Cell Genesys, Inc. ("Cell Genesys" or the "Company"), a Delaware corporation, is focused on the development and commercialization of cancer vaccines and gene therapies to treat major, life-threatening diseases.

Cell Genesys recognized total comprehensive income of $203.0 million and $483.5 million, including change in unrealized gain in investment of Abgenix, Inc. ("Abgenix") of $202.7 million and $354.0 million, for the three and nine months ended September 30, 2000, compared to total comprehensive losses of $3.4 million and $1.2 million for the same periods in the prior year.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through net income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in the other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value will be immediately recognized in earnings. SFAS 133 is effective for the Company's year ending December 31, 2001. The Company does not currently hold any derivatives and does not expect this pronouncement to materially impact results of operations at this time.

On March 31, 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation," which provides guidance on several implementation issues related to Accounting Principles Board Opinion No. 25. The most significant are clarification of the definition of employee for purposes of applying Opinion 25 and the accounting for options that have been re-priced. Under the interpretation, the employer- employee relationship would be based on case law and Internal Revenue Service regulations. The FASB granted an exception to this definition for outside directors. Under the interpretation, re-priced options effectively changed the terms of the plan, which would make it a variable plan subject to compensation expense. The Company currently does not have any options that have been re- priced subject to Interpretation No. 44. The impact of the interpretation on the Company's financial position and results of operations is not expected to be material.

On November 19, 1999, Abgenix completed a private placement of 1.8 million shares of its common stock resulting in gross proceeds of approximately $75.0 million. Cell Genesys' ownership was thereby further reduced to approximately 19 percent and accordingly, the Company no longer accounts for Abgenix's losses under the equity method of accounting. The Company's investment in Abgenix is now treated as available for sale and accounted for in accordance with Statement of Financial Accounting Standard No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities."

On February 11, 2000, Cell Genesys received net proceeds of approximately $194.0 million from the sale of 966,000 shares of Abgenix common stock. The transaction was completed as part of a secondary Abgenix offering in which a total of 3,450,000 Abgenix shares were sold, with 966,000 of the shares being sold by Cell Genesys. After the transaction, Cell Genesys currently retains 9,704,136 shares, or approximately 12 percent, of Abgenix common stock. The investment is carried at market value based on the closing value of $80.813 per share on September 30, 2000. The total carrying amount of the Company's investment in Abgenix at September 30, 2000 was $784.2 million.

On November 1, 2000, the Company completed the sale of 750,000 shares of Abgenix stock at a price of $70 per share. The sale was made as part of a private placement by Abgenix of a total of 4,050,000 shares. Following the sale, the Company retains 8,954,136 shares or 10.5 percent of Abgenix common stock.

Since its inception in April 1988, Cell Genesys, Inc. ("Cell Genesys" or "the Company") has focused its research and product development efforts on human disease therapies which are based on innovative gene modification technologies. The Company's strategic objective is to develop and commercialize cancer vaccines and in vivo and/or ex vivo gene therapies to treat cancer and other major, life-threatening diseases, including hemophilia. Cell Genesys' clinical programs include GVAX^® cancer vaccines in Phase II trials for prostate cancer and Phase I/II trials for lung cancer, and the Company expects to initiate GVAX^® cancer vaccine clinical trials in pancreatic cancer, myeloma and leukemia during the coming year. GVAX^® vaccines for prostate cancer and lung cancer are being developed through a worldwide collaboration with the pharmaceutical division of Japan Tobacco Inc. ("JT"). Since December 1998, the agreement has provided total funding of $43.8 million for the Company's GVAX^® prostate and lung cancer programs. In addition, Cell Genesys has preclinical programs which are evaluating potential gene therapies for hemophilia, cancer, cardiovascular disorders and Parkinson's disease. The Company also has assets outside of its core business which can be used to help maintain financial strength while product candidates are under development. These assets include Cell Genesys' equity ownership of Abgenix, Inc. ("Abgenix", Nasdaq-AMEX: ABGX), which is focused on the development and commercialization of antibody therapies, and a licensing program in gene activation technology.

Cell Genesys believes that gene therapies are likely to be developed on a continuum, progressing from ex vivo (modification of cells outside the patient's body for injection as therapy) to in vivo (modification of cells within the patient's body to provide therapy). The Company's goal is to emphasize "off-the-shelf" products that enable vaccinations or gene therapies to be provided in out-patient settings. These potentially include both non-patient-specific therapies, which could be vialed pharmaceuticals for direct administration, and patient-specific gene therapy products, which could be packaged as "kits" for overnight cell processing at clinical laboratories.

During 2000, the Company continued to report encouraging data from its Phase I/II human clinical trials evaluating the GVAX^® vaccine for prostate cancer. Data from the initial Phase I/II trial of GVAX^® prostate cancer vaccine demonstrate evidence of clinical safety and preliminary evidence of antitumor effects as measured by levels of prostate specific antigen ("PSA") and by specific antibody formation. Based on positive results from this trial, the Company is conducting multicenter trials of GVAX^® prostate cancer vaccine which are both fully enrolled and currently under way. A Phase I/II clinical trial for GVAX^® lung cancer vaccine demonstrated preliminary indications of antitumor activity in patients with advanced non small-cell lung cancer, and patients who received the complete course of vaccinations demonstrated enhanced anititumor immunity. The Company is currently conducting a multicenter Phase I/II trial for GVAX^® lung cancer vaccine.

The Company is also exploring the use of GVAX^® vaccines for other types of human cancer. In May 2000, the Company and its collaborators at Johns Hopkins University reported the results of a Phase I trial of a GVAX^® pancreatic cancer vaccine in patients who received the vaccine following surgery and adjuvant radiation and chemotherapy. It was reported that in a trial in fourteen patients conducted at the Johns Hopkins Oncology center, three of eight patients receiving the two highest doses of the vaccine were alive and free of disease for more than two years following treatment. All three of the patients with prolonged disease-free survival had evidence of vaccine-induced antitumor immunity. Based on these results, a Phase II clinical trial of GVAX^® pancreatic cancer vaccine in approximately 60 patients is planned to begin during the next year. Finally, in recently published animal studies of acute leukemia, GVAX^® cancer vaccine administered following bone marrow transplantation significantly prevented tumor relapse and increased the therapeutic benefit of transplantation. Human clinical trials for GVAX^® vaccine in myeloma and leukemia are currently expected to begin during the next year.

An additional financial asset for Cell Genesys, aside from the Company's cash and holdings in Abgenix, is its licensing program for its gene activation technology which has brought in more than $23.8 million to date. In 1997, the Company signed a license agreement with Hoechst Marion Roussel, Inc. ("Hoechst Marion Roussel") now Aventis Pharmaceuticals, Inc. ("Aventis") providing access to the Company's intellectual property for gene-activated erythropoietin (EPO) and a second undisclosed protein. Recently, Aventis informed the Company of its intention to terminate this license agreement as it relates to a second undisclosed protein. To date, the Company has received over $15.6 million from this license agreement and may receive royalties on potential future sales of gene-activated EPO.

The Company's preclinical research is focused on gene therapies for hemophilia, cancer, restenosis and Parkinson's disease. The Company reported data from two of its preclinical programs during the second quarter of 2000. On June 5, 2000, at the American Society for Gene Therapy meeting, the Company and collaborators from the National Institutes of Health (NIH) announced that in non-human primate models of hemophilia B, therapeutic levels of factor IX, a blood clotting protein, were detected following a single administration of hemophilia gene therapy. In August 2000, the Company has entered into an exclusive worldwide license agreement with the University of Washington to license the University's interest in a patent filing covering adeno-associated viral (AAV) gene therapy to the liver. The agreement has further strengthened the Company's position for AAV gene therapy of hemophilia and other diseases where liver-directed therapy is appropriate. In a June issue of the Journal of Neuroscience it was reported that in studies for Parkinson's disease, a single gene therapy treatment in a rat model of Parkinson's disease resulted in behavioral recovery and nerve cell regeneration as well as significant reinnervation of the striatum, an area of the brain that typically deteriorates in Parkinson's disease. In August, 2000, the Company announced, in collaboration with GPC Biotech AG, that a novel gene therapy employing a fusion gene p27/p16 was capable of killing multiple cancer cell types in preclinical studies in human tumor models in mice using an adenoviral gene delivery system. The tumor cell killing with p27/p16 gene therapy was selective and did not affect surrounding normal tissue. This encouraging preclinical data together with the expanding research efforts in cancer gene therapy involving antiangiogenesis demonstrates the Company's growing pipeline of potential cancer products and is an important complement to our program in human clinical trials of GVAX^® cancer vaccines.

Cell Genesys ended the third quarter of 2000 with approximately $231.9 million in cash and short-term investments. The Company has maintained its financial position by relying on funding from various corporate collaborations and licensing agreements, as well as through expense management. The Company plans to continue to finance its operations, on an opportunistic basis, through corporate collaborations with established pharmaceutical and biotechnology companies. This funding strategy should allow the Company to develop its technologies as broadly as possible, to fund product development and to accelerate the commercialization of certain product opportunities. Such alliances are intended to provide financial resources for research, development, manufacturing capabilities, and marketing infrastructure, which will aid in the commercialization of potential disease therapies.

Revenue decreased to $5.1 million and $14.7 million, respectively, for the three and nine months periods ended September 30, 2000, from $10.2 million and $23.5 million, respectively, for the same prior year periods. Higher revenue for the quarter ended September 1999 reflected a one- time payment of $8.0 million received in connection with a former collaboration, partially offset by higher research and development revenue under the Japan Tobacco GVAX^® collaboration for the quarter ended in September 2000, and $1.1 million revenue recognition in connection with the provisions of SEC Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". The decrease in revenue for the nine month period ended September 2000 reflects two milestone payments totaling $9.0 million recognized in the same period last year, partially offset by $3.3 million of deferred revenue recognized under SAB 101, a $2.5 million anniversary payment from Japan Tobacco, and approximately $2.4 million of increased research and development reimbursement revenue.

Research and development expenses were $7.4 million and $21.6 million, respectively, for the three and nine months ended September 30, 2000, compared with $5.9 million and $17.7 million, respectively, for the same prior year periods. The increase in research and development costs is primarily a result of the Company's expanding GVAX^® cancer vaccine and hemophilia programs. These costs are expected to continue to increase in the future. The rate of increase depends on a number of factors, including progress in research and development especially in clinical trials.

General and administrative expenses were $1.9 million and $5.1 million, respectively, for the three and nine months ended September 30, 2000, compared with $1.1 million and $3.4 million, respectively, for the three and nine months ended September 30, 1999. The increase resulted from additional headcount and facility infrastructure to support expanding preclinical and clinical programs.

Interest and other income increased to $3.9 million and $9.8 million, respectively, for the three and nine months ended September 30, 2000, from $655,000 and $2.4 million, respectively, for the same prior year periods. The increase is a result of higher average cash balances during 2000 and higher interest rates compared to 1999. Interest expense decreased to $75,000 and $318,000, respectively, for the three and nine months ended September 30, 2000, from $177,000 and $746,000, respectively, for the same prior year periods, due primarily to reduced debt in the current year.

Cell Genesys had a net loss of $308,000 for the three months ended September 30, 2000 and net income of $129.3 million for the nine months ended September 30, 2000, compared to net income of $3.4 million and $1.8 million for the same periods in the prior year. The increase in income for the nine months ended September 30, 2000 included $142.0 million gain realized on the sale of Abgenix common stock, net of tax. The net loss of $1.7 million during the same prior year period included equity in loss of Abgenix of $2.0 million. From November 1999 forward, the Company no longer accounts for Abgenix's losses under the equity method of accounting because the Company's ownership in Abgenix fell below twenty percent.

Basic earnings per share is calculated using income available to common share owners divided by the weighted average of common shares outstanding during the reporting period. Diluted earnings per share is similar to Basic EPS except that the weighted average common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as preferred stock, warrants and options, had been issued. The treasury stock method is used to calculate dilutive shares which reduces the gross number of dilutive shares by the number of shares purchasable from the proceeds of the warrants and options assumed to be exercised.

Cell Genesys has financed its operations primarily through the sale of equity securities, funding under collaborative arrangements and equipment financing. In February 2000, the Company received $194.0 million in net proceeds from the sale of 966,000 shares of Abgenix common stock. From inception through September 30, 2000, the Company has received $181.6 million in net proceeds from equity financings, $157 million under collaborative agreements and utilized $28.2 million of property and equipment financings.

At September 30, 2000, Cell Genesys' cash, cash equivalents and short-term investments totaled $231.9 million, compared to $50.3 million at December 31, 1999. The increase was due primarily to net proceeds from the sale of Abgenix common stock. At September 30, 2000, the Company held approximately 9.7 million shares (after giving recognition to the July 10th stock split) of Abgenix common stock, which had a market value of approximately $784.2 million.

Cell Genesys anticipates that fiscal year 2000 cash usage will not exceed $15.0 million, net of proceeds from Abgenix stock proceeds, anticipated tax payments from the gain on the sale of Abgenix stock and any potential acquisition of a late stage product candidate. The Company's capital requirements depend on numerous factors, including: the progress of the Company's research and development programs; preclinical and clinical trials; clinical and commercial scale manufacturing requirements; the attraction of collaborative partners; the acquisition of new products or technologies; the cost of litigation; patent interference proceedings or other legal proceedings or their resolutions.

Cell Genesys believes that its available cash, cash equivalents and short-term investments at September 30, 2000 will be sufficient to meet the Company's currently planned operating expenses for at least the next twelve months. However, progress in the Company's development programs and/or the increase in the number of programs will reduce the current cash resources and potentially create the need to raise further capital at some point in the future. Therefore, the Company may continue to consider financing alternatives. Liquidity and volatility of capital markets play a significant role in any decision to raise capital. The type of financing available to the Company includes the sale of Abgenix securities and private or public placement of Cell Genesys' equity securities. The Company's evaluation processes regularly consider the liquidity of capital markets, dilution, shareholder value and tax consequences of each type of financing on shareholders. Most of the financing options available to the Company have some type of negative consequence to shareholders. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a slightly negative consequence in order to reduce or minimize a more significant negative consequence to shareholders.

We will need substantial funds for existing and planned preclinical and clinical trials, to continue research and development activities, and to establish manufacturing and marketing capabilities for any products we may develop. We expect that our existing capital resources will enable us to maintain our operations at least through 2001. At some point beyond 2001, we may need to raise additional capital to fund our operations.

 Our future capital requirements will depend on, and could increase as a result of, many factors, such as:

• continued scientific progress of research and development programs
• magnitude of such programs' expenses
• progress of preclinical and clinical testing
• time and costs involved in obtaining regulatory approvals
• costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims
• competing technological and market developments
• changes in collaborative relationships with Japan Tobacco and others
• terms of any additional collaborative arrangements into which we may enter
• our ability to establish research, development and commercialization arrangements pertaining to products other than those covered by existing collaborative arrangements
• cost of establishing manufacturing facilities
• cost of commercialization activities
• demand for our products, if and when approved
• potential redemption obligations in connection with conversion of the Series B preferred stock
• our ability to realize the carrying value of the Abgenix stock due to its volatility

We expect to be able to raise additional funds through collaborative relationships, sales of some portion or all of our investment in Abgenix, additional equity or debt financings, or otherwise. Because of our long-term capital requirements, we may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. There can be no assurance that any such additional funding will be available to us, or, if available, that it will be on acceptable terms. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution. There can be no assurance that opportunities for in-licensing technologies or for third party collaborations will continue to be available to us on acceptable terms. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research, development and clinical activities. Alternatively, we may need to seek funds through arrangements with collaborative partners or others that require us to relinquish rights to certain of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Either of these events could have a material adverse effect on our business, results of operations, financial condition or cash flow.

All of our potential cancer vaccine and gene therapy products are in research and development. We have not generated any revenues from the sale of products. We do not expect to generate any revenues from product sales for at least the next several years. Our products currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercial use. There can be no assurance that our research and development efforts will be successful or that any of our future products will ultimately be commercially successful. Even if developed, our products may not receive regulatory approval or be successfully introduced and marketed at prices that would permit us to operate profitably.

We have incurred annual net losses since our inception. At September 30, 2000, our accumulated deficit was approximately $74.5 million. For the nine months ended September 30, 2000, we incurred profits of $129.3 million. However, these profits were related to the sale of Abgenix stock and we expect to resume incurring operating losses in the future. We expect to incur substantial operating losses for at least the next several years due primarily to the expansion of research and development programs, including preclinical studies, clinical trials, manufacturing and to a lesser extent, from general and administrative expenses. We expect that losses will fluctuate from quarter to quarter and that these fluctuations may be substantial. We cannot guarantee that we will successfully develop, commercialize, manufacture or market any products. We cannot guarantee that we will ever achieve or sustain product revenues or profitability.

Gene therapy is a new technology. Existing preclinical and clinical data on the safety and efficacy of gene therapy are limited. Data relating to our specific gene therapy approaches are also limited. Our GVAX^® cancer vaccines are currently being tested in Phase I/II and Phase II human clinical trials to determine their safety and efficacy. None of our other products or therapies under development are in human clinical trials. The results of preclinical studies do not predict safety or efficacy in humans. Possible side effects of gene therapy may be serious and potentially life-threatening. Unacceptable side effects may be discovered during preclinical and clinical testing of our potential products or thereafter. There are many reasons that potential products that appear promising at an early stage of research or development do not result in commercialization. Although we are testing proposed products or therapies in human clinical trials, we cannot guarantee that we will be permitted to undertake human clinical trials for any of our other products. Also, the results of this testing might not demonstrate the safety or efficacy of these products. Even if clinical trials are successful, we might not obtain regulatory approval for any indication. Finally, even if our products proceed successfully through clinical trials and receive regulatory approval, there is no guarantee that an approved product can be produced in commercial quantities at reasonable cost or that such a product will be successfully marketed.

The patent positions of pharmaceutical and biotechnology firms, including Cell Genesys, are generally uncertain and involve complex legal and factual questions. Cell Genesys currently has more than 260 issued or granted patents and more than 320 pending applications. Although we are prosecuting patent applications, we cannot be certain whether any given application will result in the issuance of a patent or, if any patent is issued, whether it will provide significant proprietary protection or will be invalidated. Also, patent applications in the United States are confidential until patents are issued. Publication of discoveries in scientific or patent literature tends to lag behind actual discoveries by several months. Accordingly, we cannot be sure that we were the first creator of inventions covered by pending patent applications or that we were the first to file patent applications for these inventions.

Our commercial success will also depend in part on not infringing the patents or proprietary rights of others and not breaching licenses granted to us. We will be required to obtain licenses to certain third party technology and genes necessary to conduct our business. Any failure to license any technology or genes required to commercialize our technologies or products at reasonable cost may have a material adverse effect on our business, results of operations or financial condition.

We may also have to engage in litigation, which could result in substantial cost to us, to enforce our patents, or to determine the scope and validity of other parties' proprietary rights. To determine the priority of inventions, the United States Patent and Trademark Office frequently declares interference proceedings. In Europe, other patents can be revoked through opposition proceedings. Such proceedings could result in an adverse decision as to the priority of our inventions.

We are currently involved in four separate interference and/or opposition proceedings with regard to:

• gene activation technology
• ex vivo gene therapy
• certain retroviral vector technology
• chimeric receptor technology

While we believe our position in each proceeding is strong, the outcome of each proceeding cannot be predicted. An adverse result could have a material adverse effect on our intellectual property position in these areas. We may be involved in other interference and/or opposition proceedings in the future. We believe that there will continue to be significant litigation in the industry regarding patent and other intellectual property rights.

We also rely on unpatented trade secrets, know-how and continuing technological innovation to develop and maintain our competitive position. Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly. Also, there can be no assurance that others will not gain access to our trade secrets, or that we can meaningfully protect our rights to our unpatented trade secrets.

We require our employees and consultants to execute a confidentiality agreement upon the commencement of an employment or consulting relationship with us. These agreements provide that all confidential information developed by or made known to an individual during the course of the employment or consulting relationship generally must be kept confidential. In the case of employees, the agreements provide that all inventions conceived by the employee while employed by us, relating to our business are our exclusive property. These agreements may not provide meaningful protection for our trade secrets in the event of unauthorized use or disclosure of such information.

Competition in the field of gene therapy from other biotechnology and pharmaceutical companies and from research and academic institutions is intense and expected to increase. In many instances, we compete with other commercial entities in acquiring products or technology from universities. There are numerous competitors working on products to treat each of the diseases for which we are seeking to develop therapeutic products. Some competitors are pursuing a product development strategy competitive with ours, particularly with respect to our cancer vaccine program. Certain of these competitive products are in substantially more advanced stages of product development and clinical trials. Our competitors may develop technologies and products that are more effective than ours, or that would render our technology and products less competitive or obsolete.

Many of our competitors have greater financial resources and larger research and development staffs than we do. Some of these competitors have significantly greater experience than we do in developing products, in undertaking preclinical testing and human clinical trials of new pharmaceutical products, in obtaining United States Food and Drug Administration ("FDA") and other regulatory approvals of products, and in manufacturing and marketing such products. Accordingly, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do. There can be no assurance that we will be able to obtain certain biological materials necessary to support our research, development or manufacturing of any of our planned therapies. If we are permitted to commence commercial sales of products, we will also be competing with respect to marketing capabilities and manufacturing efficiency, areas in which we have limited or no experience. We expect to build additional clinical scale and commercial scale manufacturing facilities and/or use contract facilities to commercialize our products. We also expect to secure funding for these and other product development activities through our partners and future potential partners.

We expect that competition among products approved for sale will be based, among other things, on:

• product efficacy
• price
• safety
• reliability
• availability
• patent protection
• sales, marketing and distribution capabilities

Our competitive positions also depend upon our ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient funding for the often lengthy period between product conception and commercial sales.

The stock prices of biopharmaceutical and biotechnology companies (including Cell Genesys) have historically been highly volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The following factors may affect our stock price:

• fluctuations in our financial results
• announcements of technological innovations or new therapeutic products by us or our competitors
• announcements of changes in governmental regulation affecting us or our competitors
• announcements of regulatory approvals or disapprovals of our or our competitors' products
• developments in patent or other proprietary rights affecting us or our competitors
• public concern as to the safety of products developed by us or other biotechnology and pharmaceutical companies
• general market conditions
• fluctuations in the price of Abgenix stock
• severe fluctuations in price and volume in the stock market in general which are unrelated to our operating performance
• issuance of common stock upon conversion of the Series B preferred stock or exercise of outstanding warrants
• future sales of such common stock or other shares of common stock by existing stockholders
• the perception that such issuances or sales could occur

Regulation by governmental authorities in the United States and foreign countries is important in the manufacture and marketing of our proposed products and our research and development activities. All of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products must undergo rigorous preclinical and clinical testing and other premarket approval procedures by the FDA and similar authorities in foreign countries. Since our potential products involve the application of new technologies, regulatory approvals may take longer than for products produced using more conventional methods. Various federal and, in some cases, state laws also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of these products. The lengthy process of seeking these approvals, and the subsequent compliance with applicable federal laws, requires significant expenditures. Any delay or failure by us or our collaborators or licensees to obtain regulatory approvals could hinder the marketing of our products and our ability to receive product or royalty revenue.

In responding to a new drug application, or a product license application, the FDA may grant marketing approvals, request additional information or further research, or deny the application if it determines that the application does not satisfy its regulatory approval criteria. Approvals may not be granted on a timely basis, if at all, or if granted may not cover all the clinical indications for which we are seeking approval. Also, an approval might contain significant limitations in the form of warnings, precautions or contraindications with respect to conditions of use.

In addition to laws and regulations enforced by the FDA, we are also subject to regulation under:

• Occupational Safety and Health Act
• Environmental Protection Act
• Toxic Substances Control Act
• Resource Conservation and Recovery Act
• Other present and potential future federal, state or local laws and regulations

Our manufacturing facilities are subject to licensing requirements of the California Department of Health Services. While not subject to license by the FDA, these facilities are subject to inspection by the FDA as well as by the California Department of Health Services. A separate license from the FDA is required for commercial manufacture of any product. Failure to maintain these licenses or to meet the inspection criteria of the FDA and the California Department of Health Services would disrupt our manufacturing processes and have a material adverse effect on our business, results of operations, financial condition and cash flow.

For marketing outside the United States, we are subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country. Failure to comply with these regulatory requirements or obtain required approvals could impair our ability to develop these markets and have a material adverse effect on our results of operations and financial condition.

Our research and development activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and waste products. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by applicable laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of an accident, we could be held liable for any damages that result, and any resulting liability could exceed our resources. We may also be required to incur significant costs to comply with environmental laws and regulations in the future.

We have no experience in sales, marketing or distribution of biopharmaceutical products. We expect to rely on sales and marketing expertise of potential corporate partners for our initial products. The decision to market future products directly or through corporate partners will be based on a number of factors, including:

• market size and concentration
• size and expertise of the partner's sales force in a particular market
• our overall strategic objectives

Clinical trials or marketing of any of our potential products may expose us to liability claims resulting from the use of our products. These claims might be made by consumers, health care providers or by others selling our products. We currently maintain product liability insurance with respect to each of our clinical trials. There can be no assurance that we will be able to maintain insurance or that sufficient coverage can be acquired at a reasonable cost. An inability to maintain insurance at acceptable cost, or at all, could prevent or inhibit the clinical testing or commercialization of our products or otherwise affect our financial condition. A product liability claim or recall could have a material adverse effect on our business, results of operations, financial condition and cash flow.

In both domestic and foreign markets, sales of our potential products will depend in part upon coverage and reimbursement from third-party payers, including:

• government agencies
• private health care insurers and other health care payers such as health maintenance organizations
• self-insured employee plans
• Blue Cross/Blue Shield and similar plans

There is considerable pressure to reduce the cost of biotechnology and pharmaceutical products. In particular, reimbursement from government agencies, insurers and large health organizations may become more restricted in the future. Our potential products represent a new mode of therapy and, while the cost-benefit ratio of the products may be favorable, we expect that the costs associated with our products will be substantial. There can be no assurance that our proposed products, if successfully developed, will be considered cost-effective by third-party payers. Insurance coverage might not be provided by third-party payers at all or without substantial delay. Even if such coverage is provided, the approved reimbursement might not provide sufficient funds to enable us to become profitable.

The continuing efforts of governmental and third- party payers to contain or reduce the costs of healthcare may impair future revenues and profitability of biotechnology companies. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar government control. While we cannot predict whether the government will adopt any such legislative or regulatory proposals, the announcement or adoption of these proposals could have a material adverse effect on our business, results of operations, financial condition and cash flow.

We rely and will continue to rely on our key management and scientific staff. The loss of key personnel or the failure to recruit necessary additional qualified personnel could have a material adverse effect on our business and results of operations. There is intense competition from other companies, research and academic institutions and other organizations for qualified personnel. There is no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development of our business. We will need to continue to recruit experts in the areas of clinical testing, manufacturing, marketing and distribution and develop additional expertise in our existing personnel. If we do not succeed in recruiting such personnel or developing such expertise, our business could suffer significantly.

• University of California, San Francisco
• Dana-Farber Partners Cancer Care
• The Johns Hopkins Medical Institutions
• US Oncology, Inc.
• University of Tokyo, IMSUT
• Providence Portland Medical Center
• Affiliated Research Centers
• Emory University
• University of Michigan
• University of Pennsylvania
• Stanford University

We rely on the continued availability of outside scientific collaborators performing research. These relationships generally may be terminated at any time by the collaborator, typically by giving 30 days notice. These scientific collaborators are not our employees. As a result, we have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our activities. Our agreements with these collaborators, as well as those with our scientific consultants, provide that any rights we obtain as a result of their research efforts will be subject to the rights of the research institutions in such work. In addition, some of these collaborators have consulting or other advisory arrangements with other entities that may potentially conflict with their obligations to us. For these reasons, there can be no assurance that inventions or processes discovered by our scientific collaborators or consultants will become our property.

Substantially all the outstanding shares of Cell Genesys common stock are eligible for sale in the public market. Conversion of the Series B preferred stock or exercise of outstanding warrants would result in issuance of additional shares of common stock, diluting existing investors. The number of shares of common stock issued, and therefore the dilution of existing investors, would increase as a result of either (i) an event triggering the antidilution rights of any outstanding shares of Series B preferred stock, or (ii) a decline in the market price of the Company's common stock immediately prior to conversion of the Series B preferred stock.

The holders of the Series B preferred stock may choose at any time to convert their shares into common stock. In that event, the number of shares of common stock issued would be based on the lower of:

1. a fixed conversion price of $11.02 per share for the 694 remaining shares from the original issue of $20.0 million face value preferred stock, and $14.53 per share for the 875 shares issued January, 2000 from call options (see below) or,
2. the average of certain trading prices during the 10 trading days preceding such date of conversion (the "Floating Conversion Price").

The market price of the common stock has in recent months traded above the fixed conversion price of $11.02 and $14.53 per share and consequently the conversion rate of the Series B preferred stock is currently based on the fixed conversion price. Should the market price decline below the fixed conversion rate, the greater the decline in the market price, the greater the number of shares issuable upon conversion of the Series B preferred stock.

On January 18, 2000, the Company received approximately $8.8 million from the issuance of 875 new Series B Convertible preferred shares following the exercise of call options for these shares. The newly issued preferred shares have a Fixed Conversion Price of $14.53 and other terms as defined by the Series B preferred stock agreements dated November 14, 1997. The call option right which was available under the terms of these agreements was triggered by the recent appreciation of Cell Genesys' stock price. Following the issuance of the new preferred shares, no further call options remain outstanding.

If the holders of the Series B preferred stock decide to convert their shares into common stock, we would not be required to issue more than 5,624,000 shares of common stock, including those shares already issued on conversion, (which is 19.99 percent of the outstanding shares of common stock on November 14, 1997, or the "Share Limit"), unless we first obtained stockholder approval. If we did not obtain prior stockholder approval or an exemption from the requirement for stockholder approval from the Nasdaq- AMEX (the "Nasdaq-AMEX exemption") we would not be required to issue shares of common stock in excess of the Share Limit pursuant to requests for conversion of the Series B preferred stock. However, in such event, the holders of the Series B preferred stock could require us to redeem the unconverted shares of Series B preferred stock, and the amount of these redemption obligations could become material if the common stock price declined below approximately $3.50 per share. Since we have not obtained stockholder approval or the Nasdaq-AMEX exemption, we could become subject to a material redemption obligation if the number of shares of common stock issuable upon conversion of the Series B preferred stock exceeds the Share Limit. The amount of the redemption obligation will increase as the common stock price decreases because we are limited in the number of shares we can issue upon conversion. Consequently, volatility in the price of the common stock could magnify the amount of any redemption obligation.

In the normal course of business, the financial position of the Company is subject to a variety of risks, including market risk associated with interest rate movements. The Company regularly assesses these risks and has established policies and business practices to protect against these and other exposures. As a result, the Company does not anticipate material potential losses in these areas.

The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Additionally, the Company has assumed its available for sale securities, comprised of corporate notes and commercial paper, are similar enough to aggregate those securities for presentation purposes. The average interest rate was calculated using the weighted average fixed rates under all contracts with Wells Fargo Bank, Transamerica Business Credit Corporation and FINOVA Credit Corporation.

                                  Principal Amount by Expected Maturity
Interest Rate Sensitivity
Average Interest Rate
                                                                                           Fair Value
                                                                         2004              September
(in thousands)                      2000      2001      2002    2003   Thereafter  Total    30, 2000
------------------------------------------- --------- -------- ------- --------- --------- ----------
Total Investments Securities.....  $56,499  $171,015      --       --      --    $227,514   $227,465
   Average Interest Rate.........     5.45%     6.15%     --       --      --        5.92%

Long-term Debt, including
   Current Portion...............     $391      $977     $657    $456      $252    $2,733     $2,733
   Average Interest Rate.........    11.27%    10.94%   10.46%   9.92%     9.92%    10.50%