-forwards.

Utilization of the net operating loss carry-forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating loss carry-forwards and credits before utilization.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our concentration of credit risk consists principally of cash, cash equivalents, and marketable securities. Our exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of our investments are in short-term debt securities.

Our investment policy restricts investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of our investment policy are as follows: preservation of capital; fulfillment of liquidity needs; above-market returns versus industry averages; and fiduciary control of cash and investments. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with an interest rate fixed at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, in accordance with our investment policy, we maintain our portfolio of cash equivalents, short-term marketable securities and restricted cash in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio. As of December 31, 2007, all of our investments were in money market accounts, certificates of deposit or investment grade corporate debt. Due to the short-term nature of these investments, a 10% movement in market interest rates would not have a material impact on the total fair market value of our portfolio as of December 31, 2007. We do not expect current credit market conditions to materially impact the value of our investment portfolio.

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Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

	Page
Report of Independent Registered Public Accounting Firm	67
Balance Sheets	68
Statements of Operations	69
Statement of Convertible Preferred Stock and Stockholders’ Equity (Net Capital Deficiency)	70
Statements of Cash Flows	73
Notes to Financial Statements	74

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Novacea, Inc.

We have audited the accompanying balance sheets of Novacea, Inc. as of December 31, 2007 and 2006, and the related statements of operations, convertible preferred stock and stockholders’ equity (net capital deficiency), and cash for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

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

As discussed in Note 1 to the financial statements, in 2006 Novacea, Inc. changed its method of accounting for stock-based compensation in accordance with guidance provided in Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Novacea, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Palo Alto, California

March 14, 2008

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Novacea, Inc.

Balance Sheets

(in thousands, except for share and per share amounts)

	December 31,
	2007			2006
Assets
Current assets:
Cash and cash equivalents	$	24,720		$	14,429
Marketable securities		69,887			50,150
Accounts receivable		11,522			—
Other current assets		1,650			1,099
Total current assets		107,779			65,678
Property and equipment, net		1,098			150
Security deposit		770			111
Other assets		173			125
Total assets	$	109,820		$	66,064
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,199		$	2,413
Accrued compensation		2,086			2,260
Deferred revenue		9,968			—
Other accrued liabilities		2,874			1,191
Liability for early exercise of stock options		39			376
Total current liabilities		19,166			6,240
Non-current deferred revenue		44,870			—
Other long-term liabilities		36			—
Total liabilities		64,072			6,240
Commitments (Notes 4 and 6)
Stockholders’ equity:
Common stock, $0.001 par value—123,104,000 shares authorized; 25,394,852 and 23,001,311 shares issued and outstanding as of December 31, 2007 and 2006, respectively		26			23
Additional paid-in capital		169,692			152,428
Deferred stock-based employee compensation		(270	)		(1,268	)
Accumulated other comprehensive income		208			18
Accumulated deficit		(123,908	)		(91,377	)
Total stockholders’ equity		45,748			59,824
Total liabilities and stockholders’ equity	$	109,820		$	66,064

See accompanying notes.

68

Novacea, Inc.

Statements of Operations

(in thousands, except per share amounts)

	Years ended December 31,
	2007			2006			2005
Collaboration revenue	$	16,683		$	371		$	56
Operating expenses:
Research and development		36,055			21,809			17,808
General and administrative		17,279			11,306			7,112
Total operating expenses		53,334			33,115			24,920
Loss from operations		(36,651	)		(32,744	)		(24,864	)
Interest and other income, net		4,120			3,116			1,059
Net loss	$	(32,531	)	$	(29,628	)	$	(23,805	)
Net loss per share, basic and diluted	$	(1.35	)	$	(1.98	)	$	(17.03	)
Shares used in computing basic and diluted net loss per share		24,158			14,991			1,398

See accompanying notes.

69

Novacea, Inc.

Statement of Convertible Preferred Stock and Stockholders’ Equity (Net Capital Deficiency)

(in thousands, except per share amounts)

	Convertible Preferred Stock			Common Stock				Additional Paid-in Capital			Deferred Stock-Based Employee Compensation			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Net Capital Deficiency)
	Shares	Amount		Shares		Amount
Balance at December 31, 2004	11,333	$	82,944	1,202		$	1	$	459		$	—		$	(129	)	$	(37,944	)	$	(37,613	)
Issuance of 616,088 shares of common stock for cash upon exercise of stock options at prices ranging from $0.53 to $1.93 per share	—		—	614			—		796			—			—			—			796
Impact of repurchase rights related to common shares issued pursuant to early exercises of stock options, net of vesting of prior years’ amounts	—		—	(319	)		—		(453	)		—			—			—			(453	)
Issuance of 2,870,255 shares of Series C convertible preferred stock to investors at $8.75 per share for cash in December 2005, net of issuance costs of $35	2,871		25,080	—			—		—			—			—			—			—
Deferred compensation related to employee stock options	—		—	—			—		2,564			(2,564	)		—			—			—
Amortization of deferred stock-based employee compensation			—	—			—		—			402			—			—			402
Stock compensation associated with stock options granted to non-employees	—		—	—			—		140			—			—			—			140
Comprehensive loss:
Net loss Net loss	—		—	—			—		—			—			—			(23,805	)		(23,805	)
Unrealized gain on cash equivalents and marketable securities	—		—	—			—		—			—			91			—			91
Comprehensive loss																					(23,714	)
Balance at December 31, 2005 (carried forward)	14,204	$	108,024	1,497		$	1	$	3,506		$	(2,162	)	$	(38	)	$	(61,749	)	$	(60,442	)

See accompanying notes.

(continued)

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Novacea, Inc.

Statement of Convertible Preferred Stock and Stockholders’ Equity (Net Capital Deficiency)—(Continued)

(in thousands, except per share amounts)

	Convertible Preferred Stock					Common Stock			Additional Paid-in Capital			Deferred Stock-Based Employee Compensation			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity (Net Capital Deficiency)
	Shares		Amount			Shares	Amount
Balance at December 31, 2005 (brought forward)	14,204		$	108,024		1,497	$	1	$	3,506		$	(2,162	)	$	(38	)	$	(61,749	)	$	(60,442	)
Issuance of 222,594 shares of common stock for cash upon exercise of stock options at prices ranging from $0.53 to $5.25 per share	—			—		223		—		410			—			—			—			410
Impact of repurchase rights related to common shares issued pursuant to early exercise of stock options, net of vesting of prior years’ amounts	—			—		135		—		137			—			—			—			137
Issuance of 36,006 shares of Series C2 convertible preferred stock to investors at $8.75 per share for cash in January 2006, net of issuance costs of $44	36			306		—		—		—			—			—			—			—
Issuance of 6,907,500 shares of common stock for cash at a price of $6.50 per share in May 2006, net of issuance costs of $6	—			—		6,908		7		39,207			—			—			—			39,214
Issuance of 14,239,571 shares of common stock upon conversion of 49,838,605 shares of convertible preferred stock in May 2006	(14,240	)		(108,330	)	14,240		15		108,315			—			—			—			108,330
Stock based compensation for options granted to employees				—		—		—		702			—			—			—			702
Amortization of deferred stock-based compensation related to employee stock options	—			—		—		—		—			567			—			—			567
Deferred compensation related to cancellation of employee stock options	—			—		—		—		(327	)		327			—			—			—
Stock compensation associated with stock options granted to non-employees	—			—		—		—		80			—			—			—			80
Stock compensation related to modification of stock options granted to employee	—			—		—		—		398			—			—			—			398
Comprehensive loss:
Net loss	—			—		—		—		—			—			—			(29,628	)		(29,628	)
Unrealized gain on cash equivalents and marketable securities	—			—		—		—		—			—			56			—			56
Comprehensive loss																						(29,572	)
Balance at December 31, 2006 (carried forward)	—		$	—		23,003	$	23	$	152,428		$	(1,268	)	$	18		$	(91,377	)	$	59,824

See accompanying notes.

(continued)

71

Novacea, Inc.

Statement of Convertible Preferred Stock and Stockholders’ Equity (Net Capital Deficiency)—(Continued)

(in thousands, except per share amounts)

	Convertible Preferred Stock			Common Stock			Additional Paid-in Capital			Deferred Stock-Based Employee Compensation			Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit			Total Stockholders’ Equity (Net Capital Deficiency)
	Shares	Amount		Shares	Amount
Balance at December 31, 2006 (brought forward)	—	$	—	23,003	$	23	$	152,428		$	(1,268	)	$	18	$	(91,377	)	$	59,824
Issuance of 750,130 shares of common stock for cash upon exercise of stock options at prices ranging from $0.53 to $6.50 per share	—		—	750		1		1,189			—			—		—			1,190
Impact of repurchase rights related to common shares issued pursuant to early exercise of stock options, net of vesting of prior years’ amounts	—		—	104		—		159			—			—		—			159
Issuance of 1,490,868 shares of common stock for cash at $8.049 per share	—		—	1,491		2		11,998			—			—		—			12,000
Issuance of 46,885 shares of common stock as part of 2006 401-K matching valued at price of $6.10 per share on March 12, 2007	—		—	47		—		286			—			—		—			286
Stock based compensation for options granted to employees	—		—	—		—		2,746			—			—		—			2,746
Stock based compensation for restricted stock units granted to employees	—		—	—		—		1,415			—			—		—			1,415
Amortization of deferred stock-based compensation related to employee stock options	—		—	—		—		—			365			—		—			365
Deferred compensation related to cancellation of employee stock options	—		—	—		—		(633	)		633			—		—			—
Stock compensation associated with stock options granted to non-employees	—		—	—		—		1			—			—		—			1
Stock compensation related to modification of stock options granted to employee	—		—	—		—		103			—			—		—			103
Comprehensive loss:
Net loss	—		—	—		—		—			—			—		(32,531	)		(32,531	)
Unrealized gain on cash equivalents and marketable securities	—		—	—		—		—			—			190		—			190
Comprehensive loss																			(32,341	)
Balance at December 31, 2007	—	$	—	25,395	$	26	$	169,692		$	(270	)	$	208	$	(123,908	)	$	45,748

See accompanying notes.

(continued)

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Novacea, Inc.

Statements of Cash Flows

(in thousands)

	Years ended December 31,
	2007			2006			2005
Operating activities
Net loss	$	(32,531	)	$	(29,628	)	$	(23,805	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		151			126			119
Amortization of deferred stock-based employee compensation for employee stock options granted prior to January 1, 2006		365			567			402
Stock-based employee compensation expense for employee stock options and restricted stock units granted subsequent to January 1, 2006		4,161			702			—
Stock-based compensation related to modification of employee stock option		103			398			—
Non-cash stock compensation related to non-employees		1			80			140
Non-cash expense related to settlement of the Company’s liability under 401(k) Plan		21			—			—
Changes in operating assets and liabilities:
Accounts receivable		(11,522	)		—			—
Other current assets		(551	)		108			(240	)
Other assets		(707	)		42			(78	)
Accounts payable and accrued liabilities		3,418			1,695			1,528
Deferred revenue		54,838			—			—
Net cash provided by (used in) operating activities		17,747			(25,910	)		(21,934	)
Investing activities
Purchases of property and equipment		(1,099	)		(19	)		(154	)
Purchases of short-term investments		(128,369	)		(97,156	)		(16,321	)
Maturities of short-term investments		108,822			61,545			40,378
Net cash provided by (used in) investing activities		(20,646	)		(35,630	)		23,903
Financing activities
Net proceeds from issuances of convertible preferred stock		—			306			25,080
Proceeds from issuances of common stock		13,190			39,624			796
Net cash provided by financing activities		13,190			39,930			25,876
Net increase (decrease) in cash and cash equivalents		10,291			(21,610	)		27,845
Cash and cash equivalents at beginning of period		14,429			36,039			8,194
Cash and cash equivalents at end of period	$	24,720		$	14,429		$	36,039

See accompanying notes.

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Novacea, Inc.

Notes to Financial Statements

1. Organization and Summary of Significant Accounting Policies

Novacea, Inc. (the “Company”) is a biopharmaceutical company focused on in-licensing, developing and commercializing novel therapies for the treatment of cancer. The Company was founded in February 2001, incorporated in the State of Delaware, and is located in California. The Company’s product portfolio features two clinical-stage oncology product candidates with worldwide rights, Asentar^™ and AQ4N, each of which is a potential treatment for certain types of cancer. In May 2007, the Company signed an exclusive worldwide license agreement with Schering Corporation (“Schering”) for the development and commercialization of Asentar^™. During the year ended December 31, 2007, the Company recorded material amounts of collaboration revenue and, as such, emerged from the development stage. The Company continues to be primarily involved in performing research and development activities, hiring personnel, licensing new products, and raising capital to support and expand these activities.

Reverse Stock Split

In March 2006, the Company’s board of directors approved a 1-for-3.5 reverse stock split of the Company’s common and convertible preferred stock, which was approved by the Company’s stockholders in April 2006. Such reverse stock split was effective on May 3, 2006. All share and per share amounts contained in the accompanying financial statements were retroactively adjusted to reflect the reverse stock split.

Initial Public Offering

On May 15, 2006, the Company completed its initial public offering, or IPO, of 6,250,000 shares of its common stock at the public offering price of $6.50 per share and on June 9, 2006, the underwriters of the Company’s initial public offering purchased an additional 657,500 shares of the Company’s common stock pursuant to their over-allotment option at the public offering price of $6.50 per share. Net proceeds from the initial public offering and the subsequent exercise of the underwriters’ over-allotment option to purchase additional shares of the Company’s common stock were approximately $39.2 million, after deducting underwriting discounts and commissions and other offering expenses. In connection with the closing of the initial public offering, all of the Company’s shares of convertible preferred stock outstanding at the time of the offering were automatically converted into 14,239,571 shares of common stock.

Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates.

Cash Equivalents and Marketable Securities

The Company considers all highly liquid securities with maturities of three months or less from the date of purchase to be cash equivalents.

Management determines the appropriate classification of securities at the time of purchase in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities and reevaluates such determination at each balance sheet date. The Company has classified its entire investment portfolio as available-for-sale. Management views its investment portfolio as available for use in current operations and, accordingly, has reflected all such investments as current assets although the stated maturity of individual investments may be one year or more beyond the balance sheet date. Available-for-sale

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securities are carried at fair value based on quoted market prices, with unrealized gains and losses reported in “Accumulated other comprehensive income (loss)” as a separate component of stockholders’ equity. The cost of securities in this category is adjusted for amortization of premiums and accretion of discounts from the date of purchase to maturity. Such amortization is included in “Interest and other income, net.”

Realized gains and losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in interest and other income, net. When securities are sold, any associated unrealized gain or loss recorded as a separate component of stockholders’ equity is reclassified out of stockholders’ equity on a specific-identification basis and recorded in earnings for the period. Realized gains and losses on available-for-sale securities for the periods presented were not significant.

Concentration of Credit Risk

Financial instruments that are potentially subject to concentration of credit risk consist primarily of cash, cash equivalents, and marketable securities. The Company’s investment policy restricts investments to high-quality investments and limits the amounts invested with any one issuer, industry, or geographic area. The goals of the investment policy are as follows: preservation of capital; fulfillment of liquidity needs; above-market returns versus industry averages; and fiduciary control of cash and investments. The Company’s exposure to market risk is limited primarily to interest income sensitivity, which is affected by changes in the general level of United States interest rates, particularly because the majority of the Company’s investments are in short-term debt securities.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation, and depreciated using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Leasehold improvements are stated at cost, less accumulated amortization, and amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the lease term of five years.

Long-Lived Assets

Long-lived assets include property and equipment and purchased licensed patent rights. The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total of estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, would be assessed using discounted cash flows or other appropriate measures of fair value. Through December 31, 2007, there have been no such impairments.

Revenue Recognition

The Company applies the revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

Revenue arrangements with multiple components are divided into separate units of accounting if certain criteria are met, including whether the delivered component has stand-alone value to the customer, and whether there is objective and reliable evidence of the fair value of the undelivered items. Consideration received is allocated among the separate units of accounting based on their respective fair values. Applicable revenue recognition criteria are then applied to each of the units.

Revenue is recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured.

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For each source of revenue, the Company complies with the above revenue recognition criteria in the following manner:

• Non-refundable upfront reimbursement for past research and development (R&D) expenses and license fees received with separable stand-alone values are recognized when the technology is transferred, provided that the technology transfer is not dependent upon continued efforts by the Company with respect to the agreement. If the delivered technology does not have stand-alone value, or if objective and reliable evidence of the fair value of the undelivered products or services does not exist, the amount of revenue allocable to the delivered technology is deferred and amortized ratably over the related involvement period in which the remaining products or services are provided.

• Revenue from reimbursement for the Company’s R&D efforts and commercialization-related services is recognized as the related costs are incurred. Such reimbursement is based upon direct costs incurred by the Company and negotiated rates for full time equivalent employees that are intended to approximate the Company’s actual costs. Differences, if any, between actual reimbursement and estimated reimbursement are reconciled and adjusted in the period which they become known, typically the following quarter. The Company’s costs associated with these R&D efforts are included in research and development expenses.

• Payments received that are related to substantive, performance-based “at-risk” milestones are recognized as revenue upon achievement of the milestone or event specified in the underlying contracts, which represents the culmination of the earnings process. Amounts received in advance, if any, are recorded as deferred revenue until the milestone is reached.

Comprehensive Loss

Comprehensive loss is composed of net loss and unrealized gains/losses on cash equivalents and marketable securities.

Stock-Based Compensation

Through December 31, 2005, the Company followed the intrinsic-value method of accounting as prescribed by the Accounting Principles Board (“APB”) Opinion No. 25. Under APB Opinion No. 25, compensation expense for employee stock options is based on the excess, if any, on the date of grant of the fair value of the Company’s common stock and the option exercise price. In December 2004, the Financial Accounting Standards Boards (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123R requires companies to recognize an expense for share-based payment arrangements, including stock options and employee stock purchase plans, as of the beginning of the first fiscal year that starts after June 15, 2005. On January 1, 2006, the Company adopted SFAS No. 123R using the prospective transition method. Under the prospective transition method, beginning January 1, 2006, employee stock-based compensation cost recognized includes: (a) compensation cost for all stock-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the intrinsic value of those awards in accordance with the provisions of APB No. 25, and (b) compensation cost for all stock-based payment awards granted or modified subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

SFAS No. 123R prohibits the recognition of a deferred tax asset for an excess tax benefit that has not yet been realized. As a result, the Company will only recognize a benefit from stock-based compensation in additional paid-in-capital if an incremental tax benefit is realized after all other tax attributes currently available to the Company have been utilized. In addition, the Company has elected to account for the indirect benefits of stock-based compensation on the research tax credit through the statements of operations rather than through additional paid-in-capital.

The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123, as amended by SFAS No. 148, and the Emerging Issues Task Force (“EITF”) Consensus on Issue

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No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, using a fair value approach. The compensation costs of these arrangements are subject to re-measurement over the vesting terms as earned.

Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of vested shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive common securities, including options, common stock subject to repurchase, warrants and convertible preferred stock.

The following table presents the calculation of historical and basic and diluted net loss per share (in thousands, except per share amounts):

	Years ended December 31,
	2007			2006			2005
Historical:
Net loss	$	(32,531	)	$	(29,628	)	$	(23,805	)
Weighted-average number of common shares outstanding		24,210			15,346			1,558
Less: Weighted-average common shares subject to repurchase		(52	)		(355	)		(160	)
Weighted-average number of common shares outstanding used in computing basic and diluted net loss per common share		24,158			14,991			1,398
Basic and diluted net loss per share	$	(1.35	)	$	(1.98	)	$	(17.03	)

The following outstanding options, unvested restricted stock units, common stock subject to repurchase and convertible preferred stock were excluded from the computation of diluted net loss per share for the periods presented because including them would have had an antidilutive effect (in thousands):

	Years ended December 31,
	2007	2006	2005
Options to purchase common stock	3,411	2,314	1,761
Unvested restricted stock units	495	—	—
Common stock subject to repurchase (weighted average basis)	52	355	160
Convertible preferred stock (as converted basis, until completion of the Company’s IPO in May 2006)	—	14,240	14,204

Research and Development Costs

Research and development (“R&D”) expenditures are charged to operations as incurred, pursuant to SFAS No. 2, Accounting for Research and Development Costs.

Major components of R&D expenses consist of personnel costs, including salaries and benefits, clinical trials, materials and supplies, and allocations of R&D-related costs, as well as fees paid to other entities that conduct certain research and development activities on behalf of the Company. Payments made to other entities are under agreements that are generally cancelable by the Company.

The Company’s R&D activities can be separated into two primary categories: clinical development and drug product development. Clinical development costs consist primarily of Phase 1, 2 and 3 clinical trials. Drug product development costs consist of product formulation and chemical analysis.

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Clinical trial costs are a significant component of R&D expenses. Currently, the Company manages its clinical trials through independent medical investigators at their sites and hospitals. The Company accrues costs for clinical trials based on estimates from its on-going monitoring of the levels of patient enrollment and other activities at the investigator sites.

The costs to acquire technologies to be used in research and development, but which have not reached technological feasibility and have no alternative future use are expensed when incurred. Payments to licensors that relate to the achievement of pre-approval development milestones are recorded as R&D expense when incurred.

Income Taxes

The Company uses the liability method for accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Currently, there is no provision for income taxes, as the Company has incurred net losses to date.

Recently Issued Accounting Pronouncements

Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS No. 157). In September 2006, the FASB issued SFAS No. 157. The statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting FAS No. 157 on its financial statements.

Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (SFAS No. 141R). In December 2007, the FASB issued SFAS No. 141R. SFAS No. 141R establishes principles and requirements for recognizing and measuring assets acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. SFAS No. 141R also provides guidance for recognizing and measuring goodwill acquired in a business combination and requires the acquirer to disclose information it needs to evaluate and understand the financial effect of the business combination. As SFAS No. 141R is effective for business combinations for which the acquisition date is on or after December 15, 2008. The Company has not yet evaluated whether SFAS 141R will have a material impact to our prospective financial statements.

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2. Cash, Cash Equivalents and Marketable Securities

The following is a summary of the fair value of cash and cash equivalents and available-for-sale securities (in thousands):

	December 31, 2007
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Cash	$	1,051	$	—	$	—		$	1,051
Government and municipal obligations		—		—		—			—
Corporate debt securities		77,639		215		(7	)		77,847
Money market funds		15,709		—		—			15,709
Total	$	94,399	$	215	$	(7	)	$	94,607
Reported as:
Cash and cash equivalents	$	24,720	$	—	$	—		$	24,720
Marketable securities		69,679		215		(7	)		69,887
Total	$	94,399	$	215	$	(7	)	$	94,607

	December 31, 2006
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Cash	$	350	$	—	$	—		$	350
Government and municipal obligations		910		—		—			910
Corporate debt securities		51,221		20		(2	)		51,239
Money market funds		12,080		—		—			12,080
Total	$	64,561	$	20	$	(2	)	$	64,579
Reported as:
Cash and cash equivalents	$	14,429	$	—	$	—		$	14,429
Marketable securities		50,132		20		(2	)		50,150
Total	$	64,561	$	20	$	(2	)	$	64,579

At December 31, 2007, approximately $93.6 million of available-for-sale securities mature within one year of the balance sheet date. The average maturity of available-for-sale securities was approximately four months.

As of December 31, 2007, there were no available-for-sale securities that were in a continuous unrealized loss position for more than twelve months. The Company does not expect current credit market conditions to materially impact the fair value of its investment portfolio.

3. Property and Equipment, Net

Property and equipment consisted of the following (in thousands):

	December 31,
	2007			2006
Computer equipment and software	$	782		$	417
Furniture and fixtures		736			115
Leasehold improvements		113			—
		1,631			532
Less accumulated depreciation and amortization		(533	)		(382	)
Property and equipment, net	$	1,098		$	150

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Depreciation and amortization expense for property and equipment for the years ended December 31, 2007, 2006 and 2005 was $151,000, $122,900 and $111,800, respectively.

4. Commitments and Contingencies

In June 2007, the Company entered into an operating lease for new corporate facilities located in South San Francisco, California. The lease for the new corporate facilities is non-cancelable and has a five-year term with a total obligation of $3.6 million. The Company moved into the new corporate facilities in October 2007. The Company may extend the lease term for an additional five year period following expiration of the original five-year term. The lease provides for periodic rent increases based upon previously negotiated or consumer price indexed adjustments, or in the case of an extension, market adjusted rates. Rent expense is recognized on a straight line basis over the term of the lease. As of December 31, 2007, the Company maintained a security deposit of $0.8 million required under conditions of the lease, which was recorded as a noncurrent asset on the Company’s balance sheet.

Aggregate future minimum lease payments under the operating lease are as follows (in thousands):

Year Ending December 31,
2008	$	688
2009		709
2010		730
2011		752
2012		576
	$	3,455

Rent expense, net of sublease income, was approximately $774,000, $474,000 and $436,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

Pursuant to the terms of our agreement with Plantex USA Inc., under certain circumstances we may incur annual purchase obligations in connection with Plantex’s obligation to supply the Company with calcitriol, the active ingredient in Asentar^™, for use in clinical trials and other development activities and for commercial sale. This contingency totals approximately $2.4 million in 2008 through 2010.

The Company is subject to various claims and assessments in the ordinary course of business. None of these matters are expected to have a material adverse effect on the Company’s financial position or results of operations.

5. Collaboration Agreements

Aventis. In each of August 2002 and 2003, the Company entered into agreements with Aventis under which Aventis agreed to provide grant revenue payments totaling up to $3.0 million and up to $0.4 million, respectively, to the Company. The grant revenues provide for partial reimbursement of approved costs incurred, as defined in the agreements, and are contingent upon the achievement of milestones regarding the progress of two clinical trials involving Asentar^™ and Aventis’ Taxotere^® oncology product. The Company is required to provide Aventis with a final report for both of the clinical trials upon their completion. Under the agreements, Aventis has no product rights to Asentar^™. However, Aventis does have co-ownership rights to certain inventions that arose from the Company’s Phase 2 clinical trial involving the use of Asentar^™ and Taxotere in the treatment of patients with androgen-independent prostate cancer, or AIPC.

The Company recorded revenue under the two agreements with Aventis of zero, $0.4 million and $0.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. From inception, the costs incurred under the collaboration agreements have exceeded the revenues recognized.

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Schering Corporation. In May 2007, the Company signed an exclusive worldwide License, Development and Commercialization Agreement with Schering Corporation, a wholly-owned subsidiary of Schering-Plough Corporation (“Schering”), for the development and commercialization of Asentar^™ (the “Collaboration Agreement”) in androgen-independent prostate cancer, or AIPC, earlier stages of prostate cancer, and other types of cancers, including pancreatic cancer.

The Collaboration Agreement became effective on June 26, 2007, following clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. In July 2007, the Company received non-refundable upfront payments from Schering totaling $60 million, of which $35 million was reimbursement for past research and development expenses and $25 million was a license fee. The Company is also eligible to receive up to $380 million in pre-commercial milestone payments, as well as royalties on worldwide sales of Asentar^™ based on tiered royalty percentage rates that range from the high teens to the mid-twenties, depending on annual product sales levels. The Company is recognizing revenues from the upfront payments ratably over an estimated six-year development period starting on June 26, 2007 and ending in June 2013.

The Company recorded revenue under the agreement with Schering of $16.7 million during the year ended December 31, 2007. The revenue recognized in connection with the upfront payment in the year ended December 31, 2007 was $5.2 million. Revenue from reimbursement for the Company’s R&D efforts on Asentar^™ is recognized as the related costs are incurred. The revenue from reimbursement for the Company’s R&D efforts on Asentar^™ during the year ended December 31, 2007 was $11.5 million. All payments received from Schering are non-refundable.

Under the terms of the Collaboration Agreement, the Company and Schering established a joint development committee and joint commercialization committee, which are responsible for reviewing the development and commercialization activities, respectively, of the collaboration. The Company and Schering have agreed on an initial development plan (the “Core Development Plan”) and a Forward Development Plan governing the development of the products licensed under the Collaboration Agreement. The Company has the right, but not an obligation, to participate in these joint committees and Schering has final decision-making authority with respect to the development and commercialization of Asentar^™.

In July 2007, pursuant to the terms of the Collaboration Agreement, the Company sold to Schering 1,490,868 shares of its common stock for cash of $8.05 per share, for an aggregate purchase price of $12.0 million under a Common Stock Purchase Agreement.

In November 2007, the Company ended its ASCENT-2 Phase 3 clinical trial of Asentar^™ for treatment of AIPC due to an unexplained imbalance of deaths between the treatment and control arms of the trial. As a precautionary measure, the Company also suspended enrollment in its Phase 2 clinical trial of Asentar^™ for the treatment of advanced pancreatic cancer and in each of the other ongoing investigator-sponsored trials involving the use of Asentar^™. Together with Schering, the Company is reviewing and analyzing the data from the ASCENT-2 Phase 3 clinical trial in an attempt to determine the reason for the higher number of deaths in the treatment arm and, depending on the results of this analysis the Company intends to decide with Schering whether or not to continue development efforts with respect to Asentar^™. If development efforts on Asentar^™ under the Collaboration Agreement are discontinued, the Company would no longer recognize revenue from Schering related to the reimbursement of its related development efforts other than for the costs incurred by the Company for the wind-down of activities for the then ongoing Asentar^™ development programs. Additionally, in this situation, the period over which the Company is currently recognizing revenues from the upfront payments received from Schering, which is currently estimated to be six years and represents the estimated period for which the Company believes it has significant obligations under the Collaboration Agreement, may be shortened to reflect any reduced future development period. The deferred revenue related to the upfront payments from Schering as of December 31, 2007, was $54.8 million.

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In connection with the Collaboration Agreement, the Company amended and restated its supply agreement with Plantex USA Inc., its exclusive license agreement with Oregon Health & Science University (the “OHSU License Agreement”), and its license agreement with the University of Pittsburgh of the Commonwealth System of Higher Education (the “University of Pittsburgh License Agreement”). Each agreement was revised to align with the Company’s sublicensing of Asentar^™ to Schering and to better facilitate the commercialization of licensed products under the Collaboration Agreement.

Under the amended and restated supply agreement, Novacea is allowed to maintain, and may purchase a certain amount of calcitriol from, a qualified second source manufacturer of calcitriol in any calendar year. Additionally, Novacea has the right to commit Plantex to manufacture calcitriol over a certain period at a premium price over the manufacturing cost.

6. Licensed Technology

Oregon Health & Science University. In June 2001, the Company entered into an exclusive, worldwide license with Oregon Health & Science University, or OHSU, to utilize specific technology under patent rights and know-how related to the use of calcitriol and its analogs. In connection with entering into this license, the Company issued 228,571 shares of its common stock to OHSU. Because the technology licensed related to a patent application for a method of use utilized in research and development and there was no alternative future use for the technology, the Company recorded the fair value of the licensed technology as $120,000, based on the fair value of the shares issued, as research and development expense. In connection with the Collaboration Agreement with Schering, the Company amended and restated its exclusive license agreement with OHSU in May 2007. Under the amended OHSU License Agreement, the Company paid OHSU in September 2007 a sublicensing fee of $3.8 million, equal to 15% of the $25 million license fee received under the Collaboration Agreement with Schering which was a provision under the original OHSU License Agreement. This amount was recorded as research and development expense because the technology rights are being utilized in research and development, and it is not clear that an alternative future use exists for such technology. As of December 31, 2007 and under the terms of the agreement, the Company may be obligated in the future to make certain milestone payments to OHSU of up to an aggregate of $0.6 million, which milestone payments are contingent upon the occurrence of certain clinical development and regulatory events related to Asentar^™. Payments to OHSU that relate to pre-approval development milestones are recorded as research and development expense when incurred. The Company is obligated to pay to OHSU certain royalties on net sales of Asentar^™, which royalty rate may be reduced in the event that the Company must pay certain additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell Asentar^™. The Company has agreed to pay OHSU a certain percentage of any sub-license revenues that the Company receives. The Company has also agreed to reimburse OHSU for all reasonable fees and costs related to the preparation, filing, prosecution and maintenance of the patent rights underlying the agreement, and the Company has agreed to indemnify OHSU and certain of its affiliates against liability arising out of the exercise of patent rights under the agreement. Furthermore, in addition to customary termination provisions for breach or bankruptcy, OHSU may also terminate the license agreement if the Company does not proceed reasonably with the development and practical application of the products and processes covered under the license or does not keep the products and processes covered under the license reasonably available to the public after commencing commercial use.

University of Pittsburgh. In July 2002, the Company acquired an exclusive, worldwide license from the University of Pittsburgh of the Commonwealth System of Higher Education, or University of Pittsburgh, to utilize specific technology under certain patent rights and know-how related to the use of calcitriol, and its derivatives and analogs, with certain chemotherapies. In exchange for this license, the Company issued 14,285 shares of common stock and paid cash consideration of $100,000 to the University of Pittsburgh. The Company capitalized the licensed patent rights of $109,000, included in “Other assets” on the accompanying balance sheet, and is amortizing the asset on a straight-line basis over the estimated useful life of the patents, or approximately 15 years. The net carrying value of the licensed patent rights at December 31, 2007 and 2006 was $73,000 and $80,000, respectively. The amortization expense of the licensed patent rights was $7,000 for each of the years

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ended December 2007, 2006 and 2005, and is expected to be $7,000 per year through 2017. In addition, the Company is obligated to issue an additional 14,285 shares of its common stock to the University of Pittsburgh upon the issuance of certain claims included in one of several U.S. patents that are subject to this license. Under the terms of the agreement, the Company is obligated to pay the University of Pittsburgh certain royalties on net sales of Asentar^™ when used in combination with certain chemotherapies. The royalty rate may be reduced in the event that the Company must pay certain additional royalties under patent licenses entered into with third parties in order to manufacture, use or sell Asentar^™. In connection with the Schering Collaboration Agreement, the Company amended and restated its license agreement with the University of Pittsburgh of the Commonwealth of Higher Education in May 2007. Under the amended University of Pittsburgh License Agreement, the Company paid in August 2007 a sublicensing fee of $1.3 million, equal to 5% of the $25 million license fee received under the Collaboration Agreement with Schering, effective in June 2007, which was a provision under the original University of Pittsburgh License Agreement. The sublicensing fee was recorded as research and development expense during the year ended December 31, 2007, because the technology rights are being utilized in research and development, as we do not believe that an alternative future use exists for such technology. As of December 31, 2007 and under the terms of the agreement, the Company may be obligated through 2012 to make certain minimum royalty payments to the University of Pittsburgh of up to an aggregate of $1.2 million, which royalty payments are contingent upon continuation of the license agreement and are creditable against the Company’s other royalty obligations that are actually due in any calendar year. This minimum royalty payment obligation began in July 2003. Minimum royalty payments to the University of Pittsburgh in advance of Asentar^™ marketing approval are recorded as research and development expense when incurred. The Company has agreed to pay the University of Pittsburgh a certain percentage of any sub-license revenues that the Company receives. The Company has also agreed to reimburse the University of Pittsburgh for all reasonable fees and costs related to the filing prosecution and maintenance of the patent rights underlying the agreement.

KuDOS Pharmaceuticals Limited. In December 2003, the Company entered into a license agreement with KuDOS Pharmaceuticals Limited, or KuDOS, which was acquired in early 2006 by AstraZeneca PLC. Under this license agreement, the Company obtained exclusive, royalty-bearing licenses to certain KuDOS patents and know-how acquired or to be acquired by KuDOS from a third party to the Company’s AQ4N product candidate for all human therapeutic, prophylactic and diagnostic uses in the United States, Canada and Mexico. The Company also received a sub-license to certain patents relating to AQ4N from a third party licensor to KuDOS. Upon signing the agreement in December 2003, the Company paid KuDOS an up-front fee of $1.0 million. Additionally, the Company made a $1.0 million milestone payment to KuDOS in 2004. Each of the two payments was recorded as research and development expense in the period because the licensed technology was incomplete and had no alternative future use. Payments to KuDOS that relate to pre-approval development milestones are recorded as research and development expense when incurred.

In April 2007, the Company terminated the December 2003 license agreement under which it licensed KuDOS’ North American rights to AQ4N and entered into a worldwide license agreement directly with the primary licensor to KuDOS, BTG International Limited. Relatedly, in April 2007, the Company entered into an assignment of KuDOS’ ownership of rights, title and interests in patents and know-how related to AQ4N. As of December 31, 2007 and under the terms and conditions of the assignment agreement, the Company may be obligated in the future to make a payment to KuDOS of $5.0 million upon achievement of a certain milestone tied to the Company’s AQ4N sales reaching a specified dollar level. No future pre-approval development milestones or royalties will be due to KuDOS under this agreement.

BTG International Limited. In April 2007, the Company entered into a novation and license agreement with BTG International Limited, or BTG, the primary licensor to KuDOS regarding AQ4N. The Company acquired the worldwide, exclusive rights to patents and know-how for the development, manufacture and use of AQ4N for the diagnosis, treatment and prevention of human diseases. In May 2007, the Company paid BTG $1.4 million as an up-front payment, which was recorded as a research and development expense. Under the terms and conditions of the agreement, the Company is obligated to pay BTG approximately £50,000 (approximately $0.1 million) per year beginning in 2008 until the Company receives regulatory approval for

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AQ4N. Further, under the agreement, the Company may be obligated in the future to make certain milestone payments to BTG up to approximately £6.0 million (approximately $11.9 million), which are contingent upon the occurrence of certain clinical development and regulatory events related to AQ4N. Payments to BTG that relate to pre-approval development milestones will be recorded as research and development expense when incurred. In addition, the Company is obligated to pay BTG certain annual royalties based on net sales of AQ4N, which are subject to annual minimum royalty payment amounts, and which royalty rate may be reduced in the event that we must pay certain additional royalties under patent licenses to third parties in order to manufacture, use or sell AQ4N. The Company also agreed to pay BTG a certain percentage of any sub-license revenues that the Company receives. The license agreement will terminate on a country-by-country basis on the expiration date in the applicable country of the last-to-expire patent licensed to the Company under the agreement. In addition to customary termination provisions, including breach of the agreement and bankruptcy, BTG may terminate the license agreement if the Company directly or indirectly opposes or assists any third party in opposing BTG’s patents. The Company may terminate the agreement by giving notice to BTG at any time, which termination shall be effective six months after such notice and upon transfer of ownership to BTG or its designee of certain rights as required by the agreement, subject to certain payments. As of December 31, 2007, the only payment that the Company has made to BTG is the up-front payment of $1.4 million.

7. Convertible Preferred Stock and Stockholders’ Equity

Convertible Preferred Stock

On January 13, 2006, the Company sold 36,006 shares of Series C convertible preferred stock to a number of existing holders of its preferred stock at a price of $8.75 per share, for net proceeds of approximately $0.3 million.

Immediately prior to the completion of the Company’s initial public offering of 6,250,000 shares of its common stock, which occurred on May 15, 2006, all of the shares of convertible preferred stock outstanding converted into 14,239,571 shares of common stock.

Stock Option Plans

2006 Incentive Award Plan

In March 2006, the Company’s board of directors adopted the 2006 Incentive Award Plan (the “2006 Plan”), which was approved by the Company’s stockholders in April 2006. The 2006 Plan is intended to serve as the successor equity incentive program to the Amended 2001 Stock Option Plan (the “2001 Plan”). The 2006 Plan became effective upon the completion of the Company’s initial public offering, at which time options could no longer be granted under the 2001 Plan, and the 2006 Plan will terminate on the earlier of (i) ten years after its approval by the Company’s stockholders or (ii) when the Company’s compensation committee, with the approval of the Company’s board of directors, terminates the 2006 Plan. The 2006 Plan provides for the granting of incentive stock options, non-qualified stock options, restricted stock, performance share awards, performance stock units, dividend equivalents, restricted stock units, stock payments, deferred stock, performance-based awards and stock appreciation rights. In the years ended December 31, 2007 and 2006, the Company granted both non-qualified and incentive stock options under the 2006 Plan. The employee stock options generally vest over four years, are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are issued and are granted at prices equal to the fair value of our common stock on the grant date. In the year ended December 31, 2007, the Company granted restricted stock units under the 2006 Plan. The restricted stock units generally vest over two years. Stock option and restricted stock units exercises are settled with newly issued common stock from the 2006 Plan’s previously authorized and available pool of shares. A total of 2,500,000 shares of common stock have been authorized for issuance pursuant to the 2006 Plan, plus the number of shares of the Company’s common stock available for issuance under the 2001 Plan that are not subject to outstanding options, as of the effective date of the 2006 Plan. In addition, the number of shares of common stock reserved for issuance under the 2006 Plan will increase automatically on the first day of each

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fiscal year, beginning in 2007, by a number of shares equal to the least of: (i) 4.5% of shares of the Company’s common stock outstanding on a fully diluted basis on such date; (ii) 2,000,000 shares; or (iii) a smaller number determined by the Company’s board of directors.

The Company’s 2006 Plan provides for grants of restricted stock units to employees as part of the Company’s long-term incentive compensation program. During the year ended December 31, 2007, the Company’s board of directors approved grants totaling 657,000 restricted stock units to its employees, including executive officers. Restricted stock units have no exercise price, are valued using the closing market price on the date of grant and vest as determined by the board of directors, typically in annual tranches over a two- or three-year period at different rates. Restricted stock units granted under the 2006 Plan expire no more than ten years after the date of grant. At December 31, 2007, 495,000 restricted stock units remain unvested and outstanding.

At December 31, 2007 and 2006, a total of 4,106,851 and 2,957,136 shares of common stock, respectively, had been authorized for issuance under the 2006 Plan. The 2006 Plan is the successor equity incentive program to the Amended 2001 Stock Option Plan. The 2006 Incentive Award Plan became effective upon the completion of the Company’s initial public offering, at which time options could no longer be granted under the Amended 2001 Stock Option Plan.

2001 Stock Option Plan

In 2001, the Company’s board of directors and stockholders adopted the 2001 Plan. This plan provides for the granting of incentive and non-statutory stock options to employees, officers, directors, and non-employees of the Company. Incentive stock options may be granted with exercise prices of not less than fair value, and non-statutory stock options may be granted with an exercise price of not less than 85% of the fair value of the common stock on the date of grant. Stock options granted to a stockholder owning more than 10% of voting stock of the Company must have an exercise price of not less than 110% of the fair value of the common stock on the date of grant. In the years ended December 31, 2006 and 2005, the Company granted both non-qualified and incentive stock options under the 2001 Plan. The employee stock options generally vest over four years, are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are issued and are granted at prices equal to the fair value of our common stock on the grant date. Stock option exercises were settled with newly issued common stock from the 2001 and 2006 Plans’ previously authorized and available pool of shares. At December 31, 2007, there are no shares available for future grant under this plan.

2006 401(k) Plan

The Company maintains a 401(k) Plan that is a defined contribution plan intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended. All employees who are 21 years of age or older and have been employed by the Company for at least 1 month are eligible to participate. The Company’s 401(k) Plan is a discretionary contribution plan, whereby participants may voluntarily make pre-tax contributions to the 401(k) plan of up to a maximum statutory limit. The 401(k) plan provides for discretionary matching contributions in the form of shares of common stock or cash. Under the 401(k) Plan, each employee is fully vested in his or her deferred salary contributions. For the plan years ending December 31, 2007 and 2006, the Company’s board approved a 50% matching contribution on pretax deferrals made by each participant. For each of the years ended December 31, 2007 and 2006, the Company recorded compensation expense of $0.3 million for the Company’s 50% common stock matching contribution. The Company did not make any matching contributions during the year ended December 31, 2005.

Stock-based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment—An Amendment of FASB Statements No. 123 and 95. This revised standard addresses the accounting for stock-based payment transactions in which a company

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receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the compensation transactions using the intrinsic-value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. Instead, companies are required to account for such transactions using a fair-value method and recognize the expense in the statements of operations.

The components of the stock-based compensation for employees and non-employees recognized in the Company’s statements of operations are as follows (in thousands):

	Years ended December 31,
	2007		2006		2005
Research and development	$	1,145	$	404	$	138
General and administrative		3,485		1,343		404
Total stock based compensation	$	4,630	$	1,747	$	542

Employee Stock-Based Awards Granted Prior to January 1, 2006

Compensation costs for employee stock options granted prior to January 1, 2006, the date the Company adopted SFAS No. 123R, were accounted for using the intrinsic-value method of accounting as prescribed by APB No. 25, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation, and as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Under APB No. 25, compensation expense for employee stock options is based on the excess, if any, of the fair value of the Company’s common stock over the option exercise price on the measurement date, which is typically the date of grant.

The Company determined in 2005 that, for accounting purposes, the estimated fair value of the Company’s common stock was greater than the exercise price for certain options granted to employees during 2005. The Company recorded deferred stock-based employee compensation of $2.6 million for these options as a component of stockholders’ equity, which is being amortized as a non-cash expense, as adjusted by unvested options cancelled as a result of employee terminations, over the vesting period of the applicable option, which is generally four years, on a straight line basis. As such, for the year ended December 31, 2007, the Company recorded amortization expense of $365,000 and reversed $633,000 of deferred stock-based compensation related to unvested options cancelled as a result of employee terminations. The expected future amortization expense related to employee options granted prior to January 1, 2006 is as follows (in thousands):

Year ending December 31,
2008	$	162
2009		108
	$	270

Employee Stock-Based Awards Granted On or Subsequent to January 1, 2006

Compensation cost for employee stock-based awards granted on or after January 1, 2006, the date the Company adopted SFAS No. 123R, is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R and is recognized over the vesting period of the applicable award on a straight-line basis. During the year ended December 31, 2007, the Company issued employee stock-based awards in the form of stock options and restricted stock units. During the year ended December 31, 2006, the Company issued employee stock-based awards in the form of stock options.

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The estimated grant date fair values of the employee stock options were calculated using the Black-Scholes valuation model, based on the following assumptions:

	Years ended December 31,
	2007	2006
Stock Option Plans
Weighted-average expected term	6.1 years	6.1 years
Expected volatility	70.7%	72.4%
Risk-free interest rate	4.0%	4.8%
Dividend yield	0.0%	0.0%

Weighted-Average Expected Term. Under the Company’s Stock Option plans, the expected term of options granted is determined using the “shortcut” method, as illustrated in the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 107. Under this approach, the expected term is presumed to be the average of the vesting term and the contractual term of the option. The shortcut approach is not permitted for options granted, modified or settled after December 31, 2007.

Volatility. Since the Company is a reasonably new public entity with limited historical data regarding the volatility of its common stock, the expected volatility used for 2007 and 2006 is based on volatility of similar entities, referred to as “guideline” companies. In evaluating similarity, the Company considered factors such as industry, stage of life cycle and size.

Risk-Free Interest Rate. The risk-free rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options or purchase rights.

Dividend Yield. The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zero in the valuation model.

Forfeitures. SFAS No. 123R also requires the Company to estimate forfeitures at the time of grant, and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All share-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. The Company’s estimated annual forfeiture rate is approximately 12.6%. If the Company’s actual forfeiture rate is materially different from the above estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

As of December 31, 2007, there was $7.5 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested employee stock option awards granted after January 1, 2006, which are expected to be recognized over a weighted average period of 3 years. As of December 31, 2007, there was $2.4 million of total unrecognized compensation costs, net of estimated forfeitures, related to non-vested restricted stock units granted to employees after January 1, 2006, which are expected to be recognized over a weighted average period of 2 years.

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Stock Option and Restricted Stock Unit Activity

The following table summarizes option and restricted stock unit activity under the Company’s plans including stock options granted to non-employees:

	Shares Available for Grant		Options Outstanding		Option Weighted- Average Exercise Price per Share
	(in thousands, except per share amounts)
Balance at December 31, 2004	429		1,775		$	1.12
Additional shares authorized	500		—			—
Options granted	(767	)	767			2.27
Options exercised	—		(614	)		1.30
Shares repurchased	—		(2	)		1.05
Options canceled	165		(165	)		1.15
Balance at December 31, 2005	327		1,761			1.56
Additional shares authorized	2,500		—			—
Options granted	(929	)	929			6.38
Options exercised	—		(223	)		1.83
Options canceled	153		(153	)		2.45
Balance at December 31, 2006	2,051		2,314			3.42
Additional shares authorized	1,151		—			—
Options granted	(2,936	)	2,936			4.75
Restricted stock units granted	(657	)	—			—
Options exercised	—		(750	)		1.59
Options canceled or forfeited	1,089		(1,089	)		6.54
Restricted stock units cancelled	102		—			—
Balance at December 31, 2007	800		3,411			3.99

The total intrinsic value of stock options exercised during the years ended December 31, 2007, 2006 and 2005 was $348,000, $367,000, and $754,000, respectively. The amount of cash received from exercise of stock options during the years ended December 31, 2007, 2006 and 2005 was $1,189,000, $410,000, and $796,000, respectively. At December 31, 2007, the aggregate intrinsic value of the stock options outstanding was $0.9 million. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2007, 2006 and 2005 was $9.5 million, $4.0 million and $1.2 million, respectively.

Restricted stock units and stock options granted to certain executive officers of the Company contained an accelerated vesting feature, which was reached upon effective date of the Collaboration Agreement with Schering in June 2007 and resulted in additional stock based compensation of $0.6 million recorded in the year ended December 31, 2007.

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At December 31, 2007, 1,234,000 of the outstanding options to purchase shares of common stock of the Company were exercisable at a weighted average price per share of $3.83. The options outstanding as of December 31, 2007 are summarized in the following table:

Exercise Price per Share	Number of Options Outstanding	Number of Options Vested	Weighted- Average Remaining Contractual Life
	(in thousands)		(in years)
$0.53	62	62	3.99
$0.63	2	2	4.41
$1.05	46	46	5.31
$1.30	274	274	6.26
$1.58	46	46	7.36
$1.93	83	83	7.70
$2.81	400	—	9.90
$3.03	1,201	—	9.95
$5.25	70	70	7.92
$5.90	386	180	9.05
$6.17	250	212	8.97
$6.21	98	67	8.70
$6.50	369	187	8.36
$6.82	14	—	9.12
$7.23	20	5	8.88
$7.90	35	—	9.72
$8.46	42	—	9.32
$9.39	13	—	9.49
	3,411	1,234

Options granted under the Amended 2001 Stock Option Plan may be exercised prior to vesting, with the underlying shares subject to the Company’s right of repurchase, which lapses over the vesting term. In accordance SFAS No. 123R, the shares purchased by the employees pursuant to the early exercise of stock options are not deemed to be issued until those shares vest. Therefore, cash received in exchange for exercised and unvested shares related to stock options granted after that date is recorded as a liability for early exercise of stock options on the accompanying balance sheets, and will be transferred into common stock and additional paid-in capital as the shares vest. In addition to the options outstanding as reflected in the above tables, at December 31, 2007 and December 31, 2006, there were 20,903 and 233,490 shares of common stock subject to repurchase at prices ranging from of $1.05 to $5.25 per share under option grants made after March 21, 2002, for which the Company recorded $39,000 and $376,000, respectively, as liabilities. Such shares will be reflected as shares outstanding when the shares vest.

Modification of Employee Stock-Based Awards

On December 13, 2006, the Company entered into a General Release and Separation Agreement (the “Separation Agreement”) with its former Chief Executive Officer, which agreement was effective December 20, 2006. In the year ended December 31, 2006, the Company recorded compensation cost of $0.9 million for payments and benefits received by the former Chief Executive Officer pursuant to his Separation Agreement, equal to (i) several cash payments in the total amount of $0.5 million paid over the year ended December 31, 2007, and (ii) stock-based compensation cost of $0.4 million resulting from the acceleration of vesting terms associated with options outstanding to purchase 80,125 shares of common stock. The former Chief Executive Officer exercised his vested stock options before December 31, 2007.

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The Company accounted for the acceleration of the former Chief Executive Officer’s stock options under the rules of SFAS No. 123R, Share-Based Payment, which requires that a modification of the terms or conditions of an equity award be treated as an exchange of the original award for a new award. The incremental stock-based compensation cost of $0.4 million was measured as of December 20, 2006, and is equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification of the award.

Non-employee Stock Option Awards

During the year ended December 31, 2006 the Company has granted options to non-employees to purchase 6,856 shares of common stock at exercise prices of $6.50 per share. During the year ended December 31, 2007, the Company did not grant any new non-employee options to purchase shares of common stock. The Company remeasures the non-employee options as they vest using the Black-Scholes valuation model, using a volatility rate of 70.7%, an expected life representing the remaining contractual life, which ranges from 1 to 10 years, an expected dividend yield of 0% and a weighted average risk-free interest rate of 4.0%.

Shares Reserved for Future Issuance

At December 31, 2007, the Company had shares reserved for future issuance as follows (in thousands):

Stock option plans:
Outstanding stock options	3,411
Reserved for future grants	800
Outstanding restricted stock units	555
Total	4,766

8. Income Taxes

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

	December 31,
	2007			2006
Deferred tax assets:
Federal and state net operating losses	$	33,057		$	34,181
Deferred revenues		12,741			—
Research credits		2,596			1,820
Stock-based compensation		1,553			465
Other		523			925
Total deferred tax assets		50,470			37,391
Valuation allowance		(50,470	)		(37,391	)
Net deferred tax assets	$	—		$	—

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $13.1 million and $11.8 million for the years ended December 31, 2007 and 2006, respectively.

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As of December 31, 2007, the Company had net operating loss carry-forwards for federal income tax purposes of approximately $83.1 million and research credits of approximately $2.3 million, which will expire beginning in the year 2021. The Company also had state net operating loss carry-forwards of approximately $82.5 million, which expires beginning in 2013. The Company also had state research credits of approximately $2.2 million, which have no expiration date.

Utilization of the net operating loss carry-forwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating loss carry-forwards and credits before utilization.

The Company is tracking a portion of its deferred tax assets attributable to stock option benefits in a separate memo account pursuant to SFAS No. 123R. Therefore, these amounts are no longer included in the Company’s gross or net deferred tax assets. Pursuant to SFAS No. 123R, the benefit of these stock options will only be recorded to equity when they reduce cash taxes payable. As of December 31, 2007 the portion of the stock option benefit which will be recorded to stockholders’ equity is approximately $73,000.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007. As of the date of adoption, the Company recorded a $1.2 million reduction to deferred tax assets and the associated valuation allowance for unrecognized tax benefits. If the unrecognized tax benefits were recognized, there would be no impact on the effective tax rate. Our policy is to record interest and penalties in tax expense in the statements of operations and none have been recorded. We do not expect any material changes to the unrecognized tax benefit during 2008.

The Company files U.S. and state income tax returns with varying statutes of limitations. The tax years from inception in 2001 forward remain open to examination due to the carryover of unused net operating losses and tax credits.

The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):

Balance as of January 1, 2007	$	1,250
Increases related to current year tax positions		85
Balance as of December 31, 2007	$	1,335

91

9. Unaudited Financial Information

Quarterly Results of Operations

The following table presents our unaudited statements of operations data for each of the eight quarters in the period ended December 31, 2007. The information has been presented on the same basis as the audited financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period.

Unaudited Quarterly Results of Operations

(in thousands, except per share amounts)

	Three Months Ended
	Dec 31, 2007			Sept 30, 2007			June 30, 2007			March 31, 2007			Dec 31, 2006			Sept 30, 2006			June 30, 2006			March 31, 2006
Collaboration revenue	$	7,981		$	8,566		$	136		$	—		$	—		$	—		$	—		$	371
Operating expenses:
Research and development		7,507			9,552			11,444			7,552			4,971			4,742			5,508			6,588
General and administrative		4,386			3,634			5,384			3,875			3,754			3,175			2,626			1,751
Total operating expenses		11,893			13,186			16,828			11,427			8,725			7,917			8,134			8,339
Loss from operations		(3,912	)		(4,620	)		(16,692	)		(11,427	)		(8,725	)		(7,917	)		(8,134	)		(7,968	)
Interest and other income, net		1,284			1,383			665			788			909			977			735			495
Net loss	$	(2,628	)	$	(3,237	)	$	(16,027	)	$	(10,639	)	$	(7,816	)	$	(6,940	)	$	(7,399	)	$	(7,473	)
Net loss per share, basic and diluted	$	(0.10	)	$	(0.13	)	$	(0.69	)	$	(0.46	)	$	(0.34	)	$	(0.30	)	$	(0.60	)	$	(4.75	)
Shares used in computing basic and diluted net loss per share		25,262			24,923			23,303			23,095			22,922			22,903			12,425			1,572

92

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: Our Chief Executive Officer and Chief Financial Officer reviewed and evaluated our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Form 10-K. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely providing them with material information relating to the Company, as required to be disclosed in the reports we file under the Exchange Act.

(b) Management’s Annual Report on Internal Control Over Financial Reporting: Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

Our independent registered public accounting firm, Ernst & Young LLP, has audited our financial statements included in this report on Form 10-K and has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. Their report on the audit of internal control over financial reporting appears below.

93

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Novacea, Inc.

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

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

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

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

In our opinion, Novacea, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSCO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Novacea, Inc. as of December 31, 2007 and 2006, and the related statements of operations, convertible preferred stock and stockholders’ equity (net capital deficiency), and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 14, 2008 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Palo Alto, California

March 14, 2008

Item 9B. Other Information

None.

94

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by this Item 10 is incorporated herein by reference to our Proxy Statement to be filed with the Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) to Form 10-K.

Code of Business Conduct and Ethics

Our board of directors has adopted a code of business conduct and ethics. The code of business conduct applies to all of our employees, officers and directors. The full texts of our codes of business conduct and ethics are posted on our website at http://www.novacea.com under the Investor Relations section. We intend to disclose future amendments to our codes of business conduct and ethics, or certain waivers of such provisions, at the same location on our website identified above and also in public filings. The inclusion of our website address in this report does not include or incorporate by reference the information on our Web site into this report.

Item 11. Executive Compensation

The information required by this Item 11 is incorporated by reference our Proxy Statement to be filed with the Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) to Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item 12 is incorporated by reference our Proxy Statement to be filed with the Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) to Form 10-K.

Item 13. Certain Relationships and Related Transactions

The information required by this Item 13 is incorporated by reference to our Proxy Statement to be filed with the Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) to Form 10-K.

Item 14. Principal Accountant Fees and Services

The information required by this Item 14 is incorporated by reference to the section entitled “Information about the Independent Auditors” in our Proxy Statement to be filed with the Commission within 120 days of the end of our fiscal year pursuant to General Instruction G(3) to Form 10-K.

95

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements

See Index to Financial Statements under Item 8 on page 66.

(a)(2) Financial Statement Schedules

Financial statement schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto.

(a)(3) Exhibits

The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this report.

Exhibit Index

Exhibit No.	Description of Exhibit
3.1	Amended and Restated Certificate of Incorporation of Novacea, Inc. (incorporated by reference to Exhibit 3.3 to Amendment No. 3 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on May 2, 2006).
3.2	Amended and Restated Bylaws of Novacea, Inc. (incorporated by reference to Exhibit 3.5 to Amendment No. 3 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on May 2, 2006).
4.1	Specimen Common Stock certificate of Novacea, Inc. (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on April 14, 2006).
4.2	2005 Amended and Restated Investor Rights Agreement, dated as of December 21, 2005, by and between Novacea, Inc. and purchasers of Series A, Series B and Series C Preferred Stock (incorporated by reference to Exhibit 4.4 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on February 10, 2006).
10.1	Novacea, Inc. 2001 Stock Option Plan and forms of agreements relating thereto (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on February 10, 2006).
10.2	Novacea, Inc. 2006 Equity Incentive Plan, as amended, and forms of agreements relating thereto (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K filed on April 2, 2007).
10.3	Form of Indemnification Agreement made by and between Novacea, Inc. and each of its directors and executive officers (incorporated by reference to Exhibit 10.3 to Amendment No. 3 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on May 2, 2006).
10.4 †	Amended and Restated Exclusive License Agreement, dated as of May 25, 2007, by and between the Oregon Health & Science University and Novacea, Inc. (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Quarterly Report on Form 10-Q/A filed on November 28, 2007).
10.5 †	Amended and Restated License Agreement, dated as of May 24, 2007, by and between the University of Pittsburgh of the Commonwealth System of Higher Education and Novacea, Inc. (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed on August 14, 2007).
10.6 †	License Agreement, dated as of December 3, 2003, by and between Novacea, Inc. and KuDOS Pharmaceuticals Limited (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on February 10, 2006).

96

Exhibit No.	Description of Exhibit
10.7	Agreement, dated as of August 5, 2002, by and between Novacea, Inc. and Aventis Pharmaceuticals Inc. (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on February 10, 2006).
10.8	Agreement, dated as of August 4, 2003, by and between Novacea, Inc. and Aventis Pharmaceuticals Inc. (incorporated by reference to Exhibit 10.11 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on February 10, 2006).
10.9†	Amended and Restated Supply Agreement, dated as of May 25, 2007, by and between Plantex USA, Inc. and Novacea, Inc. (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Quarterly Report on Form 10-Q/A filed on September 28, 2007).
10.10	Office Lease, by and between Kashiwa Fudosan America, Inc. and Novacea, Inc. dated as of May 15, 2007.
10.11	Executive Severance Benefits Agreement by and between Edward F. Schnipper, M.D. and Novacea, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 27, 2007).
10.12	Offer Letter by and between Edward F. Schnipper, M.D. and Novacea, Inc. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on November 27, 2007).
10.13	Executive Severance Benefits Agreement by and between Edward C. Albini and Novacea, Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 2 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on April 14, 2006).
10.14	Amendment to Executive Severance Benefits Agreement by and between Edward C. Albini and Novacea, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 18, 2007).
10.15	Executive Severance Benefits Agreement by and between Ivy Ang and Novacea, Inc. (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on April 14, 2006).
10.16	Executive Severance Benefits Agreement by and between Amar Singh and Novacea, Inc. (incorporated by reference to Exhibit 10.23 to Amendment No. 2 to our Registration Statement on Form S-1 (SEC File No. 333-131741) filed on April 14, 2006).
10.17	Amendment to Executive Severance Benefits Agreement by and between Amar Singh and Novacea, Inc. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on December 18, 2007).
10.18	Amended and Restated Director Compensation Policy (incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K filed on April 2, 2007).
10.19	General Release and Separation Agreement by and between Bradford S. Goodwin and Novacea, Inc., effective as of December 12, 2006 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 18, 2006).
10.20	Amended and Restated Chief Executive Officer Agreement by and between John Walker and Novacea, Inc., dated as of September 19, 2007 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 24, 2007).
10.21††	License, Development and Commercialization Agreement, dated May 29, 2007, by and between Schering Corporation and Novacea, Inc. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on June 1, 2007).
10.22	Common Stock Purchase Agreement, dated May 29, 2007, by and between Schering Corporation and Novacea, Inc. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on June 1, 2007).

97

10.23 ††	Novation and License Agreement, dated April 19, 2007, by and between BTG International Limited and Novacea, Inc. (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q filed on May 15, 2007).
10.24 ††	Assignment, dated April 19, 2007, by and between KUDOS Pharmaceuticals Limited and Novacea, Inc. (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q filed on May 15, 2007).
23.1	Consent of independent registered public accounting firm.
31.1	Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Company’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Company’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Confidential treatment has been granted as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.

†† Portions of the exhibit have been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with the Securities and Exchange Commission.

(b) Exhibits

See Exhibits listed under Item 15(a)(3) above.

(c) Financial Statement Schedules

Financial statement schedules are omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto.

98

SIGNATURES

Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco, State of California, on the 17th day of March, 2008.

Novacea, Inc.
By:	/S/    JOHN P. WALKER
	John P. Walker Chief Executive Officer

POWER OF ATTORNEY

KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, John P. Walker and Edward C. Albini, and each one of them, attorneys-in-fact for the undersigned, each with the power of substitution, for the undersigned in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his/her name.

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

Signature	Title	Date
/S/    JOHN P. WALKER         John P. Walker	Chief Executive Officer and Chairman of the Board (Principal Executive Officer)	March 17, 2008
/S/    EDWARD C. ALBINI         Edward C. Albini	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 17, 2008
/S/    DANIEL M. BRADBURY         Daniel M. Bradbury	Director	March 17, 2008
/S/    JAMES HEALY, M.D., PH.D.         James Healy, M.D., Ph.D.	Director	March 17, 2008
/S/    JUDITH A. HEMBERGER, PH.D.         Judith A. Hemberger	Director	March 17, 2008
/S/    MICHAEL RAAB         Michael Raab	Director	March 17, 2008
/S/    FREDERICK J. RUEGSEGGER         Frederick J. Ruegsegger	Director	March 17, 2008
/S/    CAMILLE SAMUELS         Camille Samuels	Director	March 17, 2008
/S/    LOWELL E. SEARS         Lowell E. Sears	Director	March 17, 2008
/S/    ECKARD WEBER, M.D.         Eckard Weber, M.D.	Director	March 17, 2008

99

EX-10.10

Exhibit 10.10

OYSTER POINT MARINA PLAZA

Office Lease

of

SUITE 200

to

NOVACEA, INC.,

a Delaware corporation

400 Oyster Point Boulevard

South San Francisco, CA 94080

OYSTER POINT MARINA PLAZA

Office Lease

THIS OFFICE LEASE (the “Lease”) is entered into as of May 15, 2007, by and between KASHIWA FUDOSAN AMERICA, INC., a California corporation (“Landlord”) and NOVACEA, INC., a Delaware corporation (“Tenant”).

1    BASIC LEASE TERMS

1.1 LEASE OF PREMISES. Landlord leases to Tenant, and Tenant rents and hires from Landlord, the premises described in § 1.3 below, in the building known by the street address 400 Oyster Point Boulevard (the “Building”) in the City of South San Francisco, County of San Mateo, State of California, on the property described in § 1.6 below, in the business park commonly known as Oyster Point Marina Plaza (the “Complex”), for the term stated in § 1.4 below, for the rents hereinafter reserved, and upon and subject to the terms, conditions (including limitations, restrictions, and reservations), and covenants hereinafter provided. The Building and the Complex are more particularly described and depicted in Exhibit A which is attached hereto. Each party hereby expressly covenants and agrees to observe and perform all of the conditions and covenants herein contained on its part to be observed and performed.

1.2 SUMMARY TABLE. The parties agree that the following table (the “Table”) sets forth in summary form the basic terms of this Lease, including the specific space comprising the Premises and, with respect to such space, the Term of the Lease, the usable and rentable square footage, the Base Rent, Base Year, and Tenant’s Share, as all of such terms are defined below:

PERIOD	SUITE NO.	RSF	USF	MONTHLY BASE RENT		T’S SHARE BLDG		T’S SHARE COMPLEX		BASE YEAR
Commencement Date through September 30, 2008	200	25,288	21,990	$	56,898.00	10.911	%	5.444	%	2008
October 1, 2008 through September 30, 2009	200	25,288	21,990	$	58,604.94	10.911	%	5.444	%	2008
October 1, 2009 through September 30, 2010	200	25,288	21,990	$	60,363.09	10.911	%	5.444	%	2008
October 1, 2010 through September 30, 2011	200	25,288	21,990	$	62,173.98	10.911	%	5.444	%	2008
October 1, 2011 through September 30, 2012	200	25,288	21,990	$	64,039.20	10.911	%	5.444	%	2008

In the event of any conflict between the terms contained in the Table and the terms contained in subsequent sections of the Lease, the terms of the Table shall control, except that any dates stated in the Table are subject to adjustment as appropriate to the extent any other provisions of the Lease provide for adjustments to the Commencement Date and/or the Expiration Date.

1.3 PREMISES. The premises leased to Tenant (the “Premises”) are a portion of the second (2nd) floor of the Building and are commonly known as Suite 200, as shown on the floor plan annexed hereto as Exhibit B. The Premises also include all fixtures and equipment which are attached thereto, except items not deemed to be included therein and which are removable by Tenant as provided in Article 10 below.

Oyster Point Marina Plaza Office Lease

Kashiwa Fudosan America, Inc. :: Novacea, Inc.

page 1 of 55

[Suite 200 (400 OPB) ;25,288 rsf]

Landlord and Tenant agree that the usable and rentable area of the Premises, and the respective rentable areas of the Property (as defined in § 1.6 below) and Complex, for all purposes under this Lease, are as follows and as specified in the Table:

Property’s Rentable Area:	231,769 rsf
Complex’s Rentable Area:	464,502 rsf.

Tenant acknowledges that it has caused its architect to verify the numbers stated in the Table and herein relating to the measurements of such spaces prior to the Commencement Date of this Lease or has had an opportunity to do so.

1.3.1 Rights of First Refusal. In consideration for Tenant’s execution and delivery of this Lease, provided no material Event of Default remains outstanding and uncured on the date Tenant exercises its rights under this § 1.3.1 et seq., Landlord hereby grants to Tenant the following rights of first refusal with respect to the following spaces (collectively the “RFR Space”) exercisable throughout the initial Term of the Lease:

• Suite 210 (1,421 rsf), vacant as of the date of this Lease;

• Suite 212 (1,541 rsf), currently occupied by Reprogenetics under a lease expiring on September 30, 2007;

• Suite 226 (1,451 rsf), currently occupied by Netswitch under a lease expiring on January 31, 2009; and

• Suite 228 (3,165 rsf), currently occupied by Halloo Communications under a lease expiring on March 31, 2009;

Notwithstanding anything to the contrary herein, Tenant’s rights of first refusal hereunder shall be subject to (i) any renewal or extension options under the existing leases of the RFR Space existing as of the date of the parties’ execution and delivery to each other of this Lease.

(a) Notice of Bona Fide Offer. If at any time during the period specified in § 1.3.1 above Landlord receives a bona fide offer, agreement, or proposal (“Lease Proposal”) which is acceptable to Landlord from any third party to lease any portion of the RFR Space; or if Landlord makes a bona fide offer, agreement, or proposal to a third party which the third party is willing to accept, Landlord shall send Tenant a summary (the “RFR Summary”) of the economic terms and conditions of the Lease Proposal, including a description of the subject space, proposed term, and basic business terms and shall notify Tenant of Landlord’s intention to conclude a lease on the terms of the Lease Proposal. Tenant shall have the right for a period of five (5) full business days (concluding at 5:00 p.m.) following Tenant’s receipt of the RFR Summary in which to exercise its right to lease the space described in the RFR Summary (the “RFR Space”) on the terms and conditions set forth in this § 1.3.1 et seq. by giving Landlord written notice of such exercise. If Tenant fails to notify Landlord of the exercise of its rights hereunder within such five-business-day period, Landlord may then lease the RFR Space to the third party tenant named as the tenant in the RFR Summary or an affiliate of such third party tenant, provided that the lease entered into pursuant to the Lease Proposal is (i) on the same terms and conditions as set forth in the RFR Summary or (ii) on substantially the same terms and conditions as set forth in the RFR Summary and Landlord is not required to re offer such First Refusal Space to Tenant pursuant to § 1.3.1(d) below.

(b) Commencement and Duration. If Tenant exercises its right of first refusal, Landlord shall make the RFR Space available for purposes of construction of improvements within ninety (90)

Oyster Point Marina Plaza Office Lease

Kashiwa Fudosan America, Inc. :: Novacea, Inc.

page 2 of 55

[Suite 200 (400 OPB) ;25,288 rsf]

days following Tenant’s exercise of this right of first refusal (the “RFR Space Delivery Date”); the lease shall commence as provided herein and shall expire after the length of the term specified in the Lease Proposal. The parties understand and agree that the Term of the Lease with respect to any RFR Space shall not expire coterminously with the initial Term of the Lease stated in the Table for the remainder of the Premises. The parties agree that Landlord shall improve the RFR Space within ninety (90) days of the RFR Space Delivery Date, whether or not the RFR Space has been previously improved, in accordance with the terms of the Work Letter Agreement, with appropriate changes being made only to the Plans and Specifications, Construction Schedule, and the amount of the Landlord’s contribution (i.e., the value of the TIs computed on a per-square-foot basis), which amount shall be determined as provided below. Tenant shall deliver to Landlord for approval (which shall not to be unreasonably withheld, conditioned, or delayed) Tenant’s proposed plans and specifications no later than ninety (90) days following Tenant’s exercise of this right of first refusal. Landlord shall, construct within the RFR Space the improvements specified in the final approved plans and specifications for such construction. The commencement date of the lease of such RFR Space (upon which Base Rent and Additional Rent shall begin to accrue, and Tenant’s Pro Rata Share shall be adjusted to take into account the RFR Space) shall be the earlier of (i) the date upon which Landlord’s construction of the improvements within the RFR Space satisfies the Delivery Requirements (hereinafter defined) with respect to the RFR Space or (ii) the date upon which Tenant occupies the RFR Space (or any portion thereof) and commences conducting Tenant’s business operations therein; provided, however, that in the event of any Tenant Delay (hereinafter defined), Tenant’s obligation to pay Base Rent and Additional Rent with regard to such RFR Space shall be advanced by one (1) day for each such day substantial completion of such improvements was delayed by a Tenant Delay. Following Landlord’s delivery of the RFR Space in compliance with all Delivery Requirements, the RFR Space shall be deemed to be a part of the Premises and shall be leased by Tenant upon and subject to all of the terms, covenants, and conditions of this Lease.

(c) Terms and Conditions. If Tenant exercises its right of first refusal as to the RFR Space, all terms and conditions for the lease of any such space shall be the same as those then in effect under the Lease, except for the rental, tenant inducements, rent abatements, and improvement allowances (“Third-Party Economics”). Tenant shall have the right to a lease of the RFR Space upon such Third-Party Economics as were contained in the Lease Proposal in the same proportion as the number of months remaining in the Term (including the term of any extension option then having been exercised) bears to the number of months in the lease term contained in the RFR Summary.

(d) Continuing Right, Re-Offer, and Priority. If Tenant shall not timely exercise the right of first refusal contained herein upon notification by Landlord, Tenant shall again have the same rights as to such space each time Landlord receives or makes a bona fide offer, from or to a third party, which both Landlord and the third party are willing to accept, to lease such space, whether or not Tenant has previously exercised or refused to exercise the rights herein contained with respect to such space or other space. If Tenant rejects or is deemed to have rejected a bona fide offer of which Tenant is notified, and if (i) such third-party bona fide offer is not consummated within five (5) months; (ii) the effective rental rate to be paid pursuant to the bona fide offer changes in any respect so as to become more than ten percent (10%) more favorable to the prospective tenant (iii) there is any change in the term, expansion rights, extension rights, or renewal rights proposed in the Lease Proposal; or (iv) there is any other material change in the nonmonetary terms of the bona fide offer, then the RFR Space shall again become subject to the terms of this § 1.3.1 et seq. and shall again be offered to Tenant as provided above. As used in the previous sentence, the term effective rental rate means an amount determined by taking the total base rental and deducting all abatements, allowances, cost of non-monetary tenant inducements (e.g., health club memberships, etc.), tenant

Oyster Point Marina Plaza Office Lease

Kashiwa Fudosan America, Inc. :: Novacea, Inc.

page 3 of 55

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improvement costs in excess of Building-standard, and any other monetary inducements. The foregoing right of first refusal shall be subject to the existing tenants’ or occupants’ of the First Refusal Space renewing their existing leases pursuant to options to extend or renew which were in existence in their written lease agreements as of the date of this Lease.

(e) Confirmatory Documentation. After Tenant validly exercises the right of first refusal provided herein, the parties shall execute an amendment to the Lease adding the First Refusal Space, or such other documentation as Landlord shall require, promptly after Landlord shall prepare the same, in order to confirm the leasing of such First Refusal Space to Tenant; but an otherwise valid exercise of the rights of first refusal contained herein shall be fully effective, whether or not such confirmatory documentation is executed.

(f) Failure to Exercise. If Tenant shall fail to exercise its right of first refusal after notice by Landlord of the receipt of a bona fide third-party offer to lease the RFR Space within the time specified herein, such right shall be deemed to have lapsed and expired with respect to that particular RFR Summary, and Landlord may, for a period of five (5) months, enter into a lease pursuant to the terms of the RFR Summary with the prospective tenant named therein.

(g) Default and Termination. Tenant’s exercise of such right of first refusal hereunder shall not operate to cure any default by Tenant of any of the terms or provisions in the Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such default. The exercises of the right of first refusal herein shall, at Landlord’s election, be null and void if a material Event of Default exists which remains outstanding and uncured on the date Tenant exercises its rights hereunder. Tenant agrees that time is of the essence of rights of first refusal specified herein.

(h) Effect of Transfer. If Tenant subleases or assigns an aggregate total of more than fifty percent (50%) of the Premises at any time during the Term of this Lease, the rights of first refusal hereunder with respect to the Specific RFR Spaces shall terminate with immediate effect.

1.4 TERM. The term (the “Term”) for which the Premises are hereby leased shall commence on the “Commencement Date,” which shall be the earlier to occur of (i) the day on which the Premises are ready for occupancy (as defined in Article 3) or (ii) the day on which Tenant or anyone claiming under or through Tenant first occupies the Premises for business, and shall end at noon on the “Expiration Date,” which shall be the last day of the calendar month in which occurs the day preceding the fifth (5th) anniversary of the Commencement Date, or any earlier date upon which the Term may expire or be cancelled or terminated pursuant to any of the conditions or covenants of this Lease or pursuant to law. Promptly following the Commencement Date the parties hereto shall, if required by Landlord, enter into a supplementary agreement fixing the dates of the Commencement Date and the Expiration Date in the form which is attached hereto as Exhibit E and incorporated herein by reference.

1.4.1 Option to Extend. Tenant is hereby granted one (1) option to extend (the “Extension Option”) the Term of the Lease for an additional period of five (5) consecutive Lease Years (the “Extension Period”). The Extension Period term shall begin the first day following the Expiration Date of the Lease and shall take effect on the same terms and conditions in effect under the Lease immediately prior to the Extension Period, except that (i) Tenant shall have no further right to extend and (ii) monthly Base Rent shall be the rate which is Fair Market Value (as defined below). The Fair Market Value shall be the effective rent (face rate less free rent) being charged for comparable space in comparable buildings leased on comparable terms, including annual escalations and such other terms. Tenant’s Extension Option shall apply to the entire Premises under the Lease at the time of Tenant’s exercise, including any RFR Space and/or any RFO Space that may theretofore have been

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added to the Premises pursuant to exercise of rights under § 1.3.1 and/or § 1.3.2 above, and shall not be eligible for exercise with respect to a portion of the Premises only.

(a) Exercise of Option. The Extension Option may be exercised only by (i) delivering in person to Landlord’s Building Manager in the Building Office written notice of Tenant’s irrevocable election to exercise no earlier than January 1, 2012, and no later than April 1, 2012, and (ii) collecting and retaining in exchange for such notice of exercise an original written receipt therefor signed and dated by Landlord’s Building Manager. Tenant’s exercise of its Extension Option shall not be effective or valid if there is any deviation in the timing or manner of exercise prescribed herein.

(b) Failure to Exercise. If Tenant shall fail validly and timely to exercise the option herein granted, the Extension Option shall terminate and shall be null and void and of no further force and effect.

(c) Fair Market Value. Provided that Tenant has validly exercised its option when and as required hereunder, Landlord shall, on or before May 1, 2012, provide written notice to Tenant of its determination of the Fair Market Value. Within fifteen (15) days after receiving such determination (and in no event later than May 15, 2012) (“Tenant’s Review Period”), Tenant shall irrevocably elect, in writing, to do one of the following: (i) accept Landlord’s determination; or (ii) object to Landlord’s determination and with such objection set forth in writing Tenant’s determination of the Fair Market Value. If Tenant so objects, Landlord and Tenant shall attempt in good faith to agree upon such Fair Market Value using their best good-faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) days following Tenant’s Review Period (the “Outside Agreement Date”), then Landlord shall submit each party’s determination to arbitration in accordance with the then-current rules and procedures of the American Arbitration Association. If Tenant objects to Landlord’s determination of Fair Market Value, Tenant shall pay Rent at the Fair Market Value determined by Landlord until the matter is resolved by binding arbitration as provided below, subject to retroactive adjustment after the matter is so resolved. If Tenant fails so to accept or object to Landlord’s determination of Fair Market Value in writing within Tenant’s Review Period, Tenant shall conclusively be deemed to have approved of the Fair Market Value as determined by Landlord.

(d) Appointment of Arbitrators. Not later than fifteen (15) days following the Outside Agreement Date, Landlord and Tenant shall each appoint one arbitrator who shall by profession be a real estate broker who shall have been active over the ten-year period ending on the date of such appointment in the leasing of commercial properties within northern San Mateo County. The determination of the arbitrators shall be limited solely to the issue of whether Landlord’s or Tenant’s submitted Fair Market Value for the Premises is the more accurate as determined by the arbitrators, taking into account the requirements of this § 1.4.1 et seq.

(e) Appointment of Third Arbitrator. The two (2) arbitrators so appointed shall within fifteen (15) days of the date of the appointment of the last-appointed arbitrator agree upon and appoint a third arbitrator, who shall be qualified under the same criteria as set forth hereinabove for qualification of the initial two arbitrators.

(f) Arbitrators’ Decision. The three (3) arbitrators shall, within thirty (30) days of the appointment of the third arbitrator, reach a decision as to whether the parties shall use Landlord’s or Tenant’s submitted Fair Market Value, and shall notify Landlord and Tenant

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thereof. The decision of the majority of the three (3) arbitrators shall be binding upon Landlord and Tenant. The arbitrators shall not be permitted to set Fair Market Value to any level other than either Landlord’s or Tenant’s submitted Fair Market Value.

(g) Failure to Appoint. If either Landlord or Tenant fails to appoint an arbitrator within fifteen (15) days after the Outside Agreement Date, the arbitrator timely appointed by one of the parties shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator’s decision shall be binding upon Landlord and Tenant. If the two (2) arbitrators fail to agree upon and appoint a third arbitrator, both arbitrators shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the Commercial Arbitration Rules of the American Arbitration Association then in effect, but subject to the instructions set forth in this § 1.4.1 et seq..

(h) Cost of Arbitration. The cost of arbitration shall be paid by Landlord and Tenant equally.

(i) Default. Tenant’s exercise of the Extension Option shall, at Landlord’s election, be null and void if Tenant is in Default on the date of exercise or at any time thereafter and prior to commencement of the• Extension Period. Tenant’s exercise of the Extension Option shall not operate to cure any Default by Tenant nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such Default. If the Lease or Tenant’s right to possession of the Premises shall terminate before Tenant shall have exercised the Extension Option, then immediately upon such termination the Extension Option shall simultaneously terminate and become null and void.

(j) Time. Time is of the essence of this Extension Option.

1.5 RENT. The “Rent” reserved under this Lease, for the Term thereof, shall consist of the following:

(a) “Base Rent” as set forth in the Table for the various spaces and periods described therein per month, which shall be payable in advance on the first day of each and every calendar month during the Term of this Lease, except that Tenant shall pay the first month’s Base Rent due under the Lease upon the execution and delivery of this Lease by Tenant; and

(b) “Additional Rent” consisting of any and all other sums of money as shall become payable by Tenant to Landlord hereunder; and Landlord shall have the same remedies for default in the payment of Additional Rent as for a default in payment of Base Rent).

1.5.1 Payment of Rent. Tenant shall pay the Base Rent and Additional Rent promptly when due, without demand therefor and without any abatement, deduction, or setoff whatsoever, except as may be expressly provided in this Lease. Tenant shall pay the Rent to Landlord, in lawful money of the United States of America, at Landlord’s office at the Complex or at such other place, or to such agent and at such place, as Landlord may designate by notice to Tenant. If the Commencement Date occurs on a day other than the first day of a calendar month, the Base Rent for such calendar month shall be prorated based on a 30-day month, and the balance of the first month’s Base Rent theretofore paid shall be credited against the next monthly installment of Base Rent.

1.5.2 Interest and Late Charges. If Tenant fails to pay any Rent when due, the unpaid amounts shall bear interest from the due date until paid at a rate per annum equal to the Prime Rate plus five percent (5%) or, if less, at the highest rate of interest permitted by applicable law. As used herein, “Prime Rate” means the prime rate published in the Money Rates section of the Wall Street Journal

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(Western edition) as the same may change from time to time or in a similar publication if the Wall Street Journal ceases publication or ceases publication of its Money Rates section during the Term. Tenant acknowledges that the late payment of any monthly Rent will cause Landlord to lose the use of that money and incur costs and expenses not contemplated under this Lease, including administrative and collection costs and processing and account expenses, the exact amount of which it is difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within five (5) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. In addition, any check returned by the bank for any reason will be considered late and will be subject to all late charges plus an additional returned check fee of Twenty Dollars ($20.00). After two such occasions upon which checks have been returned in any twelve-month period, Landlord will have the right to require payment by a cashier’s check or money order. Acceptance of any interest or late charge shall not constitute a waiver of Tenant’s default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease or at law or in equity, unless the payment of such interest and late charges is accompanied by all rentals then due and owning (notwithstanding anything to the contrary in § 20.2.1 below).

1.6 PROPERTY. For the purposes of this Lease, the “Property” shall mean the Building and any common or public areas or facilities, easements, corridors, lobbies, sidewalks, loading areas, driveways, landscaped areas, skywalk, parking garages and lots, and any and all other structures or facilities operated or maintained in connection with or for the benefit of the Building, and all parcels or tracts of land on which all or any portion of the Building or any of the other foregoing items are located, and any fixtures, machinery, equipment, apparatus, Systems and Equipment (as defined in § 1.6.5 below), furniture and other personal property located thereon or therein and used in connection therewith, whether title is held by Landlord or its affiliates. The Property shall also be deemed to include such other of the Complex’s buildings or structures (and related facilities and parcels on which the same are located) as Landlord shall have incorporated by reference to the total square footage of the Building stated in § 1.3 above.

1.6.1 Common Areas. Tenant and its agents, employees, and invitees shall have the non-exclusive right with others designated by Landlord to the free use of the common areas in the Property and the Complex for the common areas’ intended and normal purpose. The term common areas shall mean elevators, sidewalks, parking areas, driveways, hallways, stairways, public restrooms, common entrances, lobbies, and other similar public areas and access ways.

1.6.2 Athletic Facility. Notwithstanding the foregoing, the common areas do not include the Building’s athletic facility (the “Athletic Facility”), which is an unsupervised and unattended weight and exercise room and shower facility. Tenant acknowledges that Landlord presently makes available (but is not obligated under this Lease to make available) the Athletic Facility for the general use of all tenants and their officers and employees, subject to such rules and regulations as Landlord may impose from time to time in its sole and absolute discretion regarding the use thereof. Tenant shall cause each of its officers and employees using the Athletic Facility to sign and deliver to Landlord an “Athletic Facility Use Agreement” in the form attached hereto as Exhibit D, as such form may be revised by Landlord from time to time in its sole and absolute discretion. Tenant understands and agrees that no individual shall be permitted use of or access to the Athletic Facility unless and until such individual shall have first signed and delivered the Athletic Facility Use Agreement to Landlord. Landlord shall have the right to limit the use of the Athletic Facility in any manner it may deem necessary, or to discontinue the Athletic Facility altogether, at any time, in its sole and absolute discretion, and neither Tenant nor its officers or employees shall be entitled to any

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compensation, credit, allowance, or offset of expenses or Rent as a result of any such limitation or discontinuance.

1.6.3 Reservation to Landlord. Notwithstanding anything to the contrary herein, possession of areas necessary for utilities, services, safety, and operation of the Property, including the Systems and Equipment, telephone closets (whether located in the common areas or in the Premises), fire exits and stairways, perimeter walls, space between the finished ceiling of the Premises and the slab of the floor or roof of the Property thereabove, and the use thereof, together with the right to install, maintain, operate, repair, and replace any part of the Systems and Equipment in, through, under, or above the Premises in locations that will not materially interfere with Tenant’s use of the Premises, are hereby excepted from both the Premises and the common areas and are reserved by Landlord and not demised to Tenant. Tenant’s access to the telephone closets on each floor and the Building’s main telephone room shall be subject to the Rules (as defined in § 13.1 below) and shall be permitted only with Landlord’s written consent and under the supervision of Landlord’s Building Engineer on each occasion that such access is sought.

1.6.4 Changes and Alterations of the Property. Landlord reserves the right to make repairs, alterations, additions, or improvements, structural or otherwise, in or to the Property or Complex as deemed necessary or desirable in Landlord’s sole and absolute discretion, so long as such repairs or alterations do not materially and unreasonably interfere with Tenant’s access to or beneficial use of the Premises for their intended purposes. Landlord reserves the right hereunder to do the following: (i) install, use, maintain, repair, and replace pipes, ducts, conduits, wires, and appurtenant meters and equipment for service to the various parts of the Property above the ceiling surfaces, below the floor surfaces, within the walls, and in the central core areas; (ii) to relocate any pipes, ducts, conduits, wires, and appurtenant meters and equipment which are located in the Premises or located elsewhere outside the Premises; (iii) expand the Building or the Complex; (iv) make changes to the Property or the Complex, including changes, expansions, and reductions in the location, size, shape, and number of driveways, entrances, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways, parking spaces, and parking areas; (v) close any of the common areas, so long as reasonable access to the Premises remains available; (vi) use the common areas while engaged in making additional improvements, repairs, or alterations to the Property, Complex, or any portion thereof; and (vii) do and perform such other acts and make such other changes in, to, or with respect to the Property, Complex, common areas, and Building as Landlord may deem appropriate. The exercise of any of the foregoing rights shall not subject Landlord to claims for constructive eviction, abatement of Rent, damages, or other claims of any kind, except as otherwise expressly provided in this Lease. If Landlord enters the Premises to exercise any of the foregoing rights, Landlord shall provide reasonable advance written or oral notice to Tenant’s on-site manager.

1.6.5 Systems and Equipment. As used in this Lease, “Systems and Equipment” means collectively any existing plant, machinery, transformers, duct work, intrabuilding network cables and wires that transmit voice, data, and other telecommunications signals (“INC”), and other equipment, facilities, and systems designed to supply water, heat, ventilation, air conditioning and humidity or any other services or utilities, or comprising or serving as any component or portion of the electrical, gas, steam, plumbing, sprinkler, communications, alarm, security, or fire/life/safety systems or equipment, or any other mechanical, electrical, electronic, computer or other systems or equipment for the Property.

2    USE

2.1 USE AND ENJOYMENT OF PREMISES. Tenant shall use and occupy the Premises for executive and general offices and for no other purpose. Notwithstanding anything contained herein to the contrary,

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Tenant may use portions of the Premises not to exceed one hundred fifty (150) usable square feet for the preparation and reheating of food and beverages, including the use of refrigerators, ice makers, coffee machines, hot plates, microwave ovens, or similar heating devices (but not for the actual cooking of food) for service only to Tenant’s employees and business invitees.

2.1.1 Suitability. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Property, or the Complex, or with respect to the suitability of same for the conduct of Tenant’s business, except as expressly provided in this Lease. Tenant’s acceptance of possession of the Premises shall conclusively establish that the foregoing were at such time in satisfactory condition. Landlord makes no representation to Tenant regarding the installation, ownership, location, or suitability for Tenant’s purposes of the INC in the Building.

2.1.2 Insurance Rates. Tenant shall not do or suffer anything to be done in or about the Premises, nor shall Tenant bring or allow anything to be brought into the Premises, which will in any way increase the rate of any fire insurance or other insurance upon the Property or its contents, cause a cancellation of said insurance, or otherwise affect said insurance in any manner.

2.1.3 Use to Comply with Laws. Tenant shall use the Premises in conformity with all applicable Laws, as specified in Article 6 below.

2.1.4 Floor Loading. Tenant shall not place or permit to be placed on any floor a load exceeding eighty (80) pounds per square foot or such lower floor load as such floor was designed to carry.

2.2 NUISANCE AND WASTE. Tenant also shall not do or suffer anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Property or injure or annoy said tenants or occupants, nor shall Tenant use or suffer the Premises to be used for any unlawful purposes. In no event shall Tenant cause or permit any nuisance in or about the Premises, and no loudspeakers or similar devices shall be used without the prior written approval of Landlord, which approval may be withheld in Landlord’s sole and absolute discretion. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. The provisions of this section are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Building. If any governmental license or permit, other than a Certificate of Occupancy, shall be required for the proper and lawful conduct of Tenant’s business in the Premises, or any part thereof, and if failure to secure such license or permit would in any way affect Landlord, Tenant, at its sole expense, shall procure and thereafter maintain such license or permit and submit the same for inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit.

2.3 COMPLIANCE WITH CERTIFICATE OF OCCUPANCY. Tenant shall not at any time use or occupy the Premises, or suffer or permit anyone to use or occupy, the Premises, or do or permit anything to be done in the Premises, in violation of the Certificate of Occupancy for the Premises or for the Building.

3    PREPARATION OF THE PREMISES

3.1 CONDITION OF PREMISES. Except as otherwise expressly provided in § 3.2 below and the “Work Letter Agreement” which has been executed by Landlord and Tenant concurrently with their execution of this Lease substantially in the form attached hereto as Exhibit F, Tenant shall accept the Premises, any existing Improvements in the Premises (as defined in § 10.1 below), and the Systems and Equipment serving the same in an “as is” condition on the date the Term commences, and Landlord shall have no obligation to improve, alter, remodel, or otherwise modify the Premises prior to Tenant’s occupancy.

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3.2 LANDLORD’S PREPARATION. Landlord shall use reasonable diligence in completing and preparing the Premises for Tenant’s occupancy in the manner and subject to the terms, conditions, and covenants set forth in the Work Letter Agreement. The facilities, materials, and work to be furnished, installed, and performed in the Premises by Landlord pursuant to the Work Letter Agreement are referred to as the “Work.” Any other installations, materials, and work which may be undertaken by or for the account of Tenant to prepare, equip, decorate, and furnish the Premises for Tenant’s occupancy are referred to as the “Tenant’s Work.”

3.2.1 Readiness for Occupancy. The Premises shall be deemed ready for occupancy on the earliest date on which all of the following conditions (the “Occupancy Conditions”) have first been met:

(a) Substantial Completion of Work. The Work has been substantially completed; and it shall be so deemed notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment, or decoration remain to be performed, the noncompletion of which does not materially interfere with Tenant’s beneficial use of the Premises for their intended purposes;

(b) Access and Services. Reasonable means of access and facilities necessary to Tenant’s use and occupancy of the Premises, including corridors, elevators, stairways, heating, ventilating, air-conditioning, sanitary, water, and electrical facilities (but exclusive of parking facilities) have been installed and are in reasonably good operating order and available to Tenant; and

(c) Certificate of Occupancy or Completion. A certificate of occupancy, certificate of completion, final inspection card, or similar required governmental approval (temporary or final) has been issued by the City of South San Francisco permitting use of the Premises for office purposes.

3.2.2 Tenant Delays. If the occurrence of any of the Occupancy Conditions and Landlord’s preparation of the Premises for occupancy shall be delayed owing to either (a) any act, omission, or failure of Tenant or any of its employees, agents, or contractors which shall continue after Landlord shall have given Tenant reasonable notice that such act, omission, or failure would result in delay, and such delay shall have been unavoidable by Landlord in the exercise of reasonable diligence and prudence; or (b) the nature of any items of additional work or change orders that Landlord undertakes to perform for the account of Tenant (including any delays incurred by Landlord, after making reasonable efforts, in procuring any materials, equipment, or fixtures of a kind or nature not used by Landlord as part of its standard construction) (collectively “Tenant Delays”), then the Premises shall be deemed ready for occupancy on the date when they would have been ready but for such Tenant Delays.

3.3 EARLY ENTRY. During any period that Tenant shall be permitted to enter the Premises prior to the Commencement Date other than to occupy the same (e.g., to perform alterations or improvements), Tenant shall comply with all terms and provisions of this Lease, except those provisions requiring the payment of Rent. If Tenant shall be permitted to enter the Premises prior to the Commencement Date for the purpose of occupying the same, Rent shall commence on such date at the rate specified in the Table for the first period during which Rent is payable after the Commencement Date; and if Tenant shall commence occupying only a portion of the Premises prior to the Commencement Date, Rent shall be prorated based on the number of rentable square feet occupied by Tenant. Landlord shall permit early entry, provided the Premises are legally available and Landlord has completed any Work required under this Lease. In no event shall Tenant’s early entry extend or shorten the Term of the Lease set forth in § 1.2 above.

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3.4 NOTICE OF DEFECTS. It shall be conclusively presumed upon Tenant’s taking actual possession of the Premises that the same were in satisfactory condition (except for latent defects) as of the date of such taking of possession, unless within thirty (30) days after the Commencement Date Tenant shall give Landlord notice in writing specifying the respects in which the Premises were not in satisfactory condition.

4    ADJUSTMENTS OF RENT

4.1 TAXES, UTILITIES, AND OPERATING EXPENSES. In addition to the Base Rent and all other payments due under this Lease, Tenant shall pay to Landlord, in the manner set forth in this Article 4, as Additional Rent, the following amounts:

(a) Increased Operating Expenses. An amount equal to Tenant’s Pro Rata Share of that portion of Operating Expenses paid by Landlord during each Adjustment Period which exceeds the amount of Base Operating Expenses (as all of such terms are defined in § 4.2 below).

(b) Increased Utilities. An amount equal to Tenant’s Pro Rata Share of that portion of Utilities paid by Landlord during each Adjustment Period which exceeds the amount of Base Utilities (as all of such terms are defined in § 4.2 below).

(c) Increased Taxes. An amount equal to Tenant’s Pro Rata Share of that portion of Real Estate Taxes paid by Landlord during each Adjustment Period which exceeds the amount of Base Real Estate Taxes (as all of such terms are defined in § 4.2 below).

Tenant’s Pro Rata Share of (i) such increase in Operating Expenses over the Base Operating Expenses, (ii) such increase in Utilities over Base Utilities, and (iii) such increase in Real Estate Taxes over the Base Real Estate Taxes is sometimes referred to collectively herein as the “Rental Adjustment.”

4.2 DEFINITIONS. For the purposes of this Lease, the following definitions shall apply:

(a) Base Operating Expenses. “Base Operating Expenses” means the total of Operating Expenses paid by Landlord during calendar year 2008 (the “Base Expense Year”), as adjusted under § 4.5 below.

(b) Base Utilities. “Base Utilities” means the total of Utilities paid by Landlord during calendar year 2008 (the “Base Utilities Year”), as adjusted under § 4.5 below.

(c) Base Real Estate Taxes. “Base Real Estate Taxes” means the total of Real Estate Taxes paid by Landlord during calendar year 2008 (the “Base Tax Year”).

(d) Tenant’s Pro Rata Share. “Tenant’s Pro Rata Share” as to the Building is the percentage labeled as such in the Table in § 1.2 and is calculated by dividing the agreed rentable area of the Premises (numerator) by the agreed rentable area of the Property (denominator) and expressing the resulting quotient as a percentage. “Tenant’s Pro Rata Share” as to the Complex is the percentage labeled as such in the Table in § 1.2 as is calculated by dividing the agreed rentable area of the Premises (numerator) by the agreed rentable area of the Complex (denominator) and expressing the resulting quotient as a percentage. Tenant’s Pro Rata Share shall be increased during the Term in proportion to any increase in the area of the Premises in accordance with the formula stated herein.

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(e) Adjustment Period. “Adjustment Period” as to Operating Expenses, Utilities, and Real Estate Taxes means each calendar year of which any portion occurs during the Term, excluding the Base Year and beginning with the first calendar year immediately following the Base Year.

(f) Real Estate Taxes. “Real Estate Taxes” means all of the following charges, whether or not now customary or in the contemplation of the parties hereto, and whether or not general, special, ordinary, or extraordinary, which Landlord shall pay during any Adjustment Period because of or in connection with the ownership, leasing, or operation of the Property:

(1) ad valorem real property taxes;

(2) any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, fee, tax, or other imposition imposed by any authority, including any city, county, state, or federal governmental agency, or any school, agricultural, lighting, transportation, housing, drainage, or other improvement or special assessment district thereof;

(3) any tax on Landlord’s ‘right’ to rent or ‘right’ to other income from the Building or as against Landlord’s business of leasing the Building;

(4) any assessment, tax, fee, levy, or charge in substitution, partially or totally, of any assessment tax, fee, levy or charge previously included within the definition of Real Estate Taxes, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the Election of June, 1978, and that assessments, taxes, fees, levies, and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk, and road maintenance, refuse removal, and for other governmental services formerly provided without charge to property owners or occupants, and it being the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies, and charges be included within the definition of Real Estate Taxes for the purposes of this Lease;

(5) any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Building or Property or the Rent payable hereunder, including any gross income tax or excise tax levied by any city, county, state, or federal governmental agency or any political subdivision thereof with respect to the receipt of such Rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use, or occupancy by Tenant of the Property or any portion thereof;

(6) any assessment, tax, fee, levy, or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Building or Property;

(7) any assessment, tax, fee, levy, or charge by any governmental agency related to any transportation plan, fund, or system instituted within the geographic area of which the Building is a part; or

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(8) reasonable legal and other professional fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce Real Estate Taxes.

Exclusions. Notwithstanding the foregoing, Real Estate Taxes shall not include (A) federal, state, or local income taxes; (B) franchise, gift, transfer, excise, capital stock, estate, succession, or inheritance taxes; or (C) penalties or interest for late payment of Real Estate Taxes.

(g) Operating Expenses. “Operating Expenses” means all expenses, costs, and amounts (other than Real Estate Taxes and Utilities) of every kind and nature which Landlord shall pay during any Adjustment Period of which any portion occurs during the Term, because of or in connection with the ownership, management, repair, maintenance, restoration, and/or operation of the Property, including costs of the following:

(1) permits, licenses, and certificates necessary to operate, manage, and lease the Property;

(2) supplies, tools, equipment, and materials used in the operation, repair, and maintenance of the Property;

(3) all insurance premiums for any insurance policies deemed necessary or desirable by Landlord (including workers’ compensation, health, accident, group life, public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Property as required by Landlord or its lenders for the Property);

(4) the deductible portion of any claim paid under any insurance policy maintained by Landlord in connection with its management and operation of the Property;

(5) accounting, legal, inspection, consulting, concierge, and other services;

(6) services of independent contractors;

(7) compensation (including employment taxes and fringe benefits) of all persons who perform duties in connection with the operation, maintenance, repair, or overhaul of the Building or Property, and equipment, improvements, and facilities located within the Property, including engineers, janitors, painters, floor waxers, window washers, security, parking personnel, and gardeners;

(8) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building as required by the U.S. Postal Service (including an amount equal to the fair market rental value of the mail room premises);

(9) management of the Building or Property, whether managed by Landlord or an independent contractor (including an amount equal to the fair market value of any on-site manager’s office);

(10) rental expenses for (or a reasonable depreciation allowance on) personal property used in maintenance, operation, or repair of the Property and

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installment equipment purchase or equipment financing agreements for such personal property;

(11) costs, expenditures, or charges (whether capitalized or not) required by any governmental or quasi-governmental authority after the Commencement Date;

(12) payments under any easement, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs in any planned development;

(13) amortization of capital expenses (including financing costs) incurred by Landlord after the Commencement Date in order to (A) comply with Laws, (B) reduce Property Operating Expenses or Utilities, or (C) upgrade the utility, efficiency, or capacity of any utility or telecommunication systems serving tenants of the Property;

(14) operation, repair, and maintenance of all Systems and Equipment and components thereof (including replacement of components); janitorial service; alarm and security service; window cleaning; trash removal; elevator maintenance; cleaning of walks, parking facilities, and building walls; removal of ice and snow; replacement of wall and floor coverings, ceiling tiles, and fixtures in lobbies, corridors, restrooms and other common or public areas or facilities; maintenance and repair of the roof and exterior fabric of the Building, including replacement of glazing as needed; maintenance and replacement of shrubs, trees, grass, sod, and other landscaped items, irrigation systems, drainage facilities, fences, curbs, and walkways; repaving and restriping parking facilities; and roof repairs;

(15) the operation of any on-site maintenance shop(s) and the operation and maintenance of the Athletic Facility, any other fitness center, conference rooms, and all other common areas and amenities in the Property;

(16) provision of shuttle busses, shuttle services, and drivers between the Complex and BART and SF0 airport, as required by the Bay Area Regional Transportation Act and deed covenants and restrictions applicable to the Complex; and

(17) any other costs or expenses incurred by Landlord which are reasonably necessary to operate, repair, manage, and maintain the Building and Property in a first-class manner and condition and which are not otherwise reimbursed by tenants of the Building.

Exclusions. Notwithstanding the foregoing, Operating Expenses shall not include (A) depreciation, interest, and amortization on Superior Mortgages (as defined in § 18.1 below), and other debt costs or ground lease payments, if any; (B) legal fees in connection with leasing, tenant disputes, or enforcement of leases; (C) real estate brokers’ leasing commissions; (D) improvements or alterations to tenant spaces; (E) the cost of providing any service directly to, and reimbursed or paid directly by, any tenant; (F) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (G) costs of any items to the extent Landlord receives reimbursement from insurance proceeds or from a third party

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(such proceeds to be deducted from Operating Expenses in the year in which received); (H) capital expenditures, except those expressly permitted above; provided, all such permitted capital expenditures (together with reasonable financing charges) shall be amortized for purposes of this Lease over the shorter of (x) their useful lives, (y) the period during which the reasonably estimated savings in Operating Expenses equals the expenditures, or (z) three (3) years.

(h) Utilities. “Utilities” means all expenses, costs, and amounts of every kind and nature which Landlord shall pay during any Adjustment Period of which any portion occurs during the Term, because of or in connection with the electricity, power, gas, steam, oil or other fuel, water, sewer, lighting, heating, air conditioning, and ventilating delivered to or consumed or used in or on the Property.

4.3 MANNER OF PAYMENT. To provide for current payments of the Rental Adjustment, Tenant shall pay as Additional Rent during each Adjustment Period an amount equal to Landlord’s estimate of the Rental Adjustment which will be payable by Tenant for such Adjustment Period. Such payments shall be made in monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which Landlord gives Tenant a new notice of the estimated Rental Adjustment. It is the intention hereunder to estimate from time to time the amount of Tenant’s Rental Adjustment for each Adjustment Period and then to effect a reconciliation in the following year based on the actual expenses incurred for the preceding Adjustment Period, as provided in 4.4 below.

4.4 RECONCILIATION. On or before the first day of April of each year after the first Adjustment Period (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement (the “Statement”) setting forth the Rental Adjustment for the preceding year. If the actual Rental Adjustment for the preceding Adjustment Period exceeds the total of the estimated monthly payments made by Tenant for such Adjustment Period, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the Statement. If such total of estimated payments made exceeds the actual Rental Adjustment for such Adjustment Period, then Tenant shall receive a credit for the difference against payments of Rent next due. If the credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit, less any Rent then due. The obligations of Tenant and Landlord to make payments required under this § 4.4 shall survive the expiration or earlier termination of the Term of this Lease.

4.4.1 Changes in Method. So long as Tenant’s obligations hereunder are not materially adversely affected thereby, Landlord reserves the right reasonably to change from time to time the manner or timing of the foregoing payments. In lieu of providing one Statement covering Real Estate Taxes, Utilities, and Operating Expenses, Landlord may provide separate statements, at the same or different times. No delay by Landlord in providing the Statement (or separate statements) shall be deemed a default by Landlord or a waiver of Landlord’s right to require payment of Tenant’s obligations for actual or estimated Real Estate Taxes, Utilities, or Operating Expenses. In no event shall a decrease in Real Estate Taxes, Utilities, or Operating Expenses below the Base Operating Expenses, Base Utilities, or Base Real Estate Taxes ever decrease the monthly Base Rent or give rise to a credit in favor of Tenant.

4.4.2 Proration of Rental Adjustment. If the Term does not commence on January 1 or does not end on December 31, Tenant’s obligations to pay estimated and actual amounts towards Real Estate Taxes, Utilities, and Operating Expenses for such first or final calendar year shall be prorated to reflect the portion of such year(s) included in the Term. Such proration shall be made by multiplying the total estimated or actual (as the case may be) Real Estate Taxes, Utilities, and

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Operating Expenses for such calendar year(s), as well as the Base Real Estate Taxes, Base Utilities, and Base Operating Expenses, by a fraction, the numerator of which shall be the number of days of the Term during such calendar year, and the denominator of which shall be three hundred sixty-five (365).

4.5 GROSS-UP. If the Building is less than ninety-five percent (95%) occupied during the Base Period or any Adjustment Period, then Operating Expenses, Utilities, and Real Estate Taxes for the Base Period and/or such Adjustment Period shall be “grossed up” to that amount of Operating Expenses, Utilities, and Real Estate Taxes that, using reasonable projections, would normally have been incurred during the Base Period and/or such Adjustment Period if the Building had been ninety-five percent (95%) occupied during the Base Period and/or such Adjustment Period, as determined in accordance with sound accounting and management practices, consistently applied. Only those component elements or items of expense of Operating Expenses, Utilities, and Real Estate Taxes that are affected by variations in occupancy levels shall be grossed up.

4.6 ADJUSTMENT OF BASE OPERATING EXPENSES. Notwithstanding anything to the contrary contained in the Lease, the parties agree that Base Operating Expenses and Operating Expenses for any subsequent Adjustment Period (herein called “Subsequent Operating Expenses”) shall be subject to further adjustment by Landlord as follows:

(a) Exclusion of Capital Expenditures. Landlord may exclude from Base Operating Expenses capital expenditures otherwise permitted, provided Landlord shall also exclude any amortization of such expenditures from Subsequent Operating Expenses.

(b) Elimination of Recurring Expenses. If Landlord eliminates from any Subsequent Operating Expenses a category of recurring expenses previously included in Base Operating Expenses, Landlord may subtract such category from Base Operating Expenses commencing with such subsequent Adjustment Period.

(c) New Recurring Expenses. If Landlord includes a new category of recurring Subsequent Operating Expenses not previously included in Base Operating Expenses, Landlord shall also include an amount (the “Assumed Base Amount”) for such category in Base Operating Expenses commencing in such subsequent Adjustment Period.

(d) Assumed Base Amount. The “Assumed Base Amount” under § 4.6(c) above shall be the annualized amount of expenses for such new category in the first Adjustment Period it is included, reduced by an amount determined in Landlord’s sole good faith discretion (but in no event by an amount less than five percent (5%)) for each full or partial Adjustment Period that has elapsed during the Term of the Lease before such Adjustment Period.

4.7 ADJUSTMENT OF REAL ESTATE TAXES. If Base Real Estate Taxes are reduced as the result of protest, by means of agreement, as the result of legal proceedings, or otherwise, Landlord may adjust Tenant’s obligations for Real Estate Taxes in all years affected by any refund of taxes following the Base Tax Year; and Tenant shall pay Landlord within thirty (30)days after notice any additional amount required by such adjustment for any Adjustment Periods that have theretofore occurred. Tenant shall be entitled to receive a share of any refund or abatement of Real Estate Taxes received by Landlord to the extent of and in proportion to Tenant’s actual contribution to the amount of Real Estate Taxes paid by Landlord during the period to which such refund or abatement relates, but in no event shall Tenant be entitled to any refund with respect to Real Estate Taxes paid by Landlord during Tenant’s Base Tax Year. If Real Estate

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Taxes for any Adjustment Period during the Term or any extension thereof shall be increased after payment thereof by Landlord for any reason, including error or reassessment by applicable governmental authorities, Tenant shall pay Landlord upon demand Tenant’s Pro Rata Share of such increased Real Estate Taxes. Tenant shall pay increased Real Estate Taxes whether Real Estate Taxes are increased as a result of increases in the assessment or valuation of the Property (whether based on a sale, change in ownership, refinancing of the Property, or otherwise), increases in the tax rates, reduction or elimination of any rollbacks or other deductions available under current law, scheduled reductions of any tax abatement, as a result of the elimination, invalidity, or withdrawal of any tax abatement, or for any other cause whatsoever. Notwithstanding the foregoing, if any Real Estate Taxes shall be paid based on assessments or bills by a governmental authority using a fiscal year other than a calendar year, Landlord may elect to average the assessments or bills for the subject calendar year, based on the number of months of such calendar year included in each such assessment or bill.

4.8 ALLOCATION WITHIN COMPLEX. So long as the Property shall be part of the Complex collectively owned or managed by Landlord or its affiliates or collectively managed by Landlord’s managing agent, Landlord may allocate Real Estate Taxes, Utilities, and Operating Expenses within the Complex and between the buildings and structures comprising the Complex and the parcels on which they are located, in accordance with sound accounting and management principles. In the alternative, Landlord shall have the right to determine, in accordance with sound accounting and management principles, Tenant’s Pro Rata Share of Real Estate Taxes, Utilities, and Operating Expenses based upon the totals of each of the same for all such buildings and structures, the land constituting parcels on which the same are located, and all related facilities, including common areas and easements, corridors, lobbies, sidewalks, elevators, loading areas, parking facilities, driveways, and other appurtenances and public areas, in which event Tenant’s Pro Rata Share shall be based on the ratio of the rentable area of the Premises to the rentable area of all buildings in the Complex.

4.9 LANDLORD’S RECORDS. Landlord shall maintain records with respect to Real Estate Taxes, Utilities, and Operating Expenses and determine the same in accordance with sound accounting and management practices, consistently applied. Although this Lease contemplates the computation of Real Estate Taxes, Utilities, and Operating Expenses on a cash basis, Landlord shall make reasonable and appropriate accrual adjustments to ensure that each Adjustment Period includes substantially the same recurring items. Landlord reserves the right to change to a full accrual system of accounting so long as the same is consistently applied and Tenant’s obligations are not materially adversely affected. Tenant or its representative shall have the right to examine such records, upon reasonable prior written notice specifying such records Tenant desires to examine, during normal business hours at the place or places where such records are normally kept, by sending such notice no later than forty-five (45) days following the furnishing of the Statement.

4.10 OTHER TAXES PAYABLE BY TENANT. In addition to the Base Rent and any other charges to be paid by Tenant hereunder, Tenant shall, as an element of Rent, reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by, or reasonably attributable to (A) the cost or value of Tenant’s equipment, furniture, fixtures, and other personal property located at the Premises, or the cost or value of any improvements made in or to the Premises by or for Tenant, regardless of whether title to such improvements is held by Tenant or Landlord; (B) the gross or net Rent payable under this Lease, including any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (C) the possession, leasing, operation, management, maintenance, alteration, repair, use, or occupancy by Tenant of the Premises or any portion thereof; or (D) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. Tenant shall pay any rent tax, sales tax,

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service tax, transfer tax, value-added tax, or any other applicable tax on the Rent or services herein or otherwise respecting this Lease.

4.11 RENT CONTROL. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions.

5    SECURITY DEPOSIT

5.1 DEPOSIT FOR SECURITY. Tenant shall deposit with Landlord an irrevocable sight-draft, on-demand letter of credit in the amount of Seven Hundred and Seventy Thousand Dollars ($770,000.00) (the “Security Deposit”) upon Tenant’s execution and submission of this Lease. The letter of credit shall be in a form and drawn upon an institution reasonably acceptable to Landlord. The letter of credit shall specify that it shall remain in force and be renewed annually automatically during the Term of the Lease, unless Landlord shall have received not less than thirty (30) days’ days written notice of cancellation or nonrenewal by the issuer, in which case Tenant shall substitute a new letter or credit on or before the expiration or cancellation of the existing letter of credit. The Security Deposit shall serve as security for the prompt, full, and faithful performance by Tenant of the terms and provisions of this Lease, including the value of future rents as damages in accordance with California Civil Code § 1951.2, as set forth in § 20.3 below. Landlord shall not be required to keep the Security Deposit separate from Landlord’s general funds or pay interest on the Security Deposit.

5.1.1 Application of Deposit. In the event that Tenant is in Default hereunder and fails to cure within any applicable time permitted under this Lease, or in the event that Tenant owes any amounts to Landlord upon the expiration of this Lease, Landlord may use or apply the whole or any part of the Security Deposit for the payment of Tenant’s obligations hereunder. The use or application of the Security Deposit or any portion thereof shall not prevent Landlord from exercising any other right or remedy provided hereunder or under any Law and shall not be construed as liquidated damages.

5.1.2 Restoration of Full Deposit. In the event the Security Deposit is reduced by such use or application, Tenant shall deposit with Landlord, within ten (10) days after written notice, an amount sufficient to restore the full amount of the Security Deposit. If the Premises shall be expanded at any time, or if the Term shall be extended at any increased rate of Rent, the Security Deposit shall thereupon be proportionately increased.

5.1.3 Disposition of Security Deposit. After the Expiration Date or any earlier termination of the Lease, any remaining portion of the Security Deposit shall be returned to Tenant after deduction of all amounts due as Rent or otherwise. Tenant expressly waives the provisions of § 1950.7 of the California Civil Code.

6    COMPLIANCE WITH LAWS

6.1 TENANT’S COMPLIANCE WITH LAWS. Tenant shall use the Premises in compliance with all applicable federal, state, county, and local governmental and municipal laws, statutes, ordinances, rules, regulations, codes, decrees, orders, and other such requirements, and decisions by courts in cases where such decisions are considered binding precedents in the State of California (the “State”), and decisions of federal courts applying the laws of the State (collectively “Laws”). Tenant shall, at its sole cost and

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expense, promptly comply with each and all of such Laws, and also with the requirements of any board of fire underwriters or other similar body now or hereafter constituted to deal with the condition, use, or occupancy of the Premises, except in the case of required structural changes not triggered by Tenant’s change in use of the Premises or Tenant’s alterations, additions, or improvements therein. Tenant shall comply with all applicable Laws regarding the physical condition of the Premises, but only to the extent that the applicable Laws pertain to the particular manner in which Tenant uses the Premises or the particular use to which Tenant puts the Premises, if different from that permitted under Article 2 of this Lease. Tenant shall also comply with all applicable Laws which do not relate to the physical condition of the Premises and with which only the occupant can comply, such as laws governing maximum occupancy, workplace smoking, VDT regulations, and illegal business operations, such as gambling. The judgement of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of such Laws shall be conclusive of that fact as between Landlord and Tenant.

6.1.1 Code Costs. Notwithstanding anything to the contrary in this Article 6, if the requirement of any public authority obligates either Landlord or Tenant to expend money in order to bring the Premises and/or any area of the Property into compliance with Laws as a result of (a) Tenant’s particular use or alteration of the Premises; (b) Tenant’s change in the use of the Premises; (c) the manner of conduct of Tenant’s business or operation of its installations, equipment, or other property therein; (d) any cause or condition created by or at the instance of Tenant, other than by Landlord’s performance of any work for or on behalf of Tenant; or (e) breach of any of Tenant’s obligations hereunder, then Tenant shall bear all costs (“Code Costs”) of bringing the Premises and/or Property into compliance with Laws, whether such Code Costs are related to structural or nonstructural elements of the Premises or Property.

6.2 LANDLORD’S COMPLIANCE WITH LAWS. Landlord represents that on the Commencement Date Landlord has no actual knowledge of any violation of any applicable Laws respecting the Premises. During the Term Landlord shall comply with all applicable Laws regarding the Premises and Property, except to the extent Tenant must comply under § 6.1 above.

7    HAZARDOUS MATERIALS

7.1 REGULATION OF HAZARDOUS MATERIALS. Tenant shall not transport, use, store, maintain, generate, manufacture, handle, dispose, release, or discharge any “Hazardous Material” (as defined below) upon or about the Property, nor permit Tenant’s employees, agents, contractors, and other occupants of the Premises to engage in such activities upon or about the Property. However, the foregoing provisions shall not prohibit the transportation to and from, and use, storage, maintenance, and handling within, the Premises of substances customarily used in offices, provided all of the following conditions are met:

(a) such substances shall be used and maintained only in such quantities as are reasonably necessary for such permitted use of the Premises, strictly in accordance with applicable Laws and the manufacturers’ instructions therefor;

(b) such substances shall not be disposed of, released, or discharged on the Property and shall be transported to and from the Premises in compliance with all applicable Laws, and as Landlord shall reasonably require;

(c) if any applicable Laws or Landlord’s trash removal contractor requires that any such substances be disposed of separately from ordinary trash, Tenant shall make arrangements at Tenant’s expense for such disposal directly with a qualified and licensed disposal company at a lawful disposal site (subject to scheduling and

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approval by Landlord), and shall ensure that disposal occurs frequently enough to prevent unnecessary storage of such substances in the Premises; and

(d) any remaining such substances shall be completely, properly, and lawfully removed from the Property upon expiration or earlier termination of this Lease.

7.1.1 DEFINITION OF HAZARDOUS MATERIAL. The term “Hazardous Material” for purposes hereof shall mean any chemical, substance, material, or waste or component thereof which is now or hereafter listed, defined, or regulated as a hazardous or toxic chemical, substance, material, or waste or component thereof by any federal, state, or local governing or regulatory body having jurisdiction, or which would trigger any employee or community “right-to-know” requirements adopted by any such body, or for which any such body has adopted any requirements for the preparation or distribution of an MSDS.

7.2 NOTIFICATION OF LANDLORD. Tenant shall promptly notify Landlord of (A) any enforcement, cleanup, or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Material on the Premises or the migration thereof from or to other property; (B) any demands or claims made or threatened by any party against Tenant or the Premises relating to any loss or injury resulting from any Hazardous Material on or from the Premises; and (C) any matters where Tenant is required by law to give a notice to any governmental or regulatory authority respecting any Hazardous Material on the Premises. Landlord shall have the right (but not the obligation) to join and participate, as a party, in any legal proceedings or actions affecting the Premises initiated in connection with any environmental, health, or safety law.

7.3 LIST OF HAZARDOUS MATERIALS. At such times as Landlord may reasonably request, Tenant shall provide Landlord with a written list identifying any Hazardous Material then used, stored, or maintained upon the Premises, the use and approximate quantity of each such material, a copy of any material safety data sheet (“MSDS”) issued by the manufacturer thereof, written information concerning the removal, transportation, and disposal of the same, and such other information as Landlord may reasonably require or as may be required by law.

7.4 CLEANUP. If any Hazardous Material is released, discharged or disposed of by Tenant or any other occupant of the Premises, or their employees, agents, or contractors, on or about the Property in violation of the foregoing provisions, Tenant shall immediately, properly, and in compliance with applicable Laws clean up and remove the Hazardous Material from the Property and any other affected property and clean or replace any affected personal property (whether or not owned by Landlord), at Tenant’s expense. Such clean up and removal work shall be subject to Landlord’s prior written approval (except in emergencies), and shall include any testing, investigation, and the preparation and implementation of any remedial action plan required by any governmental body having jurisdiction or reasonably required by Landlord. If Tenant shall fail to comply with the provisions of this § 7.2 within five (5) days after written notice by Landlord, or such shorter time as may be required by Laws or in order to minimize any hazard to persons or property, Landlord may (but shall not be obligated to) arrange for such compliance directly or as Tenant’s agent through contractors or other parties selected by Landlord, at Tenant’s expense (without limiting Landlord’s other remedies under this Lease or applicable Laws).

7.5 CASUALTY DAMAGE. If any Hazardous Material is released, discharged, or disposed of on or about the Property and such release, discharge, or disposal is not caused by Tenant or other occupants of the Premises, or their employees, agents, or contractors, such release, discharge, or disposal shall be deemed casualty damage under Article 15 to the extent that the Premises or common areas serving the Premises are affected thereby; in such case, Landlord and Tenant shall have the obligations and rights respecting such casualty damage provided under Article 15 of this Lease.

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7.6 REFRIGERANT. Tenant shall not install any refrigerant-containing systems or equipment, including refrigerators, freezers, supplemental HVAC systems or self-contained air conditioners, without Landlord’s prior approval, which Landlord may withhold in its sole discretion. Unless Tenant shall have obtained Landlord’s prior written approval to install existing equipment after an inspection, at Tenant’s sole cost and expense, by Landlord’s engineer for defects and proper proposed installation in the Premises, all refrigerant-containing equipment and/or systems which Tenant installs in the Premises shall be new. Whether Tenant’s refrigerant-containing equipment or systems are defective and are properly installed shall be determined at the sole discretion of Landlord’s engineer. If Tenant wishes to install any refrigerant-containing equipment or systems, Tenant shall obtain and provide Landlord with copies of all required permits associated with such equipment or systems.

7.6.1 Removal of Refrigerant. Notwithstanding anything to the contrary in this Lease, Tenant shall remove all refrigerant and refrigerant-containing equipment and/or systems installed in the Premises by or on behalf of Tenant prior to the Expiration Date of this Lease. Prior to the removal of any such refrigerant or refrigerant-containing equipment and/or systems, Tenant shall submit to Landlord for Landlord’s approval, the names of Tenant’s contractors and all plans and specifications for such removal. Tenant and Tenant’s contractors shall comply with all legal requirements, industry practices and rules established by Landlord in performing such removal work. Tenant shall repair any damage to the Property or the Systems and Equipment associated with such removal, and Tenant shall be responsible for the costs associated with restoring the Property to the condition which existed immediately prior to any modification undertaken by Landlord in order to accommodate Tenant’s refrigerant-containing equipment or systems.

8    SERVICES AND UTILITIES

8.1 LANDLORD’S SERVICES. Landlord agrees to provide, on the terms and conditions specified herein, the following services and utilities for Tenant’s use and consumption in the Premises, the cost of which shall be included in Operating Expenses and/or Utilities and reimbursed to Landlord in accordance with § 4.1 above:

(a) Electricity. Electricity for standard office lighting fixtures and for equipment and accessories customary for offices, provided (i) the connected electrical load of all the same does not exceed an average of four (4) watts per usable square foot of the Premises (or such lesser amount as may be available, based on the safe and lawful capacity of the existing electrical circuit(s) and facilities serving the Premises); (ii) the electricity will be at nominal 120 volts, single phase (or 110 volts, depending on available service in the Building); and (iii) the safe and lawful capacity of the existing electrical circuit(s) serving the Premises is not exceeded. Landlord will permit its electric feeders, risers, and wiring servicing the Premises to be used by Tenant to the extent available and safely capable of being used for such purpose.

(b) Telecommunications Interface. Interface with the telephone network at the demarcation point or minimum point of entry (“MPOE”) supplied by the local regulated public utility by means of Landlord’s INC consisting of cable pairs with a capacity consistent with the engineering standards to which the Building was designed.

(c) HVAC. Heat, ventilation, and air-conditioning (“HVAC”) to provide a temperature required, in Landlord’s reasonable opinion and in accordance with applicable Laws, for the comfortable occupancy of the Premises during business hours (as defined in § 8.1.1 below). Landlord shall not be responsible for inadequate air-conditioning or ventilation to the extent the same occurs because Tenant uses any item of equipment consuming more than

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500 watts at rated capacity without providing adequate air-conditioning and ventilation therefor.

(d) Water. Water for drinking, lavatory and toilet purposes at those points of supply provided for nonexclusive general use of other tenants at the Property.

(e) Janitorial Services. Customary office cleaning and trash removal service Monday through Friday or Sunday through Thursday in and about the Premises.

(f) Elevator Services. Operatorless passenger elevator service and freight elevator service (if the Property has such equipment serving the Premises, and subject to scheduling by Landlord) in common with Landlord and other tenants and their contractors, agents, and visitors.

8.1.1 Business Hours. The term business hours in this Lease shall mean the hours from 8:00 a.m. until 6:00 p.m. on Monday through Friday and from 9:00 a.m. until 1:00 p.m. on Saturday throughout the year, except for New Year’s Day, Presidents’ Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and any other federally-observed holiday which may be created during the Term (“Holidays”).

8.2 ADDITIONAL ELECTRICAL CAPACITY. Any additional risers, feeders, or other equipment or service proper or necessary to supply Tenant’s electrical requirements will be installed by Landlord, upon written request of Tenant, at the sole cost and expense of Tenant, if, in Landlord’s sole judgement, the same are necessary and will not cause permanent damage or injury to the Property, the Premises, or the Systems and Equipment or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repairs, or expense or interfere with or disturb other tenants or occupants. Rigid conduit only will be allowed.

8.2.1 Approved Electrical Load. Tenant agrees not to connect any additional electrical equipment of any type to the building electric distribution system, beyond that on Tenant’s approved plans for initial occupancy, other than lamps, typewriters, and other office machines which consume comparable amounts of electricity or other electrical equipment which in the aggregate consumes the same amount of electricity as those approved for initial occupancy and will not result in any overload of electrical circuits, lines, or wiring, without Landlord’s prior written consent. In no event shall Tenant use or install any fixtures, equipment, or machines the use of which in conjunction with other fixtures, equipment, and machines in the Premises would result in an overload or the electrical circuits servicing the Premises. Tenant covenants and agrees that at all times its use of electric current shall never exceed the capacity of the feeders to the Building or the risers or wiring installation existing at the time in question.

8.3 ADDITIONAL TELECOMMUNICATIONS CAPACITY. If Tenant desires any telecommunications capacity in excess of that available as of the Commencement Date in the form of the INC between the MPOE and the telephone closet nearest the Premises and provided pursuant to § 8.1 above, Tenant shall bear the cost of installing additional risers or INC or replacing existing INC serving the Premises pursuant to Article 9 below.

8.4 REPLACEMENT BULBS AND TUBES. Tenant shall furnish, install, and replace, as required, all non-Building-standard lighting tubes, lamps, bulbs, and ballasts required in the Premises, at Tenant’s sole cost and expense. All lighting tubes, lamps, bulbs, and ballasts so installed become Landlord’s property upon the expiration or sooner termination of this Lease.

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8.5 TWENTY-FOUR HOURS ACCESS. Subject to the provisions of § 8.8, Tenant, its employees, agents, and invitees shall have access to the Premises twenty-four (24) hours a day, seven (7) days a week. Landlord may restrict access outside of business hours by requiring persons to show a badge or identification card issued by Landlord. Landlord shall not be liable for denying entry to any person unable to show the proper identification. Landlord may without liability temporarily close the Building if required because of a life-threatening or Building-threatening situation.

8.6 EXTRA SERVICES. Landlord shall, subject to all applicable Laws, seek to provide such utilities or services in excess of those Landlord is required to provide under § 8.1 above as Tenant may from time to time request, if the same are reasonable and feasible for Landlord to provide and do not involve modifications or additions to the Property or the Systems and Equipment and if Landlord shall receive Tenant’s request within a reasonable period prior to the time such extra utilities or services are required. Landlord may comply with written or oral requests by any officer or employee of Tenant, unless Tenant shall notify Landlord of, or Landlord shall request, the names of authorized individuals (up to three (3) for each floor on which the Premises are located) and procedures for written requests. Tenant shall, for such extra utilities or services, pay such charges as Landlord shall from time to time establish.

8.6.1 Extraordinary Service Usage. If Tenant shall utilize Building services for the Premises at any time other than during business hours, Landlord shall furnish such extraordinary services (excluding air-conditioning, except as provided below) at Landlord’s then-current prevailing rate for such services. In addition to the foregoing services, if Tenant shall require air-conditioning service for the Premises at any time other than during business hours, Landlord shall, upon reasonable advance notice from Tenant, furnish such after-hours air-conditioning service at Landlord’s then-current prevailing rate for such services as a separate charge; provided, however, in the event Tenant requests such after-hours air-conditioning service at a time not immediately preceding or immediately succeeding times when “regular hours” service is being furnished hereunder, then Tenant must request not less than five (5) hours of after-hours air-conditioning service. Notwithstanding anything contained herein to the contrary, Landlord’s prevailing rate for the extraordinary services described herein shall be subject to increase from time to time as Landlord may reasonably determine.

8.6.2 Payment for Excess Usage. All charges for extra utilities or services or those requested outside business hours shall be due at the same time as the installment of Base Rent with which the same are billed, or if billed separately, shall be due within twenty (20) days after such billing.

8.6.3 Changes in HVAC System. Use of the Premises, or any part thereof, in a manner exceeding the design conditions (including occupancy and connected electrical load) for the heating or cooling units in the Premises, or rearrangement of partitioning which interferes with normal operation of the HVAC system in the Premises, may require changes in the HVAC system servicing the Premises. Such changes shall be made by Tenant, at its expense, as Tenant’s Changes pursuant to Article 9. Tenant shall not change or adjust any closed or sealed thermostat or other element of the HVAC system without Landlord’s express prior written consent.

8.6.4 Separate Metering. Landlord may install and operate meters or any other reasonable system for monitoring or estimating any services or utilities used by Tenant in excess of those required to be provided by Landlord under this Article 8 (including a system for Landlord’s engineer reasonably to estimate any such excess usage). If such system indicates such excess services or utilities, Tenant shall pay Landlord’s reasonable charges for installing and operating such system and any supplementary air-conditioning, ventilation, heat, electrical, or other systems or equipment (or adjustments or modifications to the existing Systems and Equipment), and Landlord’s reasonable charges for such amount of excess services or utilities used by Tenant. If Tenant’s use of extra

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utilities or services causes Landlord’s regulated baseline quantities of water, gas, electricity, or any other utility or service to be exceeded, Tenant shall pay for such excess quantities of such utilities or services at the rate which is imposed upon Landlord for quantities in excess of the regulated baseline. In addition, Tenant shall pay prior to delinquency any fine or penalty which may be imposed upon or assessed against Landlord or the Building or the Property by virtue of Tenant’s excess usage of any services or utilities, including water, gas, and electricity.

8.7 INTERRUPTION OF SERVICES. Landlord does not warrant that any services or utilities provided hereunder for Tenant’s use in the Premises will be free from shortages, failures, variations, or interruptions caused by repairs, maintenance, replacements, improvements, alterations, changes of service, strikes, lockouts, labor controversies, accidents, inability to obtain services, fuel, steam, water or supplies, governmental requirements or requests, or other causes beyond Landlord’s reasonable control, including interference with light or other incorporeal hereditaments and any interruption in services or any failure to provide services to Landlord by a designated utility company at the demarcation point at which Landlord accepts responsibility for such service or at any point prior thereto, which interference impedes Landlord in furnishing plumbing, HVAC, electrical, sanitary, life safety, elevator, telecommunications, or other Building services, utilities, or the Systems and Equipment. None of the same shall be deemed an eviction or disturbance of Tenant’s use and possession of the Premises or any part thereof, shall render Landlord liable to Tenant for abatement of Rent, or shall relieve Tenant from performance of Tenant’s obligations under this Lease. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption, or other compensatory or consequential damages.

8.8 SAFETY AND SECURITY DEVICES, SERVICES, AND PROGRAMS. The parties acknowledge that safety and security devices, services, and programs provided by Landlord, if any, while intended to deter crime and ensure safety, may not in given instances prevent theft or other criminal acts or ensure safety of persons or property, and such devices, services and programs shall not under any circumstances be deemed to be a guaranty, representation, or warranty by Landlord to Tenant or any third parties as to the safety or protection of person or property. The risk that any safety or security device, service, or program may not be effective, or may malfunction, or be circumvented by a criminal, is assumed by Tenant with respect to Tenant’s property and interests; and Tenant shall obtain insurance coverage to the extent Tenant desires protection against such criminal acts and other losses, as further described in Article 14. Tenant agrees to cooperate in any reasonable safety or security program developed by Landlord or required by Law.

9    TENANT’S CHANGES

9.1 TENANT’S REQUESTED CHANGES. Tenant may, subject to § 9.2 below, from time to time during the Term of this Lease, at its expense, make such alterations, additions, installations, substitutions, improvements, and decorations (collectively “Tenant’s Changes”) in and to the Premises as Tenant may reasonably consider necessary for the conduct of its business in the Premises (except for changes which would require modification of the Property outside the Premises), on the following conditions:

(a) the outside appearance or the strength of the Building or of any of its structural parts shall not be affected, and Tenant shall cause no penetration of the roof or the exterior fabric of the Building;

(b) no part of the Building outside of the Premises shall be physically affected;

(c) the proper functioning of any of the Systems and Equipment shall not be adversely affected, and the usage of such systems by Tenant shall not be increased;

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(d) no such change shall require the addition of new INC riser cable or expand the number of telephone pairs dedicated to the Premises by the Buildings’ telecommunications engineering design;

(e) in performing the work involved in making such changes, Tenant shall be bound by and observe all of the conditions and covenants contained in the following sections of this Article 9; and

(f) with respect to Tenant’s Changes, Tenant shall make all arrangements for, and pay all expenses incurred in connection with, use of the freight elevators servicing the Premises.

9.2 PLANS AND APPROVAL. Before proceeding with any Tenant’s Changes, Tenant shall advise Landlord thereof and arrange a meeting with the Building Manager, the Building Architect, and/or the Building Contractor, as required by Landlord in relation to the scope of the proposed Changes. Except in extraordinary circumstances which would reasonably require an exception, all work to be performed in the Building shall be performed by the Building Contractor on the basis of plans and drawings prepared by the Building Architect. If Landlord grants permission for Tenant to utilize another contractor and/or architect for its Changes, before proceeding with any Tenant’s Changes, Tenant shall submit to Landlord plans and specifications and all changes and revisions thereto for the work to be done for Landlord’s reasonable approval; and Tenant shall, upon demand of Landlord, pay to Landlord the reasonable costs incurred and paid to third parties by Landlord for the review of such plans and specifications and all changes and revisions thereto by its architect, engineer, and other consultants. Landlord may as a condition of its approval require Tenant to make reasonable revisions in and to the plans and specifications. Landlord may require Tenant to post a bond or other security reasonably satisfactory to Landlord to insure the completion of such change. If Landlord consents to any Tenant’s Changes or supervises the work of constructing any Tenant’s Changes, such consent or supervision shall not be deemed a warranty as to the adequacy of the design, workmanship, or quality of materials, and Landlord hereby expressly disclaims any responsibility or liability for the same. Landlord shall under no circumstances have any obligation to repair, maintain, or replace any portion of such work.

9.2.1 As-Built Plans. Within thirty (30) days after completion of Tenant’s Changes requiring the submission of plans to Landlord, Tenant shall furnish to Landlord a complete set of “as-built” plans and specifications.

9.3 PERMITS AND PERFORMANCE. Tenant, at its expense, shall obtain all necessary governmental permits and certificates for the commencement and prosecution of Tenant’s Changes and for final approval thereof upon completion and shall furnish copies thereof to Landlord. Tenant shall cause Tenant’s Changes to be performed in compliance therewith and with all applicable Laws and requirements of public authorities and with all applicable requirements of insurance bodies, and in good and workmanlike manner, using new materials and equipment at least equal in quality and class to the original installations in the Property. Tenant’s Changes shall be performed in such manner as not unreasonably to interfere with, delay, or impose any additional expense upon Landlord in the renovation, maintenance, or operation of the Property or any portion thereof, unless Tenant shall indemnify Landlord therefor to the latter’s reasonable satisfaction.

9.4 CONTRACTORS. All electrical, mechanical, and plumbing work in connection with Tenant’s Changes shall be performed by Landlord’s contractors at Tenant’s expense. If Tenant shall request any electrical, mechanical, or plumbing work in connection with Tenant’s Changes, Landlord shall request Landlord’s contractors to furnish Tenant with prices to perform the same prior to prosecuting same. In addition to the foregoing, and notwithstanding anything to the contrary in this Article 9, Landlord may, at

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Landlord’s option, require that the work of constructing any Tenant’s Changes be performed by Landlord’s contractor, in which case the cost of such work shall be paid for before commencement of the work.

9.5 SUPERVISION AND FEE. Landlord may require that all work of constructing Tenant’s Changes be performed under Landlord’s supervision. If Landlord does not elect to require that Tenant use Landlord’s contractor, and if Tenant chooses to use its own contractor for the work of constructing Tenant’s Changes, Tenant shall pay to Landlord upon completion of any such work by Tenant’s contractor an administrative fee of ten percent (10%) of the cost of the work, to cover Landlord’s overhead in reviewing Tenant’s plans and specifications and performing any supervision of the work of Tenant’s Changes. If Tenant chooses to use Landlord’s contractor for such work, Tenant shall pay to Landlord upon completion an administrative fee equal to five percent (5%) of the cost of the work.

9.6 RESTORATION OF FIXTURES. If any of Tenant’s Changes shall involve the removal of any fixtures, equipment, or other property in the Premises which are not Tenant’s Property (as defined in Article 10), such fixtures, equipment, or other property shall be promptly replaced, at Tenant’s expense, with new fixtures, equipment, or other property (as the case may be) of like utility and at least equal value, unless Landlord shall otherwise expressly consent in writing; and Tenant shall, upon Landlord’s request, store and preserve, at Tenant’s sole cost and expense, any such fixtures, equipment or property so removed and shall return same to Landlord upon the expiration or sooner termination of this Lease.

9.7 MECHANIC’S LIENS. Tenant shall keep the Property and Premises free from any mechanic’s, materialman’s, or similar liens or other such encumbrances, including the liens of any security interest in, conditional sales of, or chattel mortgages upon, any materials, fixtures, or articles so installed in and constituting part of the Premises, in connection with any Tenant’s Changes on or respecting the Premises not performed by or at the request of Landlord and shall indemnify, defend, protect, and hold Landlord harmless from and against any claims, liabilities, judgements, or costs (including attorneys’ fees) arising out of the same or in connection with any such lien, security interest, conditional sale or chattel mortgage or any action or proceeding brought thereon. Tenant shall give Landlord written notice at least twenty (20) days prior to the commencement of work on any Tenant’s Change in the Premises (or such additional time as may be necessary under applicable Laws), in order to afford Landlord the opportunity of posting and recording appropriate notices of nonresponsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within thirty (30) days after written notice by Landlord; and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord’s title to the Property or Premises to any liens or encumbrances, whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Property or Premises arising in connection with any Work on or respecting the Premises not performed by or at the request of Landlord shall be null and void, or, at Landlord’s option, shall attach only against Tenant’s interest in the Premises and shall in all respects be subordinate to Landlord’s title to the Property and Premises.

9.8 NOTICES OF VIOLATION. Tenant, at its expense, and with diligence and dispatch, shall procure the cancellation or discharge of all notices of violation arising from or otherwise connected with Tenant’s Changes which shall be issued by any governmental, public, or quasi-public authority having or asserting jurisdiction. However, nothing herein contained shall prevent Tenant from contesting, in good faith and at its own expense, any such notice of violation, provided that Landlord’s rights hereunder are in no way compromised or diminished thereby.

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9.9 INDUSTRIAL RELATIONS. Tenant agrees that the exercise of its rights pursuant to the provisions of this Article 9 or any other provision of this Lease shall not be done in a manner which would create any work stoppage, picketing, labor disruption, or dispute or violate Landlord’s union contracts affecting the Property and/or Complex or interfere with the business of Landlord or any Tenant or occupant of the Building. Tenant shall, immediately upon notice from Landlord, cease any activity, whether or not permitted by this Lease, giving rise to such condition. If Tenant fails to do so, Landlord, in addition to any rights available to it under this Lease and pursuant to Law, shall have the right to an ex parte injunction without notice.

10    TENANT’S PROPERTY

10.1 FIXTURES AND IMPROVEMENTS. All fixtures, equipment, improvements, alterations, and appurtenances attached to or built into the Premises at the commencement of or during the Term of this Lease, including cabinets, sinks, faucets, appliances, hot water heaters, etc. (collectively “Improvements”), whether or not by or at the expense of Tenant, shall be and remain a part of the Premises, shall be deemed the property of Landlord, and shall not be removed by Tenant, except as expressly provided in Article 11 below.

10.2 TENANT’S PROPERTY AND TRADE FIXTURES. All movable partitions, trade fixtures, office machinery and equipment, communications equipment, and computer equipment (whether or not attached to or built into the Premises) which are installed in the Premises by or for the account of Tenant, without expense to Landlord and which can be removed without structural damage to the Property, and all furniture, furnishings, and other articles of movable personal property owned by Tenant and located in the Premises (collectively “Tenant’s Property”) shall be and shall remain the property of Tenant and may be removed by it at any time during the Term of this Lease; provided that if any of Tenant’s Property is removed, Tenant or any party or person entitled to remove same shall repair or pay the cost of repairing any damage to the Premises or to the Property resulting from such removal. Any equipment or other property for which Landlord shall have granted any allowance or credit to Tenant or which has replaced such items originally provided by Landlord at Landlord’s expense shall not be deemed to have been installed by or for the account of Tenant, without expense to Landlord, and shall not be considered Tenant’s Property.

11     CONDITION UPON SURRENDER

11.1 CONDITION AND RESTORATION. At or before the Expiration Date or the date of any earlier termination of this Lease, or as promptly as practicable using Tenant’s best efforts after such an earlier termination date, Tenant, at its expense, shall do all of the following:

(a) surrender possession of the Premises in the condition required under § 12.1 below, ordinary wear and tear excepted;

(b) surrender all keys, any key cards, and any parking stickers or cards to Landlord and give Landlord in writing the combinations of any locks or vaults then remaining in the Premises;

(c) remove from the Premises all of Tenant’s Property, including any data wiring and cabling that Tenant has installed, except such items thereof as Tenant shall have expressly agreed in writing with Landlord were to remain and to become the property of Landlord; and

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(d) fully repair any damage to the Premises or the Property resulting from such removal.

Tenant’s obligations herein shall survive the expiration or earlier termination of the Lease, unless expressly provided to the contrary herein. All Improvements and other items in or upon the Premises (except Tenant’s Property), whether installed by Tenant or Landlord, shall be Landlord’s property and shall remain upon the Premises, all without compensation, setoff, allowance, or credit to Tenant; provided, however, that if prior to such expiration or earlier termination Landlord so directs by notice, Tenant shall promptly remove such of the Improvements in the Premises as are designated in such notice and shall restore the Premises to their condition prior to the installation of such Improvements. Notwithstanding the foregoing, Landlord shall not require removal of improvements installed pursuant to the Work Letter Agreement, if any (except as expressly provided to the contrary therein), or installed by Tenant with Landlord’s written approval (except as expressly required by Landlord in connection with granting such approval).

11.2 TENANT’S FAILURE TO REMOVE OR RESTORE. If Tenant shall fail to perform any repairs or restoration or fail to remove any items from the Premises as required under this Article 11, Landlord may do so, and Tenant shall pay Landlord the cost thereof upon demand. All property removed from the Premises by Landlord pursuant to any provisions of this Lease or any Law may be handled or stored by Landlord at Tenant’s expense, and Landlord shall in no event be responsible for the value, preservation, or safekeeping thereof. All property not removed from the Premises or retaken from storage by Tenant within thirty (30) days after expiration or earlier termination of this Lease or Tenant’s right to possession shall at Landlord’s option be conclusively deemed to have been conveyed by Tenant to Landlord as if by bill of sale without payment by Landlord. Unless prohibited by applicable Laws, Landlord shall have a lien against such property for the costs incurred in removing and storing the same.

12    REPAIRS AND MAINTENANCE

12.1 TENANT’S CARE OF PREMISES. Except for customary cleaning and trash removal provided by Landlord under § 8.1 above and damage covered under Article 15, Tenant shall keep the Premises in good and sanitary condition, working order, and repair, including carpet, wall-covering, doors pertinent to and within the Premises, plumbing, all telecommunications cables and wiring within Tenant’s Premises (“IW”) from the interface of such IW with the INC, and other fixtures, equipment, alterations, and improvements, whether installed by Landlord or Tenant. In addition, Tenant, at its expense, shall promptly make all repairs, ordinary or extraordinary, interior or exterior, structural or otherwise, in and about the Premises and the Property, as shall be required by reason of (a) the performance or existence of Tenant’s Work or Tenant’s Changes; (b) the installation, use, or operation of Tenant’s Property in the Premises; (c) the moving of Tenant’s Property in or out of the Building; or (d) the misuse or neglect of Tenant or any of its employees, agents, or contractors. Tenant, at its expense, shall replace all scratched, damaged, or broken doors or other glass in or about the Premises and shall be responsible for all repairs, maintenance, and replacement of wall and floor coverings in the Premises and for the repair and maintenance of all lighting fixtures therein. All repairs except for emergency repairs made by Tenant as provided herein shall be performed by contractors or subcontractors approved in writing by Landlord prior to commencement of such repairs, which approval shall not be unreasonably withheld or delayed. If Tenant does not promptly make such arrangements, Landlord may, but need not, make such repairs, maintenance, and replacements, and the costs paid or incurred by Landlord therefor shall be reimbursed by Tenant promptly after request by Landlord.

12.2 LANDLORD’S CARE OF PROPERTY. Landlord, at its expense, shall keep and maintain the common areas of the Property and the Systems and Equipment serving the Premises in good working order, condition, and repair and shall make all repairs, structural and otherwise, interior and exterior, as and

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when needed in or about the Premises, except for those repairs for which Tenant is responsible pursuant to § 12.1 above or any other provisions of this Lease. Landlord shall maintain and repair all INC in the Building, and Tenant shall have no right to make repairs to INC. The cost of Landlord’s maintenance and repairs pursuant to this Article 12 shall be reimbursed to Landlord to the extent provided in Article 4 above.

12.3 WAIVER BY TENANT. Tenant waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord’s expense or to terminate this Lease because of Landlord’s failure to keep the Premises in good order, condition, and repair.

13    RULES AND REGULATIONS

13.1 OBSERVANCE AND MODIFICATION. Tenant and its employees and agents shall faithfully observe and comply with the Rules and Regulations attached hereto as Exhibit C (the “Rules”) and such reasonable changes therein (whether by modification, elimination, or addition) as Landlord at any time or times hereafter may make and communicate in writing to Tenant, so long as such changes do not unreasonably affect the conduct of Tenant’s business in the Premises, except as required by any applicable Law; provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules as originally promulgated or as changed, the provisions of this Lease shall control.

13.2 APPLICATION TO TENANT. Nothing in this Lease shall be construed to impose upon Landlord any obligation to Tenant to enforce the Rules or the terms, covenants, or conditions in any other lease, as against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant or its employees, agents, or visitors.

14    INSURANCE AND INDEMNIFICATION

14.1 TENANT’S INSURANCE. Tenant shall obtain and maintain in effect at all times during Tenant’s possession of the Premises the following insurance coverages and policies:

14.1.1 Liability Insurance. Tenant shall maintain a policy of commercial general liability insurance, which shall include coverages for (a) personal injury; (b) contractual liability; and (c) property damage liability. The minimum limits of liability shall be a combined single limit with respect to each occurrence of not less than Two Million Dollars ($2,000,000) and an aggregate limit of not less than Three Million Dollars ($3,000,000). The policy shall contain a cross-liability endorsement and a severability of interest clause. Tenant shall increase the insurance coverage as required by Landlord’s lender or if Landlord’s insurance consultant believes that the coverage is not adequate.

14.1.2 Tenant’s Business Personal Property Insurance. Tenant shall maintain on all of its business personal property, including valuable business papers and accounts receivable; operating supplies; inventory; and furniture, fixtures, and equipment (whether owned, leased, or rented) (collectively “Business Personal Property”) a “special perils” property damage insurance policy including coverage for sprinkler leakage and containing an agreed amount endorsement (or, if applicable, a business owner’s policy with a no-coinsurance provision) in an amount not less than one hundred percent (100%) of the full replacement cost valuation of such Business Personal Property. The proceeds from any such policy shall be used by Tenant for the replacement of such Business Personal property.

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14.1.3 Workers’ Compensation Insurance. Tenant shall maintain workers’ compensation insurance as required by law and employer’s liability insurance in an amount not less than Five Hundred Thousand Dollars ($500,000).

14.1.4 Business Interruption/Extra Expense Insurance. Tenant shall maintain business interruption or (if applicable) contingent business interruption and extra expense insurance in such amounts as will reimburse Tenant for direct or indirect loss of earnings and incurred costs attributable to the perils commonly covered by Tenant’s property insurance described in § 14.1.2 above. Such insurance will be carried with the same insurer that issues the insurance for Tenant’s Business Personal Property pursuant to § 14.1.2 above.

14.1.5 Other Coverage. Tenant, at its cost, shall maintain such other insurance as Landlord may reasonably require from time to time, but in no event may Landlord require any other insurance which is not then available at commercially reasonable rates.

14.2 TENANT’S INSURANCE CRITERIA. All insurance required to be maintained by Tenant under this Lease shall conform to the following criteria:

(i) Tenant’s insurance shall be issued by insurance companies authorized to do business in the State of California with a financial rating of at least A:XIII for any property insurance and at least A-:IX for any liability insurance, as rated in the most recent edition of Best’s Insurance Reports;

(ii) Tenant’s insurance shall be issued as primary;

(iii) Tenant’s liability and property insurance policies shall name Tenant as the insured and Landlord, Landlord’s agents, and any Lessors and Holders (as such terms are defined in § 18.1 below) whose names shall have been furnished to Tenant as additional insureds;

(iv) Tenant’s insurance shall contain an endorsement requiring at least thirty (30) days’ written notice from the insurance company to each insured and additional insured before cancellation of any coverage or policy; and

(v) with respect to damage to or loss of Tenant’s Business Personal Property, a waiver of subrogation must be obtained, as required under § 14.4 below.

14.2.1 Blanket Coverage. All of the insurance requirements set forth herein on the part of Tenant to be observed shall be deemed satisfied if the Premises are covered by a blanket insurance policy complying with the limits, requirements, and criteria contained in this Article 14 insuring all or most of Tenant’s facilities in California.

14.2.2 Evidence of Coverage. A certificate of insurance shall be deposited with Landlord at the commencement of the Term or, if earlier, upon Tenant’s taking possession of the Premises; and on renewal of the policy a certificate of insurance listing the insurance coverages required hereunder and naming the appropriate additional insureds shall be deposited with Landlord not less than seven (7) days before expiration of the policy.

14.3 LANDLORD’S INSURANCE. Landlord shall maintain “all risk” property damage insurance containing an agreed amount endorsement covering not less than one hundred percent (100%) of the full insurable replacement cost valuation of (y) the Building and the tenant improvements, betterments, and the alterations thereto; and (z) Landlord’s personal property, business papers, furniture, fixtures, and equipment (collectively “Landlord’s Property”), exclusive of the costs of excavation, foundations and footings, and risks required to be covered by Tenant’s insurance, and subject to commercially reasonable

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deductibles. Landlord shall also obtain and keep in full force the following policies of insurance: (a) commercial general liability insurance; (b) loss of rent insurance (also known as rent continuation insurance); (c) workers’ compensation insurance, if required by applicable Law; and (d) such other insurance as Landlord deems appropriate or as may be required by any Holder or Lessor.

14.4 RELEASES AND WAIVERS OF SUBROGATION. The purpose of this provision is to allow Landlord and Tenant to allocate and assume certain risks to coincide with insurance coverages required to be maintained pursuant to the terms to this Lease. Landlord and Tenant recognize the benefit that each will receive from the waivers of subrogation each is required to obtain pursuant to this § 14.4 and that there are significant advantages to each in connection with minimizing duplication of insurance coverages. Accordingly, Landlord and Tenant agree to accept and place the limitations which follow on each other’s respective liabilities and responsibility for damages in order to coincide with required insurance coverages.

14.4.1 Tenant’s Property Agreement. In light of Tenant’s agreement to insure Tenant’s Business Personal Property in accordance with § 14.1.2 above, Tenant agrees that Landlord will have no liability to Tenant in the event Landlord damages or destroys, negligently or otherwise, all or any part of Tenant’s Business Personal Property. Tenant will cause to be placed in its insurance policies covering Tenant’s Business Personal Property a waiver of subrogation so that its insurance company will not become subrogated to Tenant’s rights and will not be able to proceed against Landlord in connection with any such damage or destruction.

14.4.2 Landlord’s Property Agreement. In light of Landlord’s agreement to insure Landlord’s Property in accordance with § 14.3 above, Landlord agrees that Tenant will have no liability to Landlord in the event that Tenant damages or destroys, negligently or otherwise, all or any part of Landlord’s Property. Landlord will cause to be placed in its insurance policies covering Landlord’s Property a waiver of subrogation so that its insurance company will not become subrogated to Landlord’s rights and will not be able to proceed against Tenant in connection with any such damage or destruction.

14.4.3 Tenant’s Release. Landlord shall not be responsible or liable to Tenant for any damages or destruction to Tenant’s Business Personal Property caused by Landlord’s employees, agents, visitors, invitees, guests, or independent contractors (collectively “Landlord’s Associates”), and Tenant hereby releases Landlord from any claims, liabilities, demands, losses, damages, consequential damages, and the like, including reasonable attorneys’ fees and court costs (collectively “Claims”) resulting from damage or destruction to Tenant’s Business Personal Property caused directly or indirectly by Landlord and/or Landlord’s Associates; provided, however, that nothing herein shall be deemed to release Landlord’s independent contractors from any such Claims Tenant may have against Landlord’s independent contractors.

14.4.4 Landlord’s Release. Tenant shall not be responsible or liable to Landlord for any damages or destruction to Landlord’s Property caused by Tenant’s employees, agents, visitors, invitees, guests, or independent contractors (collectively “Tenant’s Associates”), and Landlord hereby releases Tenant from any Claims resulting from damage or destruction to Landlord’s Property caused directly or indirectly by Tenant and/or Tenant’s Associates; provided, however, that nothing herein shall be deemed to release Tenant’s independent contractors from any such Claims Landlord may have against Tenant’s independent contractors.

14.4.5 Damage to Business and Loss of Rents. In light of Landlord’s agreement to carry continuation of rent insurance pursuant to § 14.3 above and Tenant’s agreement to carry business interruption insurance (extra expense insurance) in accordance with § 14.1.4 above, in the event that

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Landlord’s Property is damaged or destroyed because of any act or conduct, negligent or otherwise, by Tenant and/or by Tenant’s Associates, Landlord shall have no rights against Tenant by virtue of such damage or destruction, and Landlord hereby releases Tenant from all Claims, including claims for loss of rent, by Landlord directly or indirectly resulting from the damage or destruction of Landlord’s Property by conduct by Tenant and/or by Tenant’s Associates. Likewise, in the event that Tenant’s Business Personal Property is damaged or destroyed because of any act or conduct, negligent or otherwise, by Landlord and/or by Landlord’s Associates, Tenant shall have no rights against Landlord by virtue of such damage or destruction, and Tenant hereby releases Landlord from all Claims by Tenant directly or indirectly resulting from the damage or destruction to Tenant’s Business Personal Property by the conduct of Landlord and/or Landlord’s Associates, including Claims for loss of business or loss of profits. Notwithstanding the foregoing, nothing herein shall be deemed to release Tenant’s or Landlord’s independent contractors from any liability to Tenant and/or Landlord.

14.4.6 Injury and Death to Individuals. Landlord and Tenant understand that waivers of subrogation do not apply to injury to and death of individuals. Landlord and Tenant shall each carry insurance, as provided by this Article 14, in connection with injury and death to individuals. Landlord hereby agrees to indemnify and hold Tenant harmless from any Claims which Tenant may otherwise have with respect to injury or death to individuals occurring within the Property but outside the Premises, except to the extent that such injury or death is caused by Tenant and/or Tenant’s Associates, through negligence or otherwise, and is not covered by the insurance Landlord is required to carry under this Lease. Likewise, Tenant agrees to indemnify, defend, protect, and hold Landlord harmless from any Claims for injury or death to persons occurring within the Premises or caused, directly or indirectly, by Tenant or Tenant’s Associates outside the Premises, except to the extent such injuries or death are caused by Landlord and/or Landlord’s Associates, through negligence or otherwise, and are not covered by the insurance Tenant is required to carry under this Lease.

14.4.7 Abatement of Rent. Except as may be expressly provided elsewhere in this Lease, Tenant shall not be entitled to Rent abatement and shall not otherwise have, and hereby releases Landlord from, any Claims resulting from Tenant’s inability to utilize all or any part of the Premises, except to the extent that Tenant is unable to use all or any part of the Premises and does not use all or any part of the Premises as a result of Landlord’s intentional decision to refuse to provide access to the Building and/or the Premises and/or to provide services and/or utilities to Tenant as required to be provided by Landlord to Tenant pursuant to this Lease, where such refusal is not caused by a Force Majeure occurrence.

14.4.8 Availability of Waiver of Subrogation. If an insurance policy cannot be obtained with a waiver of subrogation or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without waiver of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of ten (10) days after receiving the notice either to place the insurance with a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation at no additional cost or to agree to pay the additional premium if such a policy is obtainable at additional cost. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation with respect to the particular insurance involved.

14.5 OTHER CASES OF DAMAGE OR INJURY. In all cases not covered by the foregoing provisions of this Article 14, Tenant hereby assumes all risk of damage to property or injury to persons in, upon, or about

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the Premises from any cause other than the active negligence or intentional misconduct of Landlord and its agent or employees. Without limiting the generality of the foregoing, Landlord shall not be liable for injury or damage which may be sustained by the person, goods, wares, merchandise, or property of Tenant or Tenant’s Associates or any other person in or about the Premises caused by or resulting from fire, steam, electricity, gas, water or rain, which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction, or other defects of the Systems and Equipment, pipes, sprinklers, wires, INC. appliances, plumbing, heating, air-conditioning, or lighting fixtures of the same, whether the damage or injury results from conditions arising upon the Premises or upon other portions of the Property, the Complex, or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant or occupant of the Property or Complex. In all cases not covered by the foregoing provisions of this Article 14, Tenant shall indemnify, defend, protect, and hold Landlord harmless against (a) any and all Claims arising from any death or injury to any person or damage to any property whatsoever occurring in, on, or about the Premises or any part thereof, and (b) any and all Claims occurring in, on or about any of the Common Areas, the Property, or the Complex, when such injury or damage is caused in whole or in part by the act, negligence, fault, or omission of any duty with respect to the same by Tenant or Tenant’s Associates. In all cases not covered by the foregoing provisions of this-Article 14, Tenant shall further indemnify, defend, protect, and hold Landlord harmless from and against any and all Claims arising from any breach or default in the performance of any obligation on Tenant’s part to be performed under this Lease, or arising from any act or negligence of Tenant or Tenant’s Associates, and from and against all costs, attorneys’ fees, expenses, and liabilities incurred in connection with any such Claim or any action or proceeding brought thereon. In case any action or proceeding be brought against Landlord by reason of any such Claim, Tenant, upon notice from Landlord, shall defend the same at Tenant’s expense by counsel reasonably satisfactory to Landlord; provided, however, that Tenant shall not be liable in any case for damage to property or death or injury to person(s) occasioned by the active negligence or intentional misconduct of Landlord or Landlord’s Associates, unless covered by insurance Tenant is required to provide.

15    DAMAGE OR DESTRUCTION

15.1 LOSS COVERED BY INSURANCE. If at any time prior to the expiration or termination of this Lease the Premises or the Property is wholly or partially damaged or destroyed by any casualty which results in a loss to Landlord that is fully covered by insurance maintained by Landlord or for Landlord’s benefit (or required to be maintained by Landlord pursuant to § 14.3 above), which casualty renders the Premises totally or partially inaccessible or unusable by Tenant in the ordinary conduct of Tenant’s business, the parties agree that the following provisions shall modify their obligations under this Lease after such damage or destruction.

15.1.1 Repairs Which Can Be Completed Within Six (6) Months. Within thirty (30) days after Tenant’s written notice to Landlord of such damage or destruction, Landlord shall provide Tenant with notice of its determination of whether the damage or destruction can be repaired within six (6) months after the commencement of the work of repairing such damage or destruction without the payment of overtime or other premiums. If all repairs to Premises or Property can, in Landlord’s judgement, be completed within six (6) months following the date of the commencement of the work of repairing such damage or destruction without the payment of overtime or other premiums, Landlord shall, at Landlord’s expense, repair the same; and this Lease shall remain in full force and effect, except that a proportionate reduction of the Rent shall be allowed Tenant to the extent that the Premises shall be rendered inaccessible or unusable by Tenant and are not used by Tenant during the period of time that such portion is unusable or inaccessible and not used by Tenant.

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15.1.2 Repairs Which Cannot Be Completed Within Six (6) Months. If all such repairs to the Property and Premises cannot, in Landlord’s judgement, be completed within six (6) months following the commencement of the work of repairing such damage or destruction without the payment of overtime or other premiums, Landlord shall notify Tenant of such determination; and in such an event, either Landlord or Tenant may, at its option, upon written notice to the other party given within sixty (60) days after the occurrence of such damage or destruction, elect to terminate this Lease as of the date of the occurrence of such damage or destruction. In the event that neither Landlord nor Tenant elects to terminate the Lease in accordance with the foregoing provisions, then Landlord shall, at Landlord’s expense, repair such damage or destruction; and in such event, this Lease shall continue in full force and effect, except that the Rent shall be proportionately reduced as provided in § 15.1.1 above; provided, however, that if any such repair is not commenced by Landlord within ninety (90) days after the occurrence of such damage or destruction or is not substantially completed by Landlord within nine (9) months after the occurrence of such damage or destruction, then in either such event Tenant may, at its option, upon written notice to Landlord, elect to terminate this Lease as of the date of Landlord’s receipt of such notice. Notwithstanding the foregoing, Tenant shall have no right to terminate this Lease in the situation just described if all of the following conditions, are met: (x) Landlord shall have informed Tenant in its notice of determination that the repair of such damage or destruction could not be substantially completed by Landlord within nine (9) months after the occurrence of such damage or destruction; (y) Tenant shall not have elected to terminate the Lease by written notice delivered to Landlord within sixty (60) days after the occurrence of such damage or destruction; and (z) Landlord shall have commenced the work of repairing such damage or destruction.

15.2 LOSS NOT COVERED BY INSURANCE. If at any time prior to the expiration or earlier termination of this Lease the Premises or the Property is totally or partially damaged or destroyed in connection with a casualty, which loss to Landlord is not fully covered by insurance maintained by Landlord or for Landlord’s benefit (or required to be maintained by Landlord pursuant to § 14.3 above); and if such damage renders the Premises inaccessible or unusable to Tenant for their intended purpose in the ordinary course of its business, Landlord may, at its option, upon written notice given to Tenant within sixty (60) days after Tenant’s written notice to Landlord of the occurrence of such damage or destruction, either (a) elect to repair or to restore such damage or destruction or (b) elect to terminate this Lease. If Landlord elects to repair or restore such damage or destruction, this Lease shall continue in full force and effect, except that the Rent shall be proportionately reduced as provided in § 15.1.1 above. If Landlord does not elect by notice to Tenant to repair such damage, the Lease shall terminate as of the date of Tenant’s receipt of Landlord’s notice of election to terminate. Notwithstanding the foregoing, if all repairs to the Premises or the Building cannot, in Landlord’s reasonable judgement, be completed within six (6) months following the date of the commencement of the work of repairing such damage or destruction without the payment of overtime or other premiums, then either Landlord or Tenant may at the option of either, upon written notice to the other party given within sixty (60) days after the occurrence of such damage or destruction, elect to terminate this Lease as of the date of such notice.

15.3 DESTRUCTION DURING FINAL YEAR. Notwithstanding anything to the contrary contained in §§ 15.1 and l5.2, if the Premises or the Building are wholly or partially damaged or destroyed within the final twelve (12) months of the Term of this Lease or, if an applicable renewal option has been exercised, during the last year of any renewal term, in such a way that Tenant shall be prevented from using the Premises for at least thirty (30) consecutive days as a result of such damage or destruction, then either Landlord or Tenant may, at the option of either, by written notice to the other party delivered within sixty (60) days after the occurrence of such damage or destruction, elect to terminate the Lease as of the date of such notice.

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15.4 DESTRUCTION OF TENANT’S PROPERTY. Under no circumstances shall Landlord be required to repair any injury or damage to, or make any repairs to or replacements of, Tenant’s Property. However, as part of Operating Expenses, Landlord shall cause to be insured the Improvements in the Premises which do not consist of Tenant’s Property and shall cause such Improvements to be repaired and restored at Landlord’s sole expense, except that Tenant shall pay any applicable deductible. Landlord shall have no responsibility for any contents placed or kept in or on the Premises or the Property by Tenant or Tenant’s employees or invitees or any other person claiming through Tenant.

15.5 EXCLUSIVE REMEDY. Landlord and Tenant agree that their respective rights and obligations in the event of any damage or destruction of the Premises, Property, or Complex shall be governed exclusively by this Lease. Tenant, as a material inducement to Landlord entering into this Lease, irrevocably waives and releases Tenant’s rights under California Civil Code §§ 1932(2), 1933(4), and 1942, as the same may be modified or replaced hereafter. No damages, compensation, setoff, allowance, or claim shall be payable by Landlord for any inconvenience, interruption, or cessation of Tenant’s business or any annoyance arising from any damage to or destruction of all or any portion of the Premises, Property, or Complex.

16    EMINENT DOMAIN

16.1 CONDEMNATION. If the whole or any material part of the Premises or Property shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose; or if any adjacent property or street shall be so taken, condemned, reconfigured, or vacated by such authority in such manner as to require the use, reconstruction, or remodeling of any part of the Premises or Property; or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation (collectively “Takings”), Landlord shall have the option to terminate this Lease upon ninety (90) days’ notice, provided such notice is given no later than one hundred and eighty (180) days after the date of such Taking. Tenant shall have reciprocal termination rights, on the same terms and conditions and to be exercised in the same manner as the foregoing sentence provides, if the whole or any material part of the Premises is permanently taken, or if access to the Premises is permanently materially impaired.

16.2 RENTAL APPORTIONMENT. All Rent shall be apportioned as of the date of such termination or the date of such Taking, whichever shall first occur. If any part of the Premises shall be taken, and this. Lease shall not be so terminated, the Rent shall be proportionately abated.

16.3 AWARDS AND DAMAGES. Landlord shall be entitled to receive the entire award or payment in connection with any Taking, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant’s personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Term, and for moving expenses, so long as such claim does not diminish the award available to Landlord and such claim is payable separately to Tenant.

16.4 TEMPORARY CONDEMNATION. If part or all of the Premises are condemned for a limited period of time (“Temporary Condemnation”), this Lease shall remain in effect. The Rent and Tenant’s obligations for the part of the Premises taken shall abate during the Temporary Condemnation in proportion to the part of the Premises that Tenant is unable to use in its business operations as a result of the Temporary Condemnation. Landlord shall receive the entire award for any Temporary Condemnation.

17    ASSIGNMENT AND SUBLETTING

17.1 CONSENT REQUIRED FOR TRANSFER. Tenant agrees that it shall not assign, sublet, mortgage, hypothecate, or encumber this Lease, nor permit or allow the Premises or any part thereof to be used or occupied by others, without the prior written consent of Landlord in each instance. The actions described

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in the foregoing sentence are referred to collectively herein as “Transfers” and individually as a “Transfer.” If the Premises or any part thereof be sublet or occupied by anybody other than Tenant, Landlord may, after default by Tenant, collect rent from the subtenant or occupant and apply the net amount collected to the Rent herein reserved; but no Transfer, occupancy, or collection shall be deemed a waiver of the provisions hereof, the acceptance of the subtenant or occupant as tenant, or a release of Tenant from the further performance hereunder by Tenant. The consent by Landlord to a Transfer shall not relieve Tenant from obtaining the Landlord’s express written consent to any further Transfer. In no event shall any permitted sublessee assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Landlord’s prior written consent in each instance.

17.1.1 Corporate Transferor. If Tenant is a corporation, the provisions of § 17.1 shall apply to a transfer (by one or more transfers) of a majority of the stock of Tenant as if such transfer of a majority of the stock of Tenant were an assignment of this Lease (but subject to the limitations and provisions of § 17.13 below).

17.2 NOTICE OF INTENT TO TRANSFER. If Tenant shall at any time or times during the Term of this Lease desire to assign this Lease or sublet all or part of the Premises, Tenant shall give notice thereof (the “Transfer Notice”) to Landlord, which notice shall set forth all of the following:

(a) the proposed terms of the assignment or subletting, including (i) the effective or commencement date thereof, which shall be not less than thirty (30) nor more than one hundred eighty (180) days after the giving of such notice; (ii) in the case of a proposed assignment, the consideration therefor; and (iii) in the case of a proposed subletting, the rental rate to be paid by the proposed subtenant (including any escalation or Additional Rent payable), the term of the proposed sublease (including any renewal options), any work to be performed or paid for by Tenant, the amount of any security deposit, the cost and extent of any so-called “take-over” obligations to be assumed by Tenant on behalf of such subtenant, the amount of any rent concessions to be granted by Tenant, and any other additional monetary or so-called “business” terms or conditions;

(b) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business, and its proposed use of the Premises; and

(c) current financial information with respect to the proposed assignee or subtenant, including its most recent financial report, and any other information which may reasonably be required by Landlord.

17.3 LANDLORD’S RECAPTURE RIGHT. The Transfer Notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord’s designee) may, at its option, terminate this Lease as to all or the affected portion of the Premises (as the case may be) as of the effective date of the proposed Transfer. Landlord may exercise its recapture right by notice to Tenant at any time within thirty (30) days after Landlord’s receipt of Tenant’s Transfer Notice; and during such thirty-day period Tenant shall not assign this Lease nor sublet such space to any person.

17.3.1 Date of Termination. If Landlord exercises its option to terminate this Lease as provided in § 17.3 above, this Lease shall end and expire on the date that such Transfer was to be effective or commence, as the case may be, and the Base Rent and Additional Rent shall be paid and apportioned to such date.

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17.4 CONDITIONS OF CONSENT. If Landlord does not exercise its recapture right pursuant to § 17.3 above, and providing that Tenant is not in default of any of Tenant’s obligations under this Lease after notice and the expiration of any applicable grace period, Landlord’s consent (which must be in writing and in form reasonably satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed, provided the following conditions are met:

(a) Tenant shall have complied with the provisions of § 17.2 above, and Landlord shall not have exercised its recapture right pursuant to § 17.3 above within the time permitted therefor;

(b) In Landlord’s reasonable judgement the proposed assignee or subtenant is engaged in a business which would use the Premises, or the relevant part thereof, in a manner which is in keeping with the then-current standards of the Building, is limited to the use expressly permitted under this Lease, and will not violate any negative covenant or other restriction or agreement as to use contained in any other lease of space in the Complex;

(c) The proposed assignee or subtenant is a reputable entity or person of good character and with reasonably sufficient financial worth considering the responsibility involved (and in no event of less financial standing than Tenant), is not subject to any toxic or hazardous materials cleanup order with respect to any other property, and Landlord has been furnished with reasonable proof thereof;

(d) Neither the proposed assignee or sublessee nor any person which, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or sublessee or any person who controls the proposed assignee or sublessee, is then an occupant of any part of the Complex, provided Landlord then has suitable space in the Complex available for leasing. For purposes of this Lease control shall be deemed to mean ownership of more than fifty percent (50%) of all the voting stock of a corporation or more than fifty percent (50%) of all the legal and equitable interest in any other business entity;

(e) The proposed assignee or sublessee is not a person or entity with whom Landlord is then negotiating to lease space in the Building;

(f) The form of the proposed lease shall be in form reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article 17;

(g) There shall not be more than two (2) subtenants (not including the Permitted Occupant (as defined in § 17.14 below) of the Premises);

(h) The amount of the aggregate rent to be paid by the proposed subtenant is not less than the then-current market rent per rentable square foot for comparable space in the Complex, as though the Premises were vacant, and the rental and other terms and conditions of the sublease are the same as those contained in the proposed sublease furnished to Landlord in the Transfer Notice pursuant to § 17.2 above;

(i) Tenant shall reimburse Landlord on demand for any reasonable costs that may be incurred or paid by Landlord to third persons in connection with said assignment or sublease, including costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent; and

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(j) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to and approval by Landlord, nor shall any advertisement state the name (as distinguished from the address) of the Complex or the rental rate;

(k) Tenant shall not have listed the Premises for subletting or assignment at a rental rate less than the greater of (i) the Base Rent and Additional Rent then payable hereunder for such space or (ii) the Base Rent and Additional Rent at which Landlord is then offering to lease other comparable space in the Building; and

(1) The sublease shall not allow the use of the Premises or any part thereof for (i) the sale of food for on or off-premises consumption or (ii) use by a foreign or domestic governmental agency.

Whether or not Landlord shall grant consent, Tenant shall pay $500.00 towards Landlord’s review and processing expenses in connection with any Transfer request, as well as any reasonable legal fees incurred by Landlord, within thirty (30) days after written request by Landlord.

17.5 CONTINUATION OF LEASE TERMS. Each subletting pursuant to this Article 17 shall be subject to all of the covenants, agreements, terms, provisions, and conditions contained in this Lease. Notwithstanding any such subletting to any other subtenant and/or acceptance of Rent by Landlord from any subtenant, Tenant shall remain liable for the payment of the Base Rent and Additional Rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions, and conditions contained in this Lease on the part of Tenant to be performed and all acts and omissions of any licensee or subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease; and any such violation shall be deemed to be a violation by Tenant. Tenant further agrees that notwithstanding any such subletting, no other and further subletting of the Premises by Tenant or any person or entity claiming through or under Tenant shall or will be made except upon compliance with and subject to the provisions of this Article 17. If Landlord shall decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise its recapture right under § 17.3 above, Tenant shall indemnify, defend, protect, and hold Landlord harmless against and from any and all Claims resulting from any Claims that may be made against Landlord by the proposed assignee or sublessee or by any brokers or other persons claiming a commission or similar compensation in connection with the proposed assignment or sublease.

17.6 LAPSE OF CONSENT. In the event that Landlord consents to a proposed Transfer described in the Transfer Notice and Tenant fails to execute and deliver the assignment or sublease described in the Transfer Notice to which Landlord consented within one hundred twenty (120) days after the giving of such consent, then Tenant shall again comply with all of the provisions and conditions of § 17.2 above before assigning this Lease or subletting all or part of the Premises.

17.7 TRANSFER DOCUMENTATION. With respect to each and every Transfer authorized by Landlord under the provisions of this Lease, it is further agreed as follows:

(a) no subletting shall be for a term ending later than one day prior to the Expiration Date of this Lease;

(b) no sublease shall be valid, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord;

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(c) each sublease shall provide that it is subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and that in the event of termination (whether by voluntary surrender or otherwise), re-entry, or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title, and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord’s option, attorn to Landlord pursuant to the then-executory provisions of such sublease, except that Landlord shall not be (i) liable for any previous act or omission of Tenant under such sublease; (ii) subject to any offset, credit, or allowance not expressly provided in such sublease which theretofore accrued to such subtenant against Tenant or (iii) bound by any previous modification of such sublease or by any previous prepayment of more than one month’s rentals; and

(d) each assignment or sublease document must provide that the assignee or subtenant expressly assumes all obligations of the Tenant under the Lease as joint and several obligations without any release of Tenant.

17.8 TRANSFER PREMIUM. If Landlord shall give its consent to any assignment of this Lease or to any sublease, Tenant shall in consideration therefor pay to Landlord, as Additional Rent, the following amounts (collectively the “Transfer Premium”):

(a) in the case of an assignment, an amount equal to fifty percent (50%) of all sums and other considerations paid to Tenant by the assignee for such assignment, not including sums paid for the sale of Tenant’s Property, and excluding the following: (i) then-customary brokerage commissions being paid by Landlord for leasing of space in the Building or, if less, the brokerage commission paid by Tenant in connection with the assignment; (ii) reasonable legal fees and disbursements; and (iii) reasonable amounts paid by Tenant for tenant improvements constructed for the assignee; and

(b) in the case of a sublease, fifty percent (50%) of any rents, additional charge, or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the Base Rent and Additional Rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof, including sums paid for the sale or rental of Tenant’s Property, but excluding the following: (i) in the case of the sale or lease of Tenant’s Property, the fair-market value of Tenant’s Property; (ii) then-customary brokerage commissions being paid by Landlord for leasing of space in the Building or, if less, the brokerage commission paid by Tenant in connection with the sublease; (iii) reasonable legal fees and disbursements; and (iv) reasonable amounts paid by Tenant for tenant improvements constructed for the subtenant.

The sums payable as the Transfer Premium under this § 17.8 shall be paid to Landlord as and when payable by the subtenant or assignee to Tenant.

17.9 ASSUMPTION BY TRANSFEREE. Any Transfer, whether made with Landlord’s consent pursuant to § 17.1 or without Landlord’s consent pursuant to § 17.1.1, shall be made only if, and shall not be effective until, the assignee or subtenant shall execute, acknowledge, and deliver to Landlord an agreement in form and substance satisfactory to Landlord under which the assignee or transferee shall assume the obligations of this Lease on the part of Tenant to be performed or observed, from and after the date of

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Transfer, and whereby the assignee or transferee shall agree that the provisions in § 17.1 shall, notwithstanding such Transfer, continue to be binding upon it in respect of all future Transfers. The original named Tenant covenants that, notwithstanding any Transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of Base Rent and/or Additional Rent by Landlord from an assignee, transferee, or any other party, the original named Tenant shall remain fully liable for the payment of the Base Rent and Additional Rent and for the other obligations of this Lease on the part of Tenant to be performed or observed.

17.10 NO WAIVER OR DISCHARGE. The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant and the due performance of the obligations of this Lease on Tenant’s part to be performed or observed shall not be discharged, released, or impaired in any respect by any agreement or stipulation made by Landlord extending the time of, or modifying any of the obligations of, this Lease, or by any waiver or failure of Landlord to enforce any of the obligations of this Lease.

17.11 LISTING OF NAME. The listing of any name other than that of Tenant, whether on the doors of the Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any Transfer of this Lease or to any sublease of the Premises or to the use or occupancy of the Premises by others.

17.12 NET PROFITS AGREEMENT. Anything contained in the foregoing provisions of this Article 17 to the contrary notwithstanding, neither Tenant nor any other person or entity having an interest in the possession, use, occupancy, or utilization of the Premises shall enter into any lease, sublease, license, concession, or other agreement for use, occupancy, or utilization of space in the Premises which provides for rental or other payment for such use, occupancy, or utilization based, in whole or in part, on the net income or profits derived by any person from the premises leased, used, occupied, or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales); and any such purported lease, sublease, license, concession, or other agreement shall be absolutely void and ineffective as a conveyance of any right or interest in the possession, use, occupancy, or utilization of any part of the Premises.

17.13 AFFILIATES AND INVESTORS. Notwithstanding anything to the contrary in this Article 17, Landlord’s consent shall not be required in the event parties owning stock of Tenant desire to transfer a majority of the stock of Tenant to any party or parties, or in the event Tenant assigns this Lease or sublets the Premises or any portion thereof to any corporation or entity which controls, is controlled by, or is under common control with Tenant, provided and subject to the following conditions:

(a) Tenant shall not be in default of any of the terms, covenants, or conditions on Tenant’s part to observe or perform hereunder;

(b) such sublet or assignment shall be subject to all of the terms, covenants, and conditions of this Lease;

(c) Tenant shall notify Landlord of such transfer, sublet, or assignment in accordance with § 17.2 hereof and, in the event of a sublease or transfer to an affiliate, furnish Landlord with reasonably satisfactory evidence that such sublessee or assignee controls, is controlled by, or is under common control with Tenant; and

(d) in the event of a merger, consolidation, or transfer of substantially all of Tenant’s assets, the successor to Tenant has a net worth, computed in accordance with generally-accepted accounting principles, at least equal to the greater of (i) the net worth of Tenant immediately prior to such merger, consolidation, or transfer or (ii) the net worth of Tenant herein named on the date of this Lease; and proof

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satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction.

As used herein, the terms control and common control shall be deemed to mean that the ownership of fifty percent (50%) or more of all of the issued and outstanding voting shares of such corporation, or fifty percent (50%) or more of all the legal and equitable interest in any such business entities.

17.14 PERMITTED OCCUPANTS. Landlord hereby agrees that the provisions of this Article 17 shall not apply to the shared occupancy of individual offices in the Premises with Tenant by individuals renting not more than one (1) such office (the “Permitted Occupant”), provided that the space occupied by the Permitted Occupant shall not be separately demised or contain separate entrances, demarcations, or reception areas and the occupancy by the Permitted Occupant shall be upon and subject to all of the terms and conditions of this Lease.

18    SUBORDINATION AND ATTORNMENT

18.1 SUBORDINATION OF LEASE. This Lease and all rights of Tenant hereunder are and shall be subject and subordinate in all respects to (a) all ground leases, overriding leases, and underlying leases of the Building, Property, and/or the Complex now or hereafter existing; (b) all mortgages which may now or hereafter affect the Building, Property, or Complex and any of such leases, whether or not such mortgages shall also cover other lands and/or buildings; (c) each and every advance made or hereafter to be made under such mortgages; and (d) to all renewals, modifications, replacements, and extensions of such leases and such mortgages and spreaders and consolidations of such mortgages. This § 18.1 shall be self-operative, and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver any instrument that Landlord, the lessor of any such lease or the holder (“Holder”) of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination. The leases to which this Lease is, at the time referred to, subject and subordinate pursuant to this Article 18 are hereinafter sometimes referred to as “Superior Leases”; the mortgages to which this Lease is, at the time referred to, subject and subordinate are hereinafter sometimes referred to as “Superior Mortgages”; and the lessor of a superior lease or its successor in interest at the time referred to is sometimes hereinafter referred to as a “Lessor.” Notwithstanding the foregoing, Tenant agrees, upon written request from Landlord or any Holder or Lessor, to reorder the relative priority of the Lease with respect to any particular Superior Mortgage or Superior Lease so as to subordinate the lien of any such Superior Mortgage or Superior Lease to the Lease. Tenant agrees to execute any instrument which Landlord or any Holder or Lessor may present in order to effect such prioritization of the Lease, provided that such instrument does not modify any material term of the Lease or increase Tenant’s obligations thereunder.

18.2 NOTICE AND CURE RIGHT. In the event of any action or omission of Landlord which would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right unless and until (i) Tenant shall have given written notice of such act or omission to the Holder of each Superior Mortgage and the Lessor of each Superior Lease whose name and address shall previously have been furnished to Tenant in writing; and (ii) unless such act or omission shall be one which is not capable of being remedied by Landlord or such mortgage Holder or Lessor within a reasonable period of time, a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Holder or Lessor shall have become entitled under such Superior Mortgage or Superior Lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such Holder or Lessor shall with due diligence give Tenant written notice of intention

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to remedy such act or omission and shall thereafter diligently and continuously prosecute such cure to completion.

18.3 ATTORNMENT. If the Lessor of a Superior Lease or the Holder of a Superior Mortgage shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord’s rights or other person having or acquiring title by virtue of such foreclosure or termination (herein sometimes referred to as “Successor Landlord”) and upon such Successor Landlord’s written agreement to accept Tenant’s attornment, Tenant shall attorn to and recognize such Successor Landlord as Tenant’s landlord under this Lease and shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment this Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions, and covenants in this Lease, except as follows:

(a) the Successor Landlord shall not be liable for any previous act or omission of Landlord under this Lease;

(b) the Successor Landlord shall not be subject to any offset (unless expressly provided for in this Lease) which shall have theretofore accrued to Tenant against Landlord;

(c) the Successor Landlord shall not be bound by any previous modification of this Lease, unless expressly provided for in this Lease, or by any previous prepayment of more than one month’s Base Rent, unless such modification or prepayment shall have been expressly approved in writing by the Lessor of the Superior Lease or the Holder of the Superior Mortgage through or by reason of which the Successor Landlord shall have succeeded to the rights of Landlord under this Lease.

19    FINANCING REQUIREMENTS

19.1 LENDER-REQUESTED MODIFICATIONS. If, in connection with obtaining financing or refinancing for the Property or Complex a prospective lender shall request reasonable modifications to this Lease as a condition to such financing or refinancing, Tenant shall not withhold, delay, or unreasonably condition its consent thereto. It is agreed that, among the modifications which shall be deemed reasonable, are modifications to the subordination and attornment provisions of this Lease, modifications to the notice provisions of this Lease, modifications to the provisions of this Lease which permit the lender to cure any defaults by Landlord, and modifications to the provisions which grant additional time to cure as may be reasonably required by the lender.

19.2 FAILURE TO COMPLY. If Tenant fails or refuses to execute and deliver to Landlord, within fifteen (15) days after written notice to do so, the amendment(s) to this Lease accomplishing such reasonable modification(s), Landlord, at its sole option, shall have the right either (a) to terminate this Lease or (b) to execute the amendment for and on behalf of Tenant as its attorney-in-fact. Tenant hereby irrevocably appoints Landlord as its attorney-in-fact solely to execute any documents required to carry out the intent of § 19.1 above on behalf of Tenant.

20    DEFAULT

20.1 TENANT’S DEFAULT. Tenant’s failure to perform any of its obligations under this Lease when due and in the manner required shall constitute a material breach and default (“Event of Default”) of this Lease by Tenant, subject to any cure period(s) permitted or available under applicable laws or statutes. In addition, the following shall also be deemed Events of Default hereunder:

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(a) Tenant’s failure to take possession of the Premises for a period of sixty (60) days or longer after the Commencement Date;

(b) Tenant’s abandonment or vacation of the Premises;

(c) any material misrepresentation or omission herein or in any financial statements or other materials provided by Tenant or any Guarantor in connection with negotiating or entering this Lease or in connection with any Transfer under Article 17;

(d) cancellation of any guaranty of this Lease by any Guarantor;

(e) failure by Tenant to cure within any applicable times permitted thereunder any default under any other lease for space in the Complex or any other buildings owned or managed by Landlord or its affiliates now or hereafter entered by Tenant; and any Default hereunder not cured within the times permitted for cure herein shall, at Landlord’s election, constitute a default under any other such lease or leases;

(f) The levy of a writ of attachment or execution on this Lease or on any of Tenant’s property;

(g) Tenant’s or any Guarantor’s general assignment for the benefit of creditors or arrangement, composition, extension, or adjustment with its creditors;

(h) Tenant’s or any Guarantor’s filing of a voluntary petition for relief, or the filing of a petition against Tenant or any Guarantor in a proceeding under the Federal Bankruptcy laws or other insolvency laws which is not withdrawn or dismissed within forty-five (45) days thereafter; or, under the provisions of any law providing for reorganization or winding up of corporations, the assumption by any court of competent jurisdiction of jurisdiction, custody, or control of Tenant or any substantial part of its property, or of any Guarantor, where such jurisdiction, custody, or control remains in force unrelinquished, unstayed, or unterminated for a period of forty five (45) days;

(i) In any proceeding or action in which Tenant is a party, the appointment of a trustee, receiver, agent; or custodian to take charge of the Premises or Tenant’s Property for the purpose of enforcing a lien against the Premises or Tenant’s Property; or

(j) If Tenant or any Guarantor is a partnership or consists of more than one (1) person or entity, the involvement of any partner of the partnership or other person or entity in any of the acts or events described in subsections (i) through (1) above.

20.2 LANDLORD’S REMEDIES. Upon the occurrence of an Event of Default hereunder, Landlord shall have the right, in addition to any other rights or remedies Landlord may have under Laws, at Landlord’s option, without further notice or demand of any kind, to elect to do one of the following alternatives:

(i) Terminate, this Lease and Tenant’s right to possession of the Premises, re-enter the Premises, and take possession thereof; and Tenant shall have no further claim to the Premises or under this Lease; or

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(ii) Continue this Lease in effect and collect any unpaid Rent or other charges which have theretofore accrued or which thereafter become due and payable. It is intended hereunder that Landlord have the remedy described in California Civil Code § 1951.4, which provides that a landlord may continue a lease in effect after a tenant’s breach and abandonment and recover rent as it becomes due, if tenant has the right to sublease or assign, subject only to reasonable limitations.

In the event of any re-entry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant’s Property from the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant.

20.2.1 No Waiver of Default. The waiver by Landlord of any Event of Default or of any other breach of any term, covenant, or condition of this Lease shall not be deemed a waiver of such term, covenant, or condition or of any subsequent breach of the same or any other term, covenant, or condition. Acceptance of Rent by Landlord subsequent to any Event of Default or breach hereof shall not be deemed a waiver of any preceding Event of Default or breach other than the failure to pay the particular Rent so accepted, regardless of Landlord’s knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant, or condition of this Lease, unless Landlord gives Tenant written notice of such waiver. Tenant should not rely upon Landlord’s failure or delay in enforcing any right or remedy hereunder.

20.2.2 Landlord’s Right to Cure. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to), without waiving such default, perform the same for the account and at the expense of Tenant. Tenant shall pay Landlord all costs of such performance promptly upon receipt of a bill therefor.

20.3 DAMAGES. Should Landlord elect to terminate this Lease under the provisions of § 20.2 (i) above, Landlord may recover as damages from Tenant the following:

(a) Past Rent: The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus

(b) Rent Prior to Award: The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus

(c) Rent After Award: The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could have been reasonably avoided; plus

(d) Proximately Caused Damages: Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys’ fees), incurred by Landlord in (i) retaking possession of the Premises; (ii) maintaining the Premises after Tenant’s default; (iii) preparing the Premises for reletting to a new tenant, including any repairs or alterations; and (iv) reletting the Premises, including brokers’ commissions.

“The worth at the time of the award” as used in subsections (a) and (b) above is to be computed by allowing interest at the rate of ten percent (10%) per annum or, if different, the legal rate then applicable

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in California. “The worth at the time of the award” as used in subsection (c) above is to be computed by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%).

20.4 LANDLORD’S DEFAULT. If Landlord fails to perform any covenant, condition, or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying a default and the relevant Lease provision, or if Landlord fails within that thirty-day period after notice to commence to cure any such default which cannot reasonably be cured within thirty (30) days, then, subject to § 21.1 below, Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord’s breach. Tenant shall not have the right to terminate this Lease or to withhold, reduce, or offset any amount against any payments of Rent or any other charges due and payable under this Lease, except to the extent that a specific Lease provision permits such termination or withholding, reduction, or offset of Rent

20.5 HOLDER’S RIGHT TO CURE. Tenant shall give any Holder a copy, by registered mail, of any notice of default served upon Landlord, provided that Tenant previously has been notified in writing of the address of such Holder. If Landlord fails to cure such default within the time provided in this Lease, any such Holder shall have an additional forty-five (45) days within which to cure such default by Landlord or, if such default cannot reasonably be cured within that time, such additional time as may be necessary, provided that within such forty-five (45) day period the Holder has commenced and is pursuing the remedies necessary to cure such default (including commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so pursued.

20.6 SURVIVAL OF REMEDIES. The remedies permitted under this Article 20, the parties’ indemnities under §§ 14.4.3, 14.4.4, and l4.4.5, and § 29.5 below shall survive the termination of this Lease.

21    LIMITATIONS ON LANDLORD’S LIABILITY

21.1 PERSONAL LIABILITY. The liability of Landlord to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord’s operation, management, leasing, repair, renovation, alteration, or any other matter relating to the Property or the Premises shall be limited to the interest of Landlord in the Property (and the rental proceeds thereof). Under no circumstances shall Landlord ever be liable for consequential or punitive damages, including damages for lost profits or for business interruption. Tenant agrees to look solely to Landlord’s interest in the Property (and the rental proceeds thereof) for the recovery of any judgement against Landlord, and Landlord shall not be personally liable for any such judgement or deficiency after execution thereon. The limitations of liability contained in this Article 21 shall apply equally and inure to the benefit of Landlord’s present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents, and employees, and their respective partners, heirs, successors, and assigns. Under no circumstances shall any present or future general or limited partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust) or corporate officer, director, or shareholder (if Landlord or any partner of Landlord is a corporation or company) or member (if Landlord is a limited liability company) have any liability for the performance of Landlord’s obligations under this Lease.

21.2 LIABILITY UPON TRANSFER. The term Landlord as used in this Lease, so far as covenants or obligations on the part of the Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title to, or a lessee’s interest in a ground lease or master lease of the Property. In the event of any transfer, assignment, or other conveyance or transfer of any such title or interest, Landlord herein named (and in case of subsequent transfers or conveyances, the current grantor) shall be automatically freed and relieved from and after the date of such transfer,

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assignment, or conveyance of all liability with respect to the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed; and, without further agreement, the transferee of such title or interest shall be deemed to have assumed and agreed to observe and perform any and all obligations of Landlord hereunder, during its ownership of the Premises. Landlord may transfer its interest in the Premises without the consent of Tenant, and such transfer or subsequent transfer shall not be deemed a violation on Landlord’s part of any of the terms and conditions of this Lease.

22    ESTOPPEL CERTIFICATES

22.1 REQUEST AND DELIVERY. Within ten (10) days following any written request Landlord may make from time to time, Tenant without any charge therefor, shall execute, acknowledge, and deliver a statement certifying the following: (a) the Commencement Date of this Lease; (b) the fact that this Lease is unmodified and in full force and effect or, if there have been modifications hereto, that this Lease is in full force and effect, as modified, and stating the date and nature of such modifications; (c) the date to which the Rent and other sums payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in the statement; and (e) such other matters as may be reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 22 may be relied upon by any Holder, Lessor, beneficiary, purchaser, or prospective purchaser of the Building, the Complex, or any interest therein. Tenant’s failure to deliver any such statement within the specified ten-day period shall constitute a material default hereunder, and Tenant shall indemnify, defend, protect, and hold Landlord harmless from and against any and all Claims which Landlord may sustain or incur as a result of or in connection with Tenant’s failure or delay in delivering such statement.

22.2 ELECTION TO SELL BUILDING. If Landlord elects to sell the Building or to obtain loans secured by a lien on the Building, Tenant, promptly after demand, shall include with the estoppel certificate(s) provided to any prospective purchaser or lender as required under this Article 22 any financial statements of Tenant reasonably required by the purchaser or lender. The financial statements so provided shall be kept confidential as to any parties other than the purchaser or lender.

23    NOTICES

23.1 MANNER OF DELIVERY. Any notice required or permitted under this Lease shall be in writing and shall be delivered in at least one of the following ways: (a) personally or by private hand-delivery messenger service; (b) by depositing the same in the United States mail, postage prepaid, registered or certified, return receipt requested; or (c) by depositing such notice, postage prepaid, with Federal Express or another nationally-recognized private overnight delivery service. Each such notice shall be addressed to the intended recipient at such party’s address set forth as follows, or at such other address as such party has theretofore specified by written notice delivered in accordance with this § 23.1:

if to Landlord:

KASHIWA FUDOSAN AMERICA, INC.

c/o Cushman & Wakefield of California, Inc.

Attn: Property Manager

400 Oyster Point Boulevard, Suite 117

South San Francisco, CA 94080

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copy to:

Charles Dunn Real Estate Services, Inc., Agent

Attn: Oyster Point Asset Manager

4041 MacArthur Boulevard, Suite 475

Newport Beach, CA 92260

if to Tenant:

NOVACEA, INC.

Attn: General Manager

400 Oyster Point Boulevard, Suite 200

South San Francisco, CA 94080

23.2 REQUIRED CONTENTS. Every notice (other than the giving or withholding of consent or approval under the provisions of the Lease) given to a party shall state the section of the Lease pursuant to which the notice is given; the period of time within which the recipient of the notice must respond (or, if no response is required, a statement to that effect); and if applicable, that the failure to object to the notice within the stated time period will be deemed to be the equivalent of the recipient’s approval, consent to, or satisfaction with the subject matter of the notice.

23.3 PRESUMPTION OF RECEIPT. Any notice delivered personally or by private messenger service shall be deemed delivered on the next day following the deposit of such notice at the recipient’s address. Any notice delivered by Federal Express or another nationally-recognized private overnight delivery service shall be deemed delivered on the earlier of (y) the second day following deposit thereof with the carrier or (z) the delivery date shown on the carrier’s record of delivery. Any notice delivered by mail in the manner specified in § 23.1 shall be deemed delivered on the earlier of (a) the third day following deposit thereof in the United States Mail or (b) the delivery date shown on the return receipt prepared in connection therewith. Refusal by Tenant or Landlord to accept either certified or registered mail shall constitute a waiver of such notice by the respective party.

24    BROKERS

24.1 TENANT’S REPRESENTATION. Tenant represents and warrants to Landlord that Tenant has dealt with no broker in connection with this Lease other than BT Commercial and Cushman & Wakefield of California, Inc. Tenant shall be responsible for all foreseeable consequences of damages (including attorneys’ fees and costs) resulting from any claims that may be asserted against Landlord by any other broker, finder, or other person with whom Tenant has or purportedly has dealt in connection with this Lease, and Tenant agrees to indemnify, defend, protect, and hold Landlord harmless in connection with any such Claims which may be asserted.

25    RIGHTS RESERVED TO LANDLORD

25.1 ACCESS TO PROPERTY. All of the Property except the inside surfaces of all walls, windows, and doors bounding the Premises (including exterior Building walls, core corridor walls and doors, and any core corridor entrance) and any space in or adjacent to the Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric, or other utilities, sinks or other Building facilities, and the use thereof, as well as access thereto through the Premises for the purpose of operation, maintenance, decoration, and repair, are reserved to Landlord. Tenant shall permit Landlord to install, use, replace, and maintain pipes, ducts, and conduits within the demising walls, bearing columns, and ceilings of the Premises.

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25.2 CONTROL OF PROPERTY. Except to the extent expressly limited herein, Landlord reserves full rights to control the Property (which rights may be exercised without subjecting Landlord to claims for constructive eviction, abatement of Rent, damages, or other claims of any kind), including more particularly the following rights:

(a) Name, Address, Access. To change the name or street address of the Property; install and maintain signs on the exterior and interior of the Property; retain at all times, and use in appropriate instances, keys to all doors within and into the Premises; grant to any Person the right to conduct any business or render any service at the Property, whether or not it is the same or similar to the use permitted Tenant by this Lease; and have access for Landlord and other tenants of the Property to any mail chutes located on the Premises according to the rules of the United States Postal Service.

(b) Entry into Premises. To enter the Premises at reasonable hours for reasonable purposes, including inspection and supplying cleaning service or other services to be provided Tenant hereunder, to show the Premises to current and prospective lenders, ground lessors, insurers, and prospective purchasers, tenants and brokers, at reasonable hours; and if Tenant shall abandon the Premises at any time, or shall vacate the same during the last three (3) months of the Term, to decorate, remodel, repair, or alter the Premises.

(c) Safety Measures. To limit or prevent access to the Property, shut down elevator service, activate elevator emergency controls, or otherwise take such action or preventative measures deemed necessary by Landlord for the safety of tenants or other occupants of the Property or the protection of the Property and other property located thereon or therein, in case of fire, invasion, insurrection, riot, civil disorder, public excitement or other dangerous condition, or threat thereof.

(d) Improvements. To decorate and to make alterations, additions and improvements, structural or otherwise, in or to the Property or any part thereof, and any adjacent building, structure, parking facility, land, street or alley (including changes and reductions in corridors, lobbies, parking facilities and other public areas and the installation of kiosks, planters, sculptures, displays, escalators, mezzanines, and other structures, facilities, amenities and features therein, and changes for the purpose of connection with or entrance into or use of the Property in conjunction with any adjoining or adjacent building or buildings, now existing or hereafter constructed). In connection with such matters, or with any other repairs, maintenance, improvements or alterations, in or about the Property, Landlord may erect scaffolding and other structures reasonably required, and during such operations may enter upon the Premises and take into and upon or through the Premises, all materials required to make such repairs, maintenance, alterations or improvements, and may close public entry ways, other public areas, restrooms, stairways or corridors.

25.3 LANDLORD’S RIGHT TO MAINTAIN. Except as expressly otherwise provided in this Lease, Landlord shall have no liability to Tenant by reason of any inconvenience, annoyance, interruption, or injury to business arising from Landlord’s making any repairs or changes which Landlord is required or permitted to make by this Lease, by any other lease or agreement affecting the Property, or by Law, in or to any portion of the Property, Complex, or the Premises, including the Systems and Equipment and appurtenances of the Property or the Premises, provided that Landlord shall use due diligence with

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respect thereto and shall perform such work, except in case of emergency, at times reasonably convenient to Tenant and otherwise in such manner as will not materially diminish Tenant’s beneficial enjoyment of the Premises for their intended use.

25.4 REASONABLE NOTICE. In connection with entering the Premises to exercise any of the foregoing rights, Landlord shall: (a) provide reasonable advance written or oral notice to Tenant’s on-site manager or other appropriate person (except in emergencies, or for routine cleaning or other routine matters), and (b) take reasonable steps to avoid any unreasonable interference with Tenant’s business.

26    HOLDING OVER

26.1 HOLDOVER. Unless Landlord expressly agrees otherwise in writing, Tenant shall pay Landlord two hundred percent (200%) of the amount of Rent then applicable prorated on per diem basis for each day Tenant shall retain possession of the Premises or any part thereof after expiration of the Term or earlier termination of this Lease, together with all damages sustained by Landlord on account thereof. The foregoing provisions shall not serve as permission for Tenant to hold over, nor serve to extend the Term, although Tenant shall remain bound to comply with all provisions of this Lease until Tenant vacates the Premises and shall be subject to the provisions of § 11.1 above.

26.2 PERMISSIVE MONTH-TO-MONTH TENANCY. Notwithstanding the foregoing to the contrary, at any time before or after expiration or earlier termination of the Term of the Lease, Landlord may serve notice advising Tenant of the amount of Rent and other terms required, should Tenant desire to enter a month-to-month tenancy. If Tenant shall hold over more than one full calendar month after such notice, Tenant shall thereafter be deemed a month-to-month tenant, on the terms and provisions of this Lease then in effect, as modified by Landlord’s notice, except that Tenant shall not be entitled to, any renewal or expansion rights contained in this Lease or any amendments hereto.

27    PARKING

27.1 AVAILABLE PARKING. Subject to the terms and conditions contained in the balance of this Article 28, Landlord agrees to make available to Tenant during the Term of this Lease and any renewal term up to a maximum of eighty-nine (89) parking spaces on a non-exclusive basis in the area(s) designated by Landlord for parking in the Building’s parking lots and/or facility (the “Parking Facility”). Said parking spaces shall be in locations designated by Landlord, and parking shall be on a first-come-first-served, unassigned, nonreserved basis. Landlord reserves the right to designate different locations or different parking areas for Tenant’s use without any liability to Tenant and Tenant agrees that any change shall not give rise to any claims or offset against Landlord hereunder. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord’s parking operator. Landlord reserves the right in its sole and absolute discretion to restrict or prohibit the use of the Parking Facility for any vehicles other than passenger automobiles, such as full-sized vans or trucks. Tenant shall not permit any vehicles belonging to Tenant or Tenant’s employees, agents, customers, contractors, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. A failure to comply with the foregoing provisions shall afford Landlord the right without notice to remove any vehicles involved and to charge the cost to Tenant, which cost shall be immediately due and payable upon demand by Landlord.

27.2 USE AT TENANT’S OWN RISK. Landlord shall have no obligation to monitor the use of the Parking Facility. Tenant’s and its employees’ use of the Parking Facility shall be at the sole risk of Tenant and its employees. Unless caused by the willful harmful act of Landlord, Landlord shall have no responsibility or liability for any injury or damage to any person or property by or as a result of the use of the Parking Facility (or substitute parking) by Tenant and its employees, whether by theft, collision, criminal activity,

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or otherwise, and Tenant hereby assumes, for itself and its employees, all risks associated with any such occurrences in or about the Parking Facility.

28    MISCELLANEOUS PROVISIONS.

28.1 GENERAL DEFINITIONS. The definitions which follow shall apply generally to the provisions of this Lease.

(a) The term business days means Monday through Friday inclusive, excluding Holidays as defined in § 8.1.1 above. Throughout this Lease, wherever days is used the term shall refer to calendar days. Wherever the term business days is used the term shall refer to business days as defined hereunder.

(b) The term mortgage shall include any mortgage or deed of trust, and the term mortgagee shall include a trustee.

(c) The terms include, including, and such as shall each be construed as if followed by the phrase “without limitation.” The rule of eiusdem generis shall not be applicable to limit a general statement following or referrable to an enumeration of specific matters to matters similar to the matters specifically mentioned.

(d) The term obligations under this Lease and words of like import shall mean the covenants to pay Rent and Additional Rent under this Lease and all of the other covenants and conditions contained in this Lease. Any provision in this Lease that one party or the other or both shall do or not do or shall cause or permit or not cause or permit a particular act, condition, or circumstance shall be deemed to mean that such party so covenants or both parties so covenant, as the case may be.

(e) The term Tenant’s obligations hereunder and words of like import and the term Landlord’s obligations hereunder and words of like import shall mean the obligations under this Lease which are to be performed or observed by Tenant, or by Landlord, as the case may be. Reference to performance of either party’s obligations under this lease shall be construed as “performance and observance.”

(f) Reference to Tenant being or not being in default hereunder or words like import shall mean that Tenant is in default in the performance of one or more of Tenant’s obligations hereunder, or that Tenant is not in default in the performance of any of Tenant’s obligations hereunder, or that a condition of the character described in § 20.1 above has occurred and continues or has not occurred or does not continue, as the case maybe.

(g) References to Landlord as having no liability to Tenant or being without liability to Tenant shall mean that Tenant is not entitled to terminate this Lease or to claim actual or constructive eviction, partial or total, or to receive any credit, allowance, setoff, abatement, or diminution of Rent, or to be relieved in any manner of any of its other obligations hereunder, or to be compensated for loss or injury suffered or to enforce any other kind of liability whatsoever against Landlord under or with respect to this Lease or with respect to Tenant’s use or occupancy of the Premises.

(h) The term requirements of insurance bodies and words of like import shall mean rules, regulations, orders, and other requirements of the California Board of Fire Underwriters and/or the California Fire Insurance Rating Organization and/or any

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other similar body performing the same or similar functions and having jurisdiction or cognizance of the Property and/or the Premises.

(i) The term repair shall be deemed to include restoration and replacement as may be necessary to achieve and/or maintain good working order and condition.

(j) Reference to termination of this Lease includes expiration or earlier termination of the Term of this Lease or cancellation of this Lease pursuant to any of the provisions of this Lease or to Law. Upon a termination of this Lease, the Term and estate granted by this Lease shall end at noon of the date of termination as if such date were the date of expiration of the Term of this Lease, and neither party shall have any further obligation or liability to the other after such termination, except as shall be expressly provided for in this Lease and except for any such obligation as by its nature or under the circumstances can only be, or by the provisions of this Lease may be, performed after such termination; and in any event, unless expressly provided to the contrary in this Lease, any liability for a payment or obligation which shall have accrued to or with respect to any period ending at the time of termination shall survive the termination of this Lease.

(k) The term in full force and effect when herein used in reference to this Lease as a condition to the existence or exercise of a right on the part of Tenant shall be construed in each instance as including the further condition that at the time in question no default on the part of Tenant exists, and no event has occurred which has continued to exist for such period of time (after the notice, if any, required by this Lease), as would entitle Landlord to terminate this Lease or to dispossess Tenant.

(1) The term Tenant shall mean Tenant herein named or any assignee, heir, distributee, executor, administrator, legal representative, or other successor in interest (immediate or remote) of Tenant herein named; while such Tenant or such assignee or other successor in interest, as the case may be, is in possession of the Premises as owner of the Tenant’s estate and interest granted by this Lease and also, if Tenant is not a single individual or a corporation, all of the persons, firms, and corporations then comprising Tenant; and their liability hereunder shall be joint and several.

28.2 LIGHT AND AIR. No diminution of light, air or view by any structure which may hereafter be erected (whether or not by Landlord) shall entitle Tenant to any reduction of Rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease.

28.3 WAIVER OF TERMS. If either Landlord or Tenant waives the performance of any term, covenant, or condition contained in this Lease, such waiver shall not be deemed to be a waiver of the term, covenant, or condition itself or a waiver of any subsequent breach of the same or any other term, covenant, or condition contained herein. Furthermore, the acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant, or condition of this Lease, regardless of Landlord’s knowledge of such preceding breach at the time Landlord accepts such Rent. Failure by Landlord to enforce any of the terms, covenants, or conditions of this Lease for any length of time shall not be deemed to waive or to decrease the right of Landlord to insist thereafter upon strict performance by Tenant. Waiver by Landlord of any term, covenant, or condition contained in this Lease may only be made by a written document signed by Landlord.

28.4 FAILURE TO DELIVER STATEMENTS. Landlord’s failure during the Term of this Lease to prepare and deliver any of the Statements, estimates, notices, or bills contemplated or required under this Lease, or

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Landlord’s failure to make a demand, shall not in any way cause Landlord to forfeit or surrender its rights to collect any of the foregoing items of Rent which may have become due during the Term of this Lease.

28.5 ATTORNEY’S FEES. In the event that any action or proceeding (including arbitration) is brought to enforce or interpret any term, covenant, or condition of this Lease on the part of Landlord or Tenant, the prevailing party in such action or proceeding (whether after trial or upon appeal) shall be entitled to recover from the party not prevailing its expenses therein, including reasonable attorneys’ fees and all allowable costs as fixed by the court.

28.6 JURY TRIAL. Tenant and Landlord each hereby waive their respective rights to a trial by jury under applicable Laws in the event of any litigation or dispute between Landlord and Tenant arising out of or in connection with this Lease and the parties’ performance thereunder.

28.7 MERGER. Notwithstanding the acquisition (if same should occur) by the same party of the title and interests of both Landlord and Tenant under this Lease, there shall never be a merger of the estates of Landlord and Tenant under this Lease, but instead the separate estates, rights, duties, and obligations of Landlord and Tenant, as existing hereunder, shall remain unextinguished and continue, separately, in full force and effect until this Lease expires or otherwise terminates in accordance with the express provisions herein contained.

28.8 NO MERGER ON VOLUNTARY SURRENDER. A voluntary or other surrender of this Lease by Tenant or the mutual cancellation of this Lease shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies, or may, at the option of Landlord, operate as an assignment to it of any or all such subleases or subtenancies.

28.9 CONSENT. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding, or delaying by Landlord of any consent, approval, statement, or satisfaction; and in such event, Tenant’s only remedies therefor shall be an action for specific performance, injunction, or declaratory judgement to enforce any right to such consent, approval, statement, or satisfaction.

28.10 COUNTERPARTS. This Lease may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

28.11 FINANCIAL STATEMENTS. In order to induce Landlord to enter into this Lease, Tenant agrees that it shall promptly furnish Landlord, from time to time, upon Landlord’s written request, with financial statements reflecting Tenant’s current financial condition. Tenant represents and warrants that all financial statements, records, and information furnished by Tenant to Landlord in connection with this Lease are and shall be true, correct, and complete in all respects.

28.12 GENDER AND NUMBER. Words used in neuter gender include the feminine and masculine, where applicable, and words used in the singular or plural shall include the opposite number if appropriate.

28.13 JOINT AND SEVERAL OBLIGATION. If more than one person executes this Lease as Tenant, each of them is jointly and severally liable for the keeping, observing, and performing of all of the terms, covenants, conditions, provisions, and agreements of this Lease to be kept, observed, and performed by Tenant. The term Tenant as used in this Lease shall mean and include each of such signatories jointly and severally. The act of or notice from, or notice or refund to, or the signature of, any one or more of such signatories with respect to the tenancy or this Lease, including any renewal, extension, expiration, termination, or modification of this Lease, shall be binding upon each and all of the persons executing

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this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed.

28.14 HEADINGS AND SECTION NUMBERS. The headings and titles of the articles and sections of this Lease are used for convenience only and shall have no effect upon the construction or interpretation of this Lease. Wherever a reference is made in this Lease to a particular article or section, such reference shall be deemed to include all subsections following such section reference, unless the contrary is expressly provided in connection with such reference. All references in this Lease to numbered articles, numbered sections, and lettered exhibits are references to articles and sections of this Lease and exhibits annexed to (and thereby made part of) this Lease, as the case may be, unless expressly otherwise designated in the context.

28.15 TIME. Time is of the essence of this Lease and all of its provisions.

28.16 APPLICABLE LAW. This Lease shall in all respects be governed by and interpreted in accordance with the laws of the State of California without reference to its conflicts of law principles. If suit is brought by a party to this Lease, the parties agree that jurisdiction of such action shall be vested exclusively in the state courts of the State of California, County of San Mateo, or in the United States District Court for the Northern District of California, and with its execution an delivery of this Lease Tenant waives any defense it might otherwise have against the jurisdiction of such courts.

28.17 SEVERABILITY. If any provision of this Lease or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Lease and the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law.

28.18 SIGNS. Tenant shall not place or permit to be placed in or upon the Premises where visible from outside the Premises or any part of the Building, any signs, notices, drapes, shutters, blinds or window coatings, or displays of any type without the prior written consent of Landlord. Landlord shall provide, at Landlord’s sole cost and expense, a building standard sign on or near the entrance of the Premises and shall include Tenant in the Building and Complex directories located in the Building. Landlord reserves the right in Landlord’s sole discretion to place and locate on the roof and exterior of the Building and Complex and in any area of the Building and the Complex not leased to Tenant, such signs, notices, displays and similar items as Landlord deems appropriate in the proper operation of the Building and the Complex.

28.18.1 Monument Signage. Notwithstanding anything to the contrary herein, Tenant shall have the right to install one (1) building monument sign at Tenant’s sole cost and expense, subject to reasonable approval by Landlord as to the style, size, and location of the monument. Tenant shall be responsible for submitting any requisite monument plans and permit application to City of South San Francisco and obtaining its approval.

28.19 EXECUTION BY LANDLORD. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises. This document becomes effective and binding only upon execution and delivery hereof by Tenant and by Landlord. No act or omission of any employee or agent of Landlord or of Landlord’s broker shall alter, change or modify any of the provisions hereof.

28.20 USE OF NAME. Tenant shall not use the name of the Building or Complex for any purpose other than the address of the business to be conducted by Tenant in the Premises. Tenant shall not use any picture of the Building or Complex in its advertising, stationery or in any other manner so as to imply that the entire Building or Complex is leased by Tenant. Landlord expressly reserves the right at any

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time to change the name or street address of the Building and/or Complex without in any manner being liable to Tenant therefor.

28.21 NONRECORDABILITY OF LEASE. Tenant agrees that in no event shall this Lease or a memorandum hereof be recorded without Landlord’s express prior written consent, which consent Landlord may withhold in its sole discretion.

28.22 CONSTRUCTION. All provisions hereof, whether covenants or conditions, shall be deemed to be both covenants and conditions. The definitions contained in this Lease, shall be used to interpret the Lease. All rights and remedies of Landlord and Tenant shall, except as otherwise expressly provided, be cumulative and non-exclusive of any other remedy at law or in equity.

28.23 FORCE MAJEURE DELAYS. This Lease and the obligations of Tenant hereunder shall not be affected or impaired because Landlord is unable to fulfill any of its obligations hereunder or is delayed in doing so, if such inability or delay is caused by reason of force majeure, strike, labor troubles, acts of God, acts of government, unavailability of materials or labor, or any other cause beyond the reasonable control of Landlord (collectively “Force Majeure Delays”).

28.24 AUTHORITY. If Tenant is a corporation, each individual executing this Lease on behalf of Tenant represents and warrants that Tenant is qualified to do business in California and that he is duly authorized to execute and deliver this Lease on behalf of Tenant and shall deliver appropriate certification to that effect if requested. If Tenant is a limited liability company, partnership, joint venture, or other unincorporated association, each individual executing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of Tenant and that this Lease is binding on Tenant. Furthermore, Tenant agrees that the execution of any written consent hereunder, or any written modification or termination of this Lease, by any general partner or member of Tenant or any other authorized agent of Tenant, shall be binding on Tenant.

28.25 NONDISCLOSURE. Tenant agrees that it shall not disclose any of the matters set forth in this Lease or disseminate or distribute any information concerning the terms, covenants, or conditions thereof to any person, firm, or entity, other than a prospective assignee or subtenant of the Premises, without first obtaining the express written approval of Landlord; provided, however, that Tenant may disclose the contents of this Lease to any director, officer, or employee of Tenant, to Tenant’s lawyers, accountants, or other third party consultants or professionals, to any lenders, investors, or others to whom Tenant provides financial statements, or in response to any legally effective demand for disclosure pursuant to court order or from any other properly constituted legal authority.

28.26 QUIET ENJOYMENT. So long as Tenant is not in default under this Lease, Tenant shall have quiet enjoyment of the Premises for the Term, subject to all the terms and conditions of this Lease and all liens and encumbrances prior to this Lease.

28.27 EXHIBITS AND ATTACHMENTS. All exhibits and attachments referred to in the body of this Lease are deemed attached hereto and incorporated herein by reference. The parties have attached the following exhibits to the Lease prior to execution:

Exhibit A	Site Plan
Exhibit B	Floor Plan of Premises
Exhibit C	Rules and Regulations
Exhibit D	Athletic Facility Use Agreement
Exhibit E	Commencement Date Agreement
Exhibit F	Work Letter Agreement

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28.28 LANDLORD’S REPRESENTATIVE. Tenant acknowledges and agrees that, in executing this Lease, TAK Development, Inc., a California corporation, is acting solely in its capacity as Landlord’s authorized attorney-in-fact. TAK Development, Inc. is not acquiring or assuming any legal liability or obligation to any other party executing this Lease, and any claim or demand of any such other party arising under or with respect to this Lease shall be made and enforced solely against Landlord.

28.29 ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all the agreements of the parties hereto and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its exhibits. This Lease may not be modified except by a written instrument duly executed by the parties hereto.

In witness whereof, the parties have executed this Lease as of the date first above written.

Landlord:			Tenant:
KASHIWA FUDOSAN AMERICA, INC., a California corporation			NOVACEA, INC., a Delaware corporation
By:	TAK Development, Inc., a California corporation		By:	/s/ John P. Walker
				John P. Walker
				[name typed]
Its:	Attorney-in-Fact		Its:	INTERIM CEO and Chairman of the Board
	By:	/s/ Toru Iwai
		Toru Iwai, Vice President 6/5/07

/s/ Robert L. Delsman

Robert L. Delsman

Approved as to Legal Form and Sufficiency

‘00’07-11:19:36 2007.05.20

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OYSTER POINT MARINA PLAZA

Rules And Regulations

1. The sidewalks, doorways, halls, stairways, vestibules and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress to and egress from the Premises and going from one part of the Building to another part.

2. Plumbing fixtures shall be used only for their designated purpose, and no foreign substances of any kind shall be thrown therein. Damage to any such fixture resulting from misuse by Tenant or any employee or invitee of Tenant shall be repaired at the expense of Tenant.

3. Tenant shall not install any radio or television antenna, loudspeaker, or other device on the roof or exterior walls of the Building. No TV or radio or recorder shall be played in such a manner as to cause a nuisance to any other tenant.

4. There shall not be used in any space, or in the public halls of the Building, either by Tenant or others, any hand trucks except those equipped with rubber tires and side guards or such other material handling equipment as Landlord may approve. No other vehicles of any kind shall be brought by any tenant into the Building or kept in or about its premises.

5. Tenant shall store all its trash and garbage within its Premises. No material shall be placed in the hallways or in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of office building trash and garbage in the City of South San Francisco without, being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entryways and elevators provided for such purposes and at such times as Landlord shall designate.

6. The requirements of tenants will be attended to only upon application in writing at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord.

7. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the agreements, covenants, conditions, and provisions of any lease of premises in the Building.

8. Tenant shall not occupy the Building or permit any portion of the Building to be

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occupied for the manufacture or direct sale of liquor, narcotics, or tobacco in any form, or as a medical office, barber shop, manicure shop, music or dance studio, or employment agency. Tenant shall not conduct in or about the Building any auction, public or private, without the prior written approval of Landlord.

9. Tenant shall not use in the Building any machines, other than standard office machines such as typewriters, calculators, personal computers, photocopiers, and similar machines, without the prior written approval of Landlord. All office equipment and any other device of any electrical or mechanical nature shall be placed by Tenant in the Premises in settings approved by Landlord, so as to absorb or prevent any vibration, noise, or annoyance. Tenant shall not cause improper noises, vibrations, or odors within the Building.

10. Tenant shall not enter the mechanical rooms, air conditioning rooms, electrical closets, janitorial closets, or similar areas or go upon the roof of the Building without the prior written consent of Landlord.

11. Tenant shall not mark, paint, drift into, cut, string wires within, or in any way deface any part of the Building, without the prior written consent of Landlord and as Landlord may direct. Should Landlord grant approval, Tenant agrees to assume full responsibility and warrants that, should a contractor other than the Building Contractor be used, Tenant’s contractor will strictly abide by Landlord’s guidelines for work contracted directly by Tenant. Upon removal of any wall decorations or installations or floor coverings by Tenant, any damage to the walls or floors shall be repaired by Tenant at Tenant’s sole cost and expense. This rule shall apply to all work performed in the Building, electrical devices, and attachments, and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment, or any other portion of the Building. Plans and specifications for such work, prepared at Tenant’s sole expense, shall be submitted to Landlord and shall be subject to Landlord’s prior written approval in each instance before the commencement of work. All installations, alterations, and additions shall be constructed by Tenant in a good and workmanlike manner, and only good grades of materials shall be used in connection therewith.

12. Tenant will not place objects on window sills or otherwise obstruct the exterior wall window covering.

13. The Tenant will keep all doors opening to the exterior of the Building, all fire doors, and all smoke doors closed at all times.

14. If Tenant uses the Premises after regular business hours or on non-business days Tenant shall lock any entrance doors to the Building or to the Premises used by Tenant immediately after using such doors.

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15. The Tenant shall not use any portion of the Premises for lodging.

16. Landlord reserves the right to exclude or expel from the Building any person who, in the judgement of Landlord is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building.

17. Tenant shall not park or attach any bicycle or motor driven cycle on or to any part of the Premises, the Building, or within the landscaping.

18. In all carpeted areas where desks and chairs are utilized, Landlord shall require Tenant, at Tenant’s own cost, to place mats under each and every chair or use chairs on 1 ¹/2” wide rollers at minimum in order to protect said carpeting from unnecessary wear and tear.

19. Signs, advertisements, graphics, or notices visible in or from public corridors shall be subject to Landlord’s written approval. Nails, screws, and other attachments to the Building require prior written consent from Landlord.

20. Landlord shall be notified in writing in advance of any and all contractors and technicians rendering any installation service to Tenant, and such contractors and technicians shall be referred to Landlord for approval and supervision prior to performing services. This applies to all work performed in the Building, including installation of telephone and communications lines and equipment, electrical devices, and all installations affecting floors, walls, woodwork, windows, ceilings, and any other physical portions of the Building.

21. Landlord shall be notified in writing in advance of any movement in or out of the Building of furniture, office equipment, or other bulky or heavy material which requires the use of elevators, stairways, or Building entrance and lobby; and such movement shall be restricted to hours established by Landlord and any other requirements of Landlord, including the use of elevator pads and the placement of masonite panel on the path of travel to protect flooring. All such movement shall be under Landlord’s supervision, and the use of an elevator for such movements shall be restricted to the Building’s freight elevators. Arrangements with Landlord should be made regarding the time, method, and routing of movement, and Tenant shall assume all risks of damage to articles moved and injury to persons or public resulting from such moves. Landlord shall not be liable for any acts or damages resulting from any such activity.

22. Landlord reserves the right to restrict access to all telephone closets, cabling, conduits, and risers in the Property. Tenant shall not have access for any reason to any of the aforementioned areas of the Property without the written permission of Landlord and the supervision of Landlord’s Building Engineer. The means by which

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telephone, telegraph, and similar wires are to be introduced to the Premises and the location of telephones, call boxes, and other office equipment affixed to the Premises, shall be subject to the prior written approval of Landlord.

23. Any damage done to the Building by the movement of Tenant’s property, or done by Tenant’s property while in the Building, shall be repaired at Tenant’s expense.

24. All door pertinent to Tenant’s Premises and all other Building door outside the Premises (other than smoke or heat-activated fire doors) are to be kept closed and not blocked open at all times, as they are fire control doors.

25. Tenant shall cooperate with Landlord in maintaining the Premises. Tenant shall not employ any person for the purpose of such cleaning other than the Building’s cleaning and maintenance personnel.

26. To insure orderly operation of the Building, no deliveries of water, soft drinks, newspapers, or other such items to any Premises shall be made except by persons appointed or approved by Landlord in writing.

27. Nothing shall be swept or thrown into the corridors, halls elevator shafts, or stairways. No birds, fish, or animals of any kind shall be brought into or kept in, on, or about the Premises without the written permission of Landlord.

28. No machinery of any kind, except for standard electronic office machinery such as personal computers, typewriters, and photocopiers, shall be operated by Tenant in the Premises without the prior written approval of the Landlord.

29. No cooking shall be done in the Premises, except that the use by Tenant of Underwriter’s Laboratory approved microwave ovens and equipment for brewing coffee, tea, or other hot beverages shall be permitted, provided such use is in accordance with all applicable codes, laws, and ordinances.

30. Tenant shall not install any food, soft drink, or other vending machine within the Premises.

31. Tenant shall not use or keep on its Premises any kerosene, gasoline, or inflammable or combustible fluid or material other than limited quantities reasonably necessary for the operation and maintenance of office equipment. Tenant shall not use or keep any noxious gas or substances in the Premises or permit the Premises to be used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations, or interfere in any way with other Tenants or those having business therein.

32. Tenant shall not tamper with or attempt to adjust temperature control thermostats in the Premises. Landlord shall make adjustments in thermostats on call from Tenant.

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33. Tenant shall comply with all measures instituted by Landlord in its sole and absolute discretion for the security of the Premises, Property, and Complex, and all personnel using the same, including the use of service passes issued by Landlord for after-hours movement of office equipment or packages and signing a security register in Building lobby after hours. Nothing herein shall be construed to impose any obligation or requirement that Landlord provide any security services in the Premises, Property, or Complex, or any particular level or type of security services.

34. Landlord will initially furnish Tenant with a reasonable number of keys for entrance doors into the Premises and may charge Tenant for additional keys thereafter. All such keys shall remain the property of Landlord. No additional locks are allowed on any door of the Premises. At termination of this Lease, Tenant shall surrender to Landlord all keys to the Premises and give to Landlord the combination of all locks for safes and vault doors, if any, in the Premises.

35. Landlord retains the right, without notice or liability to any Tenant, to change the name and street address of the Building.

36. Canvassing, peddling, soliciting, and distribution of handbills in the Building are prohibited, and Tenant will cooperate to prevent these activities.

37. The Building hours of operation (excluding Holidays) are:

8:00 a.m. to 6:00 p.m.	Monday through Friday
9:00 a.m. to 1:00 p.m.	Saturday

38. Landlord reserves the right to rescind any of these Rules and regulations and to make future Rules and regulations required for the safety, protection, and maintenance of the Building, the operation and preservation of good order thereof, and the protection and comfort of the tenants and their employees and visitors. Such Rules and regulations and all modifications thereto shall, upon written notice, be binding as if originally included herein.

*****

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[Exhibit D]

OYSTER POINT MARINA PLAZA

Athletic Facility Use Agreement & Release of Liability

THIS IS A LEGALLY BINDING AGREEMENT. READ IT CAREFULLY.

I,                                         , hereby acknowledge that my use of the exercise facility (the “Facility”) at      Oyster Point Boulevard, owned by KASHIWA FUDOSAN AMERICA, INC. (“Landlord”), as well as any activities in which I may engage in conjunction with my use of the Facility, is entirely voluntary.

I AM AWARE THAT PARTICIPATING IN ATHLETIC ACTIVITIES AND THE USE OF THE EXERCISE FACILITY MAY BE HAZARDOUS AND THAT IT IS NOT POSSIBLE FOR LANDLORD TO GUARANTEE THAT OTHER PATRONS USING THE FACILITY WILL COMPLY WITH ALL ESTABLISHED RULES AND REGULATIONS. I AM VOLUNTARILY PARTICIPATING IN THESE ATHLETIC ACTIVITIES AND UTILIZING THE FACILITY WITH FULL KNOWLEDGE OF THE DANGER INVOLVED. I HEREBY AGREE TO ACCEPT AND ASSUME ANY AND ALL RISKS OF PROPERTY LOSS, PERSONAL INJURY, OR DEATH, WHETHER OR NOT CAUSED BY THE NEGLIGENCE OF LANDLORD, LANDLORD’S EMPLOYEES OR AGENTS, OR ANY OTHER PATRON OR GUEST USING THESE FACILITIES.

[initial here]

In exchange, as lawful consideration for being permitted by Landlord to participate in activities on Landlord’s property and use its exercise Facility, I hereby agree that I, my heirs, next of kin, successors, and assigns will not sue, make a claim against, attach the property of or prosecute Landlord or Landlord’s agents and employees for injury, death, or damage resulting from the negligence or other acts, howsoever caused, by any of Landlord’s employees, agents, contractors, or patrons as a result of my participation in these activities or use of the exercise Facility. In addition, I hereby release and discharge Landlord from all actions, claims, or demands that I, my heirs, next of kin, successors, or assigns now have or may hereafter have for any loss of property, personal injury, death, or damage resulting from my participation in these activities or use of the facilities.

I HAVE CAREFULLY READ THIS AGREEMENT AND FULLY UNDERSTAND ITS CONTENTS. I AM AWARE THAT THIS IS A LEASE OF LIABILITY AND A CONTRACT BETWEEN MYSELF AND LANDLORD AND SIGN IT OF MY OWN FREE WILL.

Participant:
	[name typed or printed]
Tenant:
Suite:

Executed at South San Francisco on .

WITNESS

I certify that the person whose signature appears above acknowledged in my presence that he or she has read and fully understands the meaning and consequences of the foregoing Agreement and Release of Liability and the he or she signed it in my presence.

Witness:
	[name typed or printed]

Date:

WARNING: USE OF STEROIDS TO INCREASE STRENGTH OR GROWTH CAN CAUSE SERIOUS HEALTH PROBLEMS. STEROIDS CAN KEEP TEENAGERS FROM GROWING TO THEIR FULL HEIGHT, THEY CAN ALSO CAUSE HEART DISEASE, STROKE, AND DAMAGED LIVER FUNCTION. MEN AND WOMEN USING STEROIDS MAY DEVELOP FERTILITY PROBLEMS, PERSONALITY CHANGES, AND ACNE. MEN CAN ALSO EXPERIENCE PREMATURE BALDING AND DEVELOPMENT OF BREAST TISSUE. THESE HEALTH HAZARDS ARE IN ADDITION TO THE CIVIL AND CRIMINAL PENALTIES FOR UNAUTHORIZED SALE, USE, OR EXCHANGE OF ANABOLIC STEROIDS. California Civil Code § 1812.67

[EXHIBIT E]

OYSTER POINT MARINA PLAZA

Lease Commencement Date Agreement

THIS LEASE COMMENCEMENT DATE AGREEMENT (the “Agreement”) is made as of                                         , between KASHIWA FUDOSAN AMERICA, INC., a California corporation (“Landlord”) and                                         , a                                          (“Tenant”).

Tenant and Landlord acknowledge and agree as follows:

1. Tenant has received a fully-executed counterpart of the Lease dated as of                                          for premises commonly known as Suite              at          Oyster Point Boulevard in the Oyster Point Marina Plaza business part.

2. The Commencement Date of the Lease for all purposes thereunder is                                 , 2        , and the Expiration Date is                                 , 2        .

3. Tenant-acknowledges and agrees that, in executing this Agreement, TAK Development, Inc., a California corporation, is acting solely in its capacity as Landlord’s authorized attorney-in-fact. TAK Development, Inc. is not acquiring or assuming any legal liability or obligation to any other party executing this Agreement or the Lease, and any claim or demand of any such other party arising under or with respect to this Agreement or the Lease shall be made and enforced solely against Landlord.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the date first above written.

Landlord:		Tenant:
KASHIWA FUDOSAN AMERICA, INC., a California corporation		,   a
By:	TAK Development, Inc., a California corporation	By:
Its:	Attorney-in-fact
			[name typed]
By:		Its:
	Toru Iwai, Vice President

Oyster Point Marina Plaza Commencement Date Agreement
Kashiwa Fudosan America, Inc. ::
page E-1	[Suite      (    rsf)]

[Exhibit F]

OYSTER POINT MARINA PLAZA

Landlord Performance, Turnkey Deal

Construction Documents Completed

Work Letter Agreement

THIS WORK LETTER AGREEMENT (the “Agreement”) is made as of May 15, 2007, between KASHIWA FUDOSAN AMERICA, INC., a California corporation (“Landlord”) and NOVACEA, INC., a Delaware corporation (“Tenant”).

RECITALS

A. Landlord and Tenant have entered into a lease dated as of May 15, 2007 (the “Lease”) for premises known as Suite 200 (the “Premises”), located in the building known as 400 Oyster Point Boulevard (the “Building”) in the Oyster Point Marina Plaza, South San Francisco, California.

B. The parties have agreed pursuant to the Lease that the Premises will be improved for Tenant’s occupancy in the manner and on the terms and conditions specified herein.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual terms and conditions contained in the Lease and herein, and in consideration of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1 THE WORK. The “Work” herein shall consist of the improvements shown on the plans (“Plans”) referenced as follows, and any demolition or preparation work required in connection therewith:

(A) ARCHITECT OR SPACE PLANNER:

TSH INTERNATIONAL

Attn: Niles Tanakasubo

25 Edwards Court, Suite 208

Burlingame, CA 94010

(650) 373-0128 (O)

(650) 373-0127 (F)

(B) CAPTION OF PLANS:                                         .

(C) NUMBER OF SHEETS:                             .

(D) DATES OF PLANS AND REVISIONS:                                          .

The terms Plans, Work, Space Plan, Construction Documents, Finish Selections, and Landlord’s Space Planner are defined in ¶ 14 below, below.

2 BASIC TERMS. The following are the basic terms of this Agreement:

(A) DATE TO COMPLETE PLANNING. The Date of Complete Planning will be April 30, 2007 (including any Space Plan, Construction Documents, and Finish Selections).

(B) SUBSTANTIAL COMPLETION DATE. The Substantial Completion Date of the Work shall be the Commencement Date under the Lease.

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(C) SPACE PLAN REVISIONS. Landlord will provide one (1) space plan revisions (including revisions prior hereto) at Landlord’s Cost, provided that Landlord’s cost for Space Plans shall not exceed in the aggregate One Dollar ($1.00) per rentable square foot of the Premises (including the cost of the initial set of Space Plans and all revisions).

(D) CONSTRUCTION DOCUMENTS REVISIONS. Landlord will provide one (1) revisions of the Construction Documents (including revisions prior hereto) at Landlord’s Cost, provided that Landlord’s cost for Construction Documents shall not exceed in the aggregate One Dollar ($1.00) per square rentable foot of the Premises (including the cost of the initial set of Construction Documents and all revisions).

3 BASIC AGREEMENT. The following terms constitute the parties’ basic agreement with respect to the parties’ responsibility for (a) the construction of the Work and (b) payment of the cost of the Work:

3.1 COMPLETION OF PLANS. On or before the Date To Complete Planning described above, Tenant shall (a) provide Space Planner with all information concerning Tenant’s requirements in order for Space Planner to prepare the Plan, (b) arrange for Space Planner to prepare the Plans, and (c) obtain Landlord’s written approval of the Plans. Tenant shall not be responsible for delays caused by Landlord or Landlord’s Space Planner, as further described in ¶ 4 below. Upon completion the Plans shall be initialed by the parties and attached hereto as Schedule 1.

3.2 COMPLETION OF WORK. On or before the Commencement Date under the Lease, Landlord shall substantially complete the Work shown on the final approved Plans. However, Landlord shall not be responsible for delays caused by Tenant or Tenant’s contractors, agents, or employees and as further described in ¶ 5 below.

3.3 COST OF THE PLANS. Landlord shall bear the cost of the Plans (including any engineering reports or other studies or tests in connection therewith, but excluding any furniture planning) up to the amounts specified above, provided that such amounts shall be reduced by ten percent (10%) if Tenant does not use Landlord’s Space Planner to prepare the Plans; and Tenant shall bear any costs of the Plans which exceed such amounts.

3.4 COST OF THE WORK. Landlord shall bear the cost of the Work (including the cost of building permits and sales tax) as shown on the final approved Plans, and Tenant shall bear any costs incurred in connection with any work it may desire in addition to that shown on the final approved Plans. The parties agree that the value of the Work shown on the final approved Plans shall not exceed One Million Sixty-Two Thousand Ninety-Six Dollars ($1,062,096.00).

4 DELAYS IN PLANNING. The Commencement Date under the Lease shall be postponed for each day that final Plans are not prepared and approved by the Date to Complete Planning described above, including any revisions reasonably required by Landlord pursuant to ¶ 6 below and revisions by Tenant to reduce Tenant’s Cost pursuant to ¶ 9 below (collectively called “Delays in Planning”). However, the commencement of Rent shall be postponed only to the extent that substantial completion of the Work is delayed beyond the Commencement Date as a result of one or more of the following events (collectively called “Landlord Delays”):

(A) DELAY IN APPROVAL OF PLANS. Landlord takes more than seven (7) working days to approve or disapprove the Plans or revisions thereof after receiving the same (or such longer time as may be reasonably required in order to obtain any engineering or HVAC report or due to other special or unusual features of the Work or Plans);

(B) DELAY OF SPACE PLANNER. Landlord’s Space Planner takes more than seven (7) working days to meet with Tenant after receiving a written request for a meeting or takes more than

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seven (7) working days to prepare or revise the Plans after meeting with Tenant and receiving all information from Tenant required in order to do so, provided that this provision shall apply only if Tenant uses Landlord’s Space Planner (as described in ¶ 14 below below) to prepare the Plans; or

(c) DELAY OF COST ESTIMATES. Landlord takes more than thirty (30) working days to provide Tenant with cost estimates after receiving Plans sufficiently detailed for such purposes, provided that this ¶ 4(c) shall only apply if Landlord elects to provide cost estimates under ¶ 9 below.

5 DELAYS IN CONSTRUCTION. The Commencement Date under the Lease shall be postponed for each day that Landlord fails substantially to complete the Work as a result of strikes, acts of God, shortages of materials or labor, delays in obtaining governmental approvals or requirements, the various causes set forth below, or any other causes beyond Landlord’s reasonable control. In such case, the commencement of Rent shall be similarly postponed, except to the extent that delays occur as a result of one or more of the following (collectively called “Tenant Delays”):

(A) TENANT DELAYS IN PLANNING. Delays in Planning as described above (except for Landlord Delays);

(B) TENANT CHANGE ORDERS. Tenant’s request for changes to the Work or Change Orders under ¶ 8 or otherwise;

(C) FAILURE TO FURNISH TENANT’S COST. Tenant’s failure to furnish an amount equal to Landlord’s reasonable estimate of Tenant’s Cost (if any) within ten (10) days, as described in ¶ 9 below, which failure shall give Landlord the absolute right to postpone the Work until such amount is furnished to Landlord;

(D) SPECIALTY ITEMS. Any upgrades, special work, or items not customarily provided by Landlord to office tenants, to the extent that the same involve longer lead times, installation times, delays, or difficulties in obtaining building permits, requirements for any governmental approval, permit, or action beyond the issuance of normal building permits (as described in ¶ 7), or other delays not typically encountered in connection with Landlord’s standard office improvements;

(E) TENANT’S PERFORMANCE OF WORK. The performance by Tenant or Tenant’s contractors, agents, or employees of any work at or about the Premises or Building; or

(F) TENANT’S FAULT OR NEGLIGENCE. Any act or omission of Tenant or Tenant’s contractors, agents, or employees, or any breach by the Tenant of any provisions contained in the Agreement or in the Lease, or any failure of Tenant to cooperate with Landlord or otherwise act in good faith in order to cause the Work to be designed and performed in a timely manner.

6 LANDLORD’S APPROVAL OF PLANS. Landlord shall either approve any Plans or revisions submitted pursuant to this Agreement or disapprove the same with suggestions for making the same acceptable within the time required under ¶ 4 above. Landlord shall not unreasonably withhold approval, if the Plans provide for a customary office layout, with finishes and materials generally conforming to Building-standard materials currently being used by Landlord at the Building, are compatible with the Building’s shell and core construction, and if no modifications will be required for the Building electrical, heating, air-conditioning, ventilation, plumbing, fire protection, life safety, or other systems or equipment, and will not require any structural modifications to the Building, whether required by heavy loads or otherwise. Landlord may request that Tenant approve Landlord’s suggested changes in writing (such approval shall not be

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unreasonably withheld), or Landlord may arrange directly with Space Planner for revised Plans to be prepared incorporating such suggestions; and in any such case, Tenant shall sign or initial the revised Plans and/ or Landlord’s notice concerning the suggested changes, if requested by Landlord. Landlord’s approval of the Plans shall not be deemed a warranty as to the adequacy or legality of the design, and Landlord hereby disclaims any responsibility or liability for the same.

7 GOVERNMENTAL APPROVAL OF PLANS. Landlord shall apply for any normal building permits required for the Work which are issued pursuant to a local building code as a ministerial matter. If the Plans must be revised in order to obtain such building permits, Landlord shall promptly notify Tenant. In such case, Tenant shall promptly arrange for the Plans to be revised to satisfy the building permit requirements and shall submit the revised Plans to Landlord for approval as a Change Order under ¶ 8. Landlord shall have no obligation to apply for any zoning, parking, or sign code amendments, approvals, permits, or variances, or any other governmental approval, permit, or action other than normal building permits, as described above. If any such other matters are required, Tenant shall promptly seek to satisfy such requirements or revise the Plans to eliminate such requirements. Delays in substantially completing the Work by the Commencement Date as a result of requirements for building permits or other governmental approvals, permits, or actions shall affect the Commencement Date and commencement of Rent to the extent provided in ¶ 5, except that any delays in obtaining normal building permits as a result of errors or omissions of Landlord’s Space Planner in preparing the Plans shall postpone the commencement of Rent to the extent that substantial completion of the Work is delayed thereby beyond the Commencement Date; and Tenant shall not be obligated to bear the cost of Plan revisions to correct the same, notwithstanding anything to the contrary contained in this Agreement.

8 CHANGES AFTER PLANS ARE APPROVED. If Tenant shall desire any changes, alternations, or additions to the final Plans after they have been approved by Landlord, Tenant shall submit a detailed written request or revised Plans (the “Change Order”) to the Landlord for approval. If reasonable and practicable and generally consistent with the Plans theretofore approved, Landlord shall not unreasonably withhold approval; but all costs in connection therewith, including construction costs, permit fees, and any additional plans, drawings, engineering reports, or other studies or tests, or revisions of such existing items, shall be paid for by Tenant as a Tenant’s Cost under ¶ 9.1.

9 TENANT’S COST; ESTIMATES (IF APPLICABLE). Any amounts that Tenant is required to pay under this Agreement shall be referred to as “Tenant’s Cost” herein. Tenant’s Cost shall be deemed additional “Rent” under the Lease. Landlord may at any time reasonably estimate Tenant’s Cost in advance, in which case, Tenant shall deposit such estimated amount with Landlord within ten (10) days after requested by Landlord. If such estimated amount exceeds the actual amount of Tenant’s Cost, Tenant shall receive a refund of the difference; and if the actual amount shall exceed the estimated amount, Tenant shall pay the difference to Landlord within ten (10) days after requested by Landlord.

9.1 Request For Cost Estimate. In connection with submitting any Plans to Landlord for approval, Tenant may request that Landlord obtain a written estimate from Landlord’s contractor concerning Tenant’s Cost. Landlord shall not have an obligation to obtain such estimates. However, if Landlord elects to obtain such estimates, and if any such estimates are unacceptable to Tenant, Tenant may eliminate or substitute items in order to reduce the estimated Tenant’s Cost in connection with preparing a revised version of the Plans.

9.2 Tenant’s Approval of Cost Estimate. In connection with submitting any cost estimates to Tenant under this ¶ 9.2, Landlord may request Tenant’s written approval of such estimates. Tenant shall not unreasonably withhold such approval and shall approve or disapprove the same in writing within five (5) days after requested by Landlord. If Tenant reasonably disapproves any such estimate, Tenant shall meet with the Space Planner and eliminate or substitute items in order to reduce Tenant’s Cost as described in the preceding paragraph.

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9.3 Preliminary Cost Estimates. Any cost estimates based on a Space Plan or so-called “pricing plan” will be preliminary in nature and may not be relied on by Tenant. However, Landlord agrees that any written estimate of Tenant’s Cost based on the approved Construction Documents will not be exceeded by more than twenty percent (20%), except to the extent that (a) Tenant thereafter makes changes in the Construction Documents or the Work; (b) overtime labor is required in order substantially to complete the Work by the Work Completion Date; (c) concealed conditions are encountered on the job site; (d) new legal requirements become effective following preparation of the estimate; or (e) there are strikes, acts of God, shortages of materials or labor, or other causes beyond Landlord’s reasonable control.

10 SUBSTANTIAL COMPLETION. The term substantial completion and its various inflections as used herein shall mean that Landlord has caused all of the Work to be completed substantially, except for so-called “punchlist items”; e.g., minor details of construction or decoration or mechanical adjustments which do not substantially interfere with Tenant’s occupancy or beneficial enjoyment of the Premises for their intended purposes or Tenant’s ability to complete any improvements to the Premises to be made by Tenant. If there is any dispute as to whether Landlord has substantially completed the Work, the good faith decision of Landlord’s Space Planner shall be final and binding on the parties.

10.1 Notice of Substantial Completion. If Landlord notifies Tenant in writing that the Work is substantially completed, and Tenant fails to object thereto in writing within seven (7) days thereafter specifying in reasonable detail the items of work needed to be performed in order to achieve substantial completion, Tenant shall be deemed conclusively to have agreed that the Work is substantially completed, for purposes of commencing the Commencement Date and Rent under the Lease.

10.2 Final Completion. Substantial completion shall not prejudice Tenant’s rights to require full completion of any remaining items of Work. However, if Landlord notifies Tenant in writing that the Work is fully completed, and Tenant fails to object thereto in writing within fifteen (15) days thereafter specifying in reasonable detail the items of work needed to be completed and the nature of work needed to complete said items, Tenant shall be deemed conclusively to have accepted the Work as fully completed (or such portions thereof as to which Tenant has not so objected).

10.3 Substitution of Materials. Landlord reserves the right to substitute comparable or better materials and items for those shown in the Plans, so long as they do not materially and adversely affect the appearance of the Premises.

11 WORK PERFORMED BY TENANT. Landlord, at Landlord’s discretion, may permit Tenant and Tenant’s agents and contractors to enter the Premises prior to completion of the Work in order to make the Premises ready for Tenant’s use and occupancy. If Landlord permits such entry prior to completion of the Work, then such permission is conditioned upon Tenant and Tenant’s agents, contractors, workmen, mechanics, suppliers, and invitees working in harmony and not interfering with Landlord and Landlord’s contractors in doing the Work or with other tenants and occupants of the Building. If at any time such entry shall cause or threaten to cause such disharmony or interference, Landlord shall have the right to withdraw such permission upon twenty-four (24) hours’ oral or written notice to Tenant. Tenant agrees that any such entry into the Premises shall be deemed to be under all of the terms, covenants, conditions, and provisions of the Lease (including, without limitation, all insurance requirements), except as to the covenant to pay Rent thereunder, and further agrees that Landlord shall not be liable in any way for any injury, loss, or damage which may occur to any items of work constructed by Tenant or to other property of Tenant that may be placed in the Premises prior to completion of the Work, the same being at Tenant’s sole risk.

12 LIABILITY. The parties acknowledge that Landlord is not an architect or engineer and that the Work will be designed and performed by independent architects, engineers, and contractors. Accordingly, Landlord does not guarantee or warrant that the Plans will be free from errors or omissions, nor that the Work will be

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free from defects; and Landlord shall have no liability therefor, provided that such architects, engineers, and contractors are licensed and reputable (except as provided in ¶ 7 above). In the event of such errors, omissions, or defects, Landlord shall cooperate in any action Tenant desires to bring against such parties.

13 CERTAIN DEFINITIONS. The following terms shall bear the definitions assigned them below for all purposes under this Agreement:

(A) WORK. Work herein means the construction of the improvements shown on the final approved Plans, and any demolition, preparation, or other work required in connection therewith, including, without limitation, any work required to be performed outside the Premises in order to obtain building permits for the work to be performed within the Premises (if Landlord elects to perform such work outside the Premises).

(B) LANDLORD’S SPACE PLANNER. Landlord’s Space Planner herein means the space planner (if any) regularly used by Landlord and with whom Landlord has a written contractual arrangement for space planning services at the Building.

(C) LANDLORD’S CONTRACTOR. Landlord’s Contractor herein means the contractor (if any) regularly used by Landlord and with whom Landlord has a written contractual arrangement for construction services at the Building.

(D) FINISH SELECTIONS. Finish Selections herein means the type and color of floor and wall coverings, wall paint and any other finishes.

(E) PLANS. Plans herein means, collectively, any Space Plan, Construction Documents, or other plans, drawings, or specifications, and Finish Selections (and in the event of any inconsistency between any of the same, or revisions thereto, the latest dated item approved by Landlord shall control). The Plans shall be signed or initialed by Tenant, if requested by Landlord, and any Construction Documents shall include at least three (3) mylar sepias (or such other quantity as Landlord may reasonably require).

(F) SPACE PLAN. Space Plan herein means a preliminary floor plan, generally showing demising walls, corridor doors, interior partition walls, and interior doors. The term Space Plan for purposes of this Agreement shall also refer to any so-called “pricing plan”; i.e., a more detailed Space Plan, drawn to scale, showing: (1) any special walls, glass partitions, or corridor doors; (2) any restrooms, kitchens, computer rooms, file rooms, and other special purpose rooms, and any sinks or other plumbing facilities, or other special facilities or equipment; (3) communications system, indicating telephone and computer outlet locations; and (4) any other details or features reasonably required in order to obtain a preliminary cost estimate as described in ¶ 10, above, or otherwise reasonably requested by Landlord or Landlord’s Space Planner.

(G) CONSTRUCTION DOCUMENTS. Construction Documents herein means fully dimensioned architectural construction drawings and specifications, and any required engineering drawings (including mechanical, electrical, plumbing, air-conditioning, ventilation, and heating), and shall include any applicable items described above for the Space Plan, and if applicable: (i) electrical outlet locations, circuits, and anticipated usage therefor; (ii) reflected ceiling plan, including lighting, switching, and any special ceiling specifications; (iii) duct locations for heating, ventilating, and air-conditioning equipment; (iv) details of all millwork; (v) dimensions of all equipment and cabinets to be built in; (vi) furniture plan showing details of space occupancy; (vii) keying schedule; (viii) lighting arrangement; (ix) location of print machines, equipment in lunch rooms, concentrated file and library loadings, and any other equipment or systems (with brand names wherever possible) which require special

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consideration relative to air-conditioning, ventilation, electrical, plumbing, structural, fire protection, life—fire-safety system, or mechanical systems; (x) special heating, ventilating, and air conditioning equipment and requirements; (xi) weight and location of heavy equipment, and anticipated loads for special usage rooms; (xii) demolition plan; (xiii) partition construction plan; (xiv) Finish Selections, and any other details or features reasonably required in order to obtain a more firm cost estimate as described in ¶ 10, above, or otherwise reasonably requested by Landlord or Landlord’s Space Planner.

14 TAXES. Tenant shall pay prior to delinquency all taxes, charges, or other governmental impositions (including without limitation, any real estate taxes or assessments, sales tax, or value added tax) assessed against or levied upon tenant’s fixtures, furnishings, equipment, and personal property located in the Premises and the Work to the Premises under this Agreement. Whenever possible, Tenant shall cause all such items to be assessed and billed separately from the property of Landlord. In the event any such items shall be assessed and with the property of Landlord, Tenant shall pay its share of such taxes, charges, or other governmental impositions to Landlord within thirty (30) days after Landlord delivers a statement and a copy of the assessment or other documentation showing the amount of such impositions applicable to Tenant.

15 LANDLORD’S REPRESENTATIVE. Tenant acknowledges and agrees that, in executing this Work Letter Agreement, TAK Development, Inc., a California corporation, is acting solely in its capacity as Landlord’s authorized attorney-in-fact. TAK Development, Inc. is not acquiring or assuming any legal liability or obligation to any other party executing this Work Letter Agreement, and any claim or demand of any such other party arising under or with respect to this Work Letter Agreement shall be made and enforced solely against Landlord.

16 INCORPORATION INTO LEASE; DEFAULT. The parties agree that the provisions of this Work Letter Agreement are hereby incorporated by this reference into the Lease fully as though set forth therein. In the event of any express inconsistencies between the Lease and this Work Letter Agreement, the latter shall govern and control. Any default by a party hereunder shall constitute a default by that party under the Lease, and said party shall be subject to the remedies and other provisions applicable thereto under the Lease.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the date first-above written.

Landlord:			Tenant:
KASHIWA FUDOSAN AMERICA, INC., a California corporation			NOVACEA, INC., a Delaware corporation
By:	TAK Development, Inc., a California corporation		By:	/s/ John P. Walker
				John P. Walker
				[name typed]
Its:	Attorney-in-Fact		Its:	INTERIM CEO and Chairman of the Board
	By:	/s/ Toru Iwai
		Toru Iwai, Vice President 6/5/07

Oyster Point Marina Plaza Work Letter Agreement
Kashiwa Fudosan America, Inc. :: Novacea, Inc.
page E-7 of 7	[Suite 200]

[Schedule 1]

[THE PLANS]

TABLE OF CONTENTS

1	BASIC LEASE TERMS	1
2	USE	4
3	PREPARATION OF THE PREMISES	5
4	ADJUSTMENTS OF RENT	7
5	SECURITY DEPOSIT	14
6	COMPLIANCE WITH LAWS	14
7	HAZARDOUS MATERIALS	15
8	SERVICES AND UTILITIES	17
9	TENANT’S CHANGES	20
10	TENANT’S PROPERTY	22
11	CONDITION UPON SURRENDER	23
12	REPAIRS AND MAINTENANCE	24
13	RULES AND REGULATIONS	24
14	INSURANCE AND INDEMNIFICATION	25
15	DAMAGE AND DESTRUCTION	29
16	EMINENT DOMAIN	31
17	ASSIGNMENT AND SUBLETTING	31
18	SUBORDINATION AND ATTORNMENT	37
19	FINANCING REQUIREMENTS	38
20	DEFAULT	38
21	LIMITATIONS ON LANLORD’S LIABILITY	41
22	ESTOPPEL CERTIFICATES	41
23	NOTICES	42
24	BROKERS	43
25	RIGHTS RESERVED TO LANDLORD	43
26	BUILDING PLANNING	44
27	HOLDING OVER	45
28	PARKING	45
29	MISCELLANEOUS PROVISIONS	46

Oyster Point Marina Plaza Lease Table of Contents

page T-1 of 1

INDEX OF DEFINED TERMS

A
Additional Rent	2, 7, 11, 22, 32, 33, 34, 35, 46
Adjustment Period	7, 8, 9, 11, 12, 13
Assumed Base Amount	12
Athletic Facility	3, 10, 50
B
Base Expense Year	7
Base Operating Expenses	7, 11, 12
Base Real Estate Taxes	7, 11, 12
Base Rent	1, 2, 7, 11, 13, 19, 29, 30, 32, 33, 34, 35, 38
Base Tax Year	7, 12
Base Utilities	7, 11
Building	1, 3, 4, 5, 7, 8, 9, 10, 12, 17, 18, 19, 20, 21, 22, 24, 26, 28, 30, 32, 33, 35, 36, 37, 42, 43, 44, 45, 49
Business Hours	18
Business Personal Property	25, 26, 27
C
Claims	27, 28, 34, 42, 43
Code Costs	15
Commencement Date	1, 2, 6, 7, 10, 15, 18, 38, 41, 50
Complex	1, 2, 3, 4, 5, 7, 10, 13, 22, 28, 30, 32, 33, 37, 38, 42, 44, 49
E
Event of Default.	38, 39
Expiration Date	1, 2, 11, 14, 17, 23, 34
F
Force Majeure Delays	50
H
Hazardous Material	15, 16
Holder	26, 37, 38, 41, 42
Holidays	18, 46
HVAC	16, 17, 19, 20
I
Improvements	5, 22, 23, 30, 44
INC	1, 4, 5, 17, 18, 20, 24, 28
IW	24
L
Landlord	1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51
Laws	5, 10, 14, 15, 16, 17, 18, 21, 22, 24
Lease	i, 1, 2, 3, 4, 5, 6, 7, 8, 10, 11, 12, 13, 14, 15, 16, 17, 18, 20, 22, 23, 24, 25, 26, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 44, 45, 46, 47,48, 49, 50, 51
Lessor	26, 37, 38, 42

Oyster Point Marina Plaza Lease Table of Defined Terms

Page I-ii of 1

M
MPOE	17, 18
MSDS	16
O
Occupancy Conditions	6
Operating Expenses	7, 9, 10, 11, 12, 13, 17, 30
P
Parking Facility	45
Permitted Occupant	33, 36
Premises	1, 2, 4, 5, 6, 7, 13, 14, 15, 16, 17, 18, 19, 20, 22, 23, 24, 25, 26, 28, 29, 30, 31, 32, 33, 34, 36, 38, 39, 40, 41, 43, 44, 45, 46, 47, 49, 50
Prime Rate	2
Property	2, 3, 4, 5, 7, 8, 9, 10, 11, 13, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 35, 37, 38, 39, 41, 42, 43, 44, 46
R
Real Estate Taxes	7, 8, 9, 11, 12, 13
Rent	1, 2, 3, 4, 6, 7, 8, 11, 13, 14, 19, 20, 22, 28, 29, 30, 31, 32, 33, 34, 35, 38, 39, 40, 42, 43, 45, 46, 47, 48
Rental Adjustment	7, 11
Rules	4, 24, 25, 50
S
Security Deposit	14
State	1, 8, 14, 26, 49
Statement	11, 13
Subsequent Operating Expenses	12
Successor Landlord	37, 38
Superior Leases	37
Superior Mortgages	10, 37
Systems and Equipment	3, 4, 5, 10, 17, 18, 19, 20, 24, 28, 44
T
Table	1, 2, 6, 7, 45
Takings	31
Temporary Condemnation	31
Tenant	1, 2, 3, 4, 5, 6, 7, 8, 11, 12,13, 14, 15, 16, 17,18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38,39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50
Tenant Delays	6
Term	1, 2, 5, 6, 7, 8, 9, 11, 12, 14, 15, 18, 20, 22, 23, 26, 30, 31, 32, 40, 44, 45, 47, 50
Transfer	31, 32, 33, 34, 35, 36, 38, 41
Transfer Notice	32, 33, 34
Transfer Premium	35
U
Utilities	7, 9, 11, 12, 13, 17
W
Work	5, 6, 22, 23, 24, 50

Oyster Point Marina Plaza Lease Table of Defined Terms

Page I-iii of 2

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-135506) pertaining to the Novacea, Inc. 2006 Incentive Award Plan and the Amended 2001 Stock Option Plan of Novacea, Inc. and the Registration Statement on Form S-3 (No. 333-145840) of our reports dated March 14, 2008 with respect to the financial statements of Novacea, Inc., and the effectiveness of internal control over financial reporting of Novacea, Inc., included in this Annual Report on Form 10-K for the year ended December 31, 2007.

/s/ Ernst & Young LLP

Palo Alto, California

March 14, 2008

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John P. Walker, certify that:

1. I have reviewed this annual report on Form 10-K of Novacea, Inc.;

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

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

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

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

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

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

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

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

Date: March 17, 2008

/s/ John P. Walker

John P. Walker

Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Edward C. Albini, certify that:

1. I have reviewed this annual report on Form 10-K of Novacea, Inc.;

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

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

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

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

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

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

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

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

Date: March 17, 2008

/s/ Edward C. Albini

Edward C. Albini

Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Novacea, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the annual period ended December 31, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 17, 2008

/s/ John P. Walker

John P. Walker

Chief Executive Officer

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Novacea, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:

(i) the accompanying Annual Report on Form 10-K of the Company for the annual period ended December 31, 2007 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 17, 2008

/s/ Edward C. Albini

Edward C. Albini

Chief Financial Officer