Since 1996, the Company has maintained an investment in Abgenix. In December 1997 and January 1998, Abgenix completed private placements of securities reducing Cell Genesys' percentage ownership from approximately 100 percent to approximately 54 percent.

On July 2, 1998, Abgenix completed an initial public offering ("IPO"), reducing Cell Genesys' percentage ownership to approximately 40 percent. Prior to the IPO, Abgenix was a consolidated subsidiary and its financial results were presented accordingly. From July 2, 1998 through November 19, 1999, the Company's investment in Abgenix was accounted for under the equity method of accounting as a result of the reduced ownership position. On March 4, 1999, Abgenix completed the sale of an additional 3,000,000 shares of common stock in a public offering which further reduced the Company's ownership percentage in Abgenix to approximately 22 percent. The difference between the cost of the investment (the carrying value of the net assets less the equity in loss of Abgenix immediately prior to the public offering) and the amount of the underlying equity in net assets of Abgenix immediately following each of the public offerings was accounted for under the equity method of accounting. Accordingly, the Company recognized $9.8 million as a contribution to stockholders' equity upon completion of the Abgenix public offering in March 1999.

During 2000, the Company sold shares of Abgenix common stock resulting in $243.9 million in net proceeds. During 2001 and the first six months of 2002, the Company did not sell any of the Abgenix common stock and retains 8,954,136 million shares, or 10.27 percent, ownership in Abgenix. Based on Abgenix common stock's market value of $9.80 per share as of June 30, 2002, the total carrying amount of the Company's investment in Abgenix was approximately $87.8 million.

In January 2001, the Company created a new subsidiary, Ceregene, Inc. ("Ceregene"). The Company contributed $10 million in cash and access to technology and patents in the Central Nervous System ("CNS") gene therapy area, in exchange for approximately 60 percent ownership of the new company. Ceregene's financial statements are consolidated into the operations of the Company. For the six months ended June 30, 2002, Cell Genesys reported net loss after minority interest for Ceregene of approximately $1.9 million.

In November 2001, Cell Genesys and the pharmaceutical division of Japan Tobacco Inc. ("JT") modified an agreement originally signed in December 1998 involving the Company's GVAX^® prostate cancer and lung cancer vaccine programs. Under the terms of the new agreement, the two parties established a royalty arrangement on sales of GVAX^® lung cancer vaccines and on sales in other cancer indications that may be derived from a certain form of that vaccine. JT will pay Cell Genesys an undisclosed royalty on GVAX^® lung cancer vaccine sales in Japan, Taiwan and Korea, and Cell Genesys will pay JT the same royalty on such sales in North America and the rest of the world. The two parties will continue to share equally in the product development costs of GVAX^® lung cancer vaccine and JT will continue to pay Cell Genesys milestone payments for this program. In addition, full commercial rights to GVAX^® prostate cancer vaccine have been returned to Cell Genesys. As of June 30, 2002, Cell Genesys has received approximately $85.9 million in milestone and other payments, reimbursement for research and development costs and for capital expenditures on manufacturing facilities. The agreement provides for future loans of up to $30 million to Cell Genesys for Phase III development costs, if JT continues in the collaboration into Phase III trials. The parties have also agreed to support an ongoing clinical trial of GVAX^® for kidney cancer in Japan, which is the first clinical trial of cancer gene therapy in Japan. If the parties agree to proceed with the development of this GVAX^® product for kidney cancer, Cell Genesys will be eligible to receive additional funding in the form of research and development reimbursements and other payments to be agreed upon at a later date. None of the payments involve an additional equity investment in Cell Genesys by JT, which currently owns approximately three percent of the Company. This is the second collaboration agreement between Cell Genesys and JT. The first collaboration, signed in 1991, funded the successful development of the fully human monoclonal antibody technology which was transferred to Abgenix.

During the month of August 2002, 210 shares of the Company's Series B redeemable convertible preferred stock were converted into 216,961 shares of the Company's common stock at the then-effective conversion price of $10.895 per share. The total value of such common share as of the date of conversion was approximately $2.4 million. The transaction will be recorded as a reclass from Preferred stock to Common stock and additional paid-in-capital on the balance sheet.

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 that are based on innovative gene modification technologies. The Company's strategic objective is to develop and commercialize cancer vaccines, oncolytic virus therapies and gene therapies to treat cancer and other major, life-threatening diseases. Cell Genesys' current clinical programs include GVAX^® cancer vaccines and oncolytic virus therapies. GVAX^® cancer vaccines are in Phase II studies for prostate cancer, lung cancer, pancreatic cancer, and leukemia and in Phase I/II studies for multiple myeloma. The Company expects to initiate a Phase III trial for GVAX^® prostate cancer vaccine during the first half of 2003. Clinical programs evaluating the Company's oncolytic virus therapies include a Phase II study of CG7060 and a Phase I/II study of CG7870, both targeting prostate cancer. In addition, Cell Genesys has preclinical oncolytic virus therapy programs evaluating potential therapies for bladder cancer, colon cancer and liver cancer as well as preclinical gene therapy programs evaluating potential therapies for multiple types of cancer. Additionally, Cell Genesys has a majority-owned subsidiary, Ceregene Inc., which is focused on gene therapies for central nervous system disorders, and also continues to hold approximately nine million shares of common stock of its former subsidiary, Abgenix (Nasdaq: ABGX), which is focused on the development and commercialization of antibody therapies.

• Reported encouraging long term survival data at the American Society of Clinical Oncology (ASCO) meeting from the initial Phase II multicenter trial of GVAX^® prostate cancer vaccine in patients with hormone refractory prostate cancer. In the 34-patient study, seven of 10 (70 percent) patients receiving the higher of two dose levels of the vaccine remain alive 2.5 years after treatment (median survival > 30 months). Of the 24 patients receiving the lower dose of the vaccine, nine of 22 patients (41 percent) remain alive 2.5 years after treatment (median survival = 22 months), and two were lost to follow-up. Based on these encouraging data, Cell Genesys expects to initiate a Phase III clinical trial in the first half of 2003.

• Reported updated data at the Third International Lung Cancer Congress from a multicenter Phase II trial which evaluated a GVAX^® vaccine prepared directly from the patients' own tumor cells. The new findings included survival data for 33 advanced disease patients which demonstrated a median survival of 8.0 months, as compared to the reported 5.7 to 7.0 months for the approved second-line chemotherapy for such patients (docetaxel) or 4.6 months for best supportive care. Three patients were reported to have achieved durable complete responses (complete disappearance of tumor) with a median duration of at least 16 months, and two of these patients were noted to have a subtype of lung cancer known as bronchoalveolar carcinoma (BAC). Based on these data, Cell Genesys expects to conduct two Phase II clinical trials in patients with BAC targeted to begin in the late 2002 to early 2003 timeframe, and a Phase III trial in all types of non small-cell lung cancer could be targeted for late 2003.

• Announced the completion of a worldwide licensing agreement with Transkaryotic Therapies, Inc. ("TKT") under which Cell Genesys has exclusively licensed to TKT intellectual property relating to its gene activation technology for certain therapeutic proteins. In exchange, Cell Genesys received an up-front license fee of $26 million comprised of $11 million in cash and $15 million in shares of TKT common stock and could receive additional payments upon the completion of certain patent-related milestones.

• Initiated a multicenter Phase II clinical trial of GVAX^® pancreatic cancer vaccine in patients with inoperable or metastatic pancreatic cancer. The new Phase II trial is in addition to a second ongoing Phase II trial in patients with operable pancreatic cancer who receive GVAX^® pancreatic cancer vaccine in combination with pancreatic cancer surgery and standard adjuvant radiation and chemotherapy.

• Reported in conjunction with collaborator, EntreMed, Inc. (Nasdaq: ENMD), encouraging preclinical data demonstrating that the systemic delivery of the Angiostatin gene, an angiogenesis inhibitor gene that blocks the growth of tumor blood vessels, significantly decreased tumor burden and increased survival in multiple types of cancer in preclinical animal studies. In these studies, EntreMed's Angiostatin gene was combined with Cell Genesys' adeno-associated viral (AAV) gene delivery system.

• Reported preclinical data at the American Society of Gene Therapy (ASGT) meeting which demonstrated that company scientists have developed a proprietary lentiviral-producing cell line that will enable the production of large quantities of high quality lentiviral gene delivery vector. This new technology is expected to enable Cell Genesys to produce sufficient quantities of high quality vector for future human clinical trials.

The Company may finance certain of its operations through corporate collaborations with established pharmaceutical and biotechnology companies in order 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, research, development and manufacturing capabilities and marketing infrastructure to aid in the commercialization of potential disease therapies. Cell Genesys also evaluates, on an ongoing basis, opportunities to in-license or acquire products and/or technologies that complement its portfolio. There can be no assurance that Cell Genesys will be able to enter into additional collaborative relationships or obtain new products and/or technologies on acceptable terms, if at all, or that if such actions occur, they will be successful. Failure to enter new corporate relationships or expand Cell Genesys' product and technological base may limit Cell Genesys' success.

We consider certain accounting policies related to revenue recognition and use of estimates to be critical policies.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Estimates in the financial statements include, but are not limited to accrued but unbilled expenses in clinical trials, fees of outside experts and consultants (including legal and accounting fees), useful lives of property and equipment, and other items.

Revenue was $31.1 million and $35.7 million for the three and six months ended June 30, 2002 and was $4.0 million and $10.0 million for three and six months ended June 30, 2001. The increased revenue in 2002 primarily reflects recognition of non-recurring licensing revenue of $26 million earned under the license agreement with TKT. Other sources of revenue during the quarter included payments under the Company's collaboration agreement with the pharmaceutical division of Japan Tabacco (JT) which was modified in November 2001 such that reimbursements have continued for the GVAX lung cancer vaccine program but not for the GVAX prostate cancer vaccine program for which Cell Genesys regained full commercial rights.

Research and development expenses were $17.8 million and $34.4 million for the three and six months ended June 30, 2002, and $11.0 million and $21.8 million for the three and six months ended June 30, 2001. The increase in research and development costs can be attributed primarily to the Company's expanding product development programs for both its GVAXÒ cancer vaccine and oncolytic virus therapies. The Company expects that its research and development expenditures and headcount will continue to increase in future years to support expanded, more advanced and more numerous clinical trials, additional office and manufacturing facilities and additional product development activities. The rate of increase depends on a number of factors including progress in research and development and clinical trials.

General and administrative expenses were $4.3 million and $8.0 million for the three and six months ended June 30, 2002, and were $2.8 million and $5.5 million for the three and six months ended June 30, 2001. The increase resulted from additional headcount and facility infrastructure to support expanding preclinical and clinical programs including facilities added during 2001 and the first half of 2002. Future spending for general and administrative costs is expected to continue to increase in order to support the growing infrastructure needs of the Company, particularly in the area of facilities.

Interest and other income were $2.2 million and $4.6 million for the three and six months ended June 30, 2002, compared to $3.6 million and $10.9 million for the three and six months ended June 30, 2001. The higher income for the comparable six-month period of 2001 was primarily due to realized gains earned during the first quarter of 2001 from converting a portion of the investment portfolio from tax-free securities to taxable securities. The higher income for both comparable periods in 2001 could also be partially attributed to higher average cash during the period. The conversion in investment securities was part of the Company's strategy to minimize future tax liabilities by offsetting operating losses and available tax net operating loss carryforwards against interest income and gain on future sales of Abgenix stock. Interest expense was $436,000 and $845,000 for the three and six months ended June 30, 2002, and was $73,000 and $127,000 for the three and six months ended June 30, 2001. The increase in interest expense was primarily the result of a $60 million liquid asset-backed collateral debt financing completed in December, 2001 in connection with the construction of the Company's manufacturing facility in Hayward, California.

The Company recorded a tax provision for the quarter ended June 30, 2002 of $4.0 million. For the six months ended June 30, 2002 the tax benefit was $0.5 million which was the estimated refund available from the carryback of the current year's losses to offset taxable income in 2000.

Cell Genesys had a net income of $6.5 million and net loss of $2.3 million for the three and six months ended June 30, 2002, and net loss of $4.7 million and $4.9 million for the three and six months ended June 30, 2001. The net income for the second quarter of 2002 can be primarily attributed to non-recurring revenue earned under the license agreement with TKT entered into during that quarter. Losses, excluding non-recurring charges and gains from sales of Abgenix stock, are expected to continue and may increase in future years as operating expenses rise, particularly as the Company incurs expenses related to manufacturing and advanced clinical trials of its potential products.

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 potentially dilutive common shares, such as shares issuable upon conversion of preferred stock and upon exercise of warrants and options, had been issued. These potential additional share issuances are not included in diluted earnings per share in loss periods as their effect would be anti-dilutive. 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.

Capital expenditures were $8.6 million and $22.3 million per cash flow for the three and six months ended June 30, 2002 relating primarily to the construction of the Company's manufacturing facilities for Phase III trials and market launch.

Cell Genesys currently has three manufacturing facilities at various stages of construction. Construction of the Company's manufacturing facility for non patient-specific GVAX cancer vaccines located in Hayward, California, is expected to be completed in late 2002. Expenditures associated with the completion and validation of this facility during 2002 are expected to total up to approximately $30 million. As of June 30, 2002, the Company had accumulated construction-in-progress costs of approximately $46.2 million for the Hayward facility. In addition, the Company recently announced the initiation of construction for a new manufacturing facility in Memphis, Tennessee that will be devoted to the manufacture of patient-specific GVAX cancer vaccines for lung cancer. Total costs for equipment and improvements for this facility are expected to be approximately $1.5 million in 2002. The Company has accumulated construction costs of approximately $4.7 million for the modifications of its San Diego, California, GMP facility, in preparation of the manufacture of viral based products. During 2001, the Company announced that it had signed a lease with a purchase option for a new facility in South San Francisco, California intended to serve as the Company's new corporate headquarters and research and development facility. Construction of this new facility began in 2002, and total payments for build-out of tenant improvements during 2002 are expected to be up to approximately to $22 million.

Cell Genesys anticipates that its net operating use of cash during fiscal year 2002 will not exceed approximately $40 million. Net Operating use of cash does not include capital expenditures or the cost of any potential acquisitions nor does it reflect the potential offset by future sales of Abgenix stock. The Company's capital requirements depend on numerous factors, including: the progress of the Company's research and development programs and its preclinical and clinical trials; clinical and commercial scale manufacturing requirements; the funding from collaborative partners; the acquisition of new products or technologies; the cost of litigation; and patent interference proceedings or other legal proceedings or their resolution. The Company's ongoing development programs and any increase in the number of programs will reduce the Company's current cash resources and potentially create the need to raise further capital. Therefore, the Company may continue to consider financing alternatives, including potential equity and debt financings in addition to periodic sales of the Company's holdings of Abgenix stock.

A substantial portion of the Company's working capital consists of shares maintained in its former subsidiary, Abgenix. These shares are carried at market value and have been subject to extreme fluctuation in recent quarters due to the highly volatile nature of the market price of Abgenix stock. To the extent that we continue to hold a substantial amount of these shares, our working capital position can be expected to continue to fluctuate in future periods. In June of 2002, the Company completed a license agreement with TKT under which it received consideration partially in the form of TKT common stock, the number of shares of which will be adjusted to a value of $15 million when these are freely tradable. The Company expects the shares to be fully tradable by the end of the current fiscal year.

While Cell Genesys believes that its current liquidity position will be sufficient to meet its cash needs for at least the next year, the Company may entertain the possibility of raising additional capital to preserve its liquidity, depending on the condition of the capital markets. The types of financing available to the Company include the sale of Abgenix securities, asset-backed debt financing and private or public placement of Cell Genesys equity securities. The Company's evaluation processes regularly consider the liquidity of capital markets, dilution, stockholder value and tax consequences of each type of financing on stockholders. Certain of the financing options available to the Company may have negative consequences to stockholders such as dilution. Given the volatile nature of the capital markets, decisions to raise capital may require actions that would impose a negative future consequence in order to reduce or minimize a more significant negative consequence to stockholders.

Our products are in developmental stage, are not approved for commercial sale and might not receive regulatory approval or become commercially viable. All of our potential cancer vaccines, oncolytic virus therapies 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.

Our cancer vaccine, oncolytic virus therapies and gene therapy programs depend on new and unproven technologies. 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 and oncolytic virus therapies are currently being tested in Phase I/II and Phase II human clinical trials to determine their safety and efficacy. None of our cancer gene therapy 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 commercially successful products. 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 manufactured in commercial quantities at reasonable cost or that such a product will be successfully marketed.

We have not been profitable in our operations (absent the gains on sales of Abgenix stock and certain one-time license fees) and may not become profitable in the future. We have incurred an accumulated deficit since our inception. At June 30, 2002, our accumulated deficit was approximately $65.9 million, compared with $63.6 million at December 31, 2001. For the quarter ended June 30, 2002, we recorded net income of $6.5 million as a result of a one-time payment in connection with the Company's license agreement with TKT. However, the Company experienced a net loss of approximately $2.3 million for the six months ended June 30, 2002 and we expect to incur substantial operating losses for at least the next several years. This is due primarily to the expansion of research and development programs, clinical trials and manufacturing activities 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.

We may have a need for substantial additional funds. 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. At some point in the future, 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 the pharmaceutical division of 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 relating to the Series B preferred stock
• our ability to realize the carrying value of the Abgenix stock due to its volatility

We intend 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.

We rely heavily on the development and protection of our intellectual property portfolio. 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 approximately 330 issued or granted patents and approximately 390 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. In addition, to the extent we license our intellectual property to other parties, we may incur expenses as a result of contractual agreements in which we indemnify such licensing parties against losses incurred if our intellectual property infringes upon the rights of others.

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. The Company is aware of competing intellectual property relating to both its programs in cancer vaccines and oncolytic viruses. While the Company currently believes it has freedom to operate in these areas, there can be no assurance that its position will not be challenged by others in the future. We may be required to obtain licenses to certain third party technologies or genes necessary in order to market our products. Any failure to license any technologies 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. In addition, to the extent we license our intellectual property to other parties, we may incur expenses as a result of contractual agreements in which we indemnify such licensing parties against losses incurred if our intellectual property infringes upon the rights of others.

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

• gene activation technology
• certain ex vivo gene therapies
• certain vector technologies
• chimeric receptor technology

We cannot predict the outcome of these proceedings. An adverse result could have a material adverse effect on our intellectual property position in these areas and on our business as a whole. 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 to 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 confidentiality agreements upon the commencement of employment or consulting relationships 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.

The fields of cancer vaccines, oncolytic virus therapy and gene therapy are highly competitive. Competition in the field 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 and oncolytic virus therapy programs. Certain of these competitive products are in 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.

Certain 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 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.

Our stock price has fluctuated in the past and is likely to continue to be volatile in the future. 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 approval or disapproval 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 (or in the trading of the stock of pharmaceutical and biotechnology companies in particular) which are unrelated to our operating performance
• issuance of common stock upon conversion of the Series B preferred stock
• future sales of such common stock or other shares of common stock by existing stockholders
• the perception that such issuances or sales could occur

Our business is subject to extensive regulation and any failure to obtain required regulatory approvals could prevent or delay the commercialization of our products. 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 with which these regulatory agencies are more familiar and comfortable. 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 currently 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 will be required for commercial manufacture of any product. Failure to maintain these licenses or to meet the inspection criteria of the FDA or 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 product development activities involve the use of hazardous materials and we may incur significant costs as a result of the need to comply with environmental laws. 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 contamination or injury, by accident or as the results of intentional acts of terrorists, 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 may depend on our strategic partners for the sales, marketing and distribution of our future products. We have no experience in sales, marketing or distribution of biopharmaceutical products. We may need 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

We may in the future be exposed to product liability claims and may be unable to obtain sufficient insurance coverage. 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 an 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.

Sales of our future products will be influenced by the willingness of third-party payers to provide reimbursement. 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 pricing of our future products may be influenced in part by government controls. The continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare may impair future revenues and profitability of pharmaceutical and 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 depend on our key technical and management personnel and collaborative partners to advance our technology, and the loss of these personnel or partners could impair the development of our products. 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.

We have clinical trial agreements with a number of public and private medical institutions relating to the conduct of human clinical trials for our GVAXâ cancer vaccine programs and oncolytic virus therapies. The early termination of any of these clinical trial agreements would hinder the progress of our clinical trials. If any of these relationships are terminated, the clinical trials might not be completed and the results might not be evaluated.

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.

Cell Genesys stockholders may be diluted by the exercise of outstanding stock options, the conversion of outstanding Series B redeemable convertible preferred stock, or other issuances of our common stock. Substantially all the outstanding shares of Cell Genesys common stock are eligible for sale in the public market. Conversion of the Company's Series B preferred stock or exercise of outstanding stock options 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:

• a fixed conversion price of $11.02 per share for the 694 remaining shares from the original issue of $20 million face value preferred stock and $14.53 per share for the 875 shares issued January 2000 from call options or

• the average of certain trading prices during the 10 trading days preceding such date of conversion.

As of June 30, 2002, the market price of Cell Genesys common stock traded between the two fixed conversion prices of $11.02 and $14.53. As a result, as of June 30, 2002, shares with a fixed conversion price of $11.02 would have converted at that fixed price, whereas the shares with a fixed conversion price of $14.53 would have converted at the then-effective floating conversion rate. As of June 30, 2002, the 694 outstanding shares of Series B preferred stock issued in November 1997 were convertible into an aggregate of approximately 760,000 shares of common stock, while the 875 outstanding shares issued in January 2000 were convertible into an aggregate of approximately 660,000 shares of common stock. As the market price declines below one or both the fixed conversion rates, the greater the decline in the market price, the greater the number of shares issuable upon conversion of the Series B preferred stock. Since June 30, 2002, the Company's stock price has fallen below the $14.53 fixed conversion price, which has the effect of increasing the number of shares issuable upon conversion of the preferred stock.

During the month of August 2002, 210 shares of the Company's Series B redeemable convertible preferred stock were converted into 216,961 shares of the Company's common stock at the then-effective conversion price of $10.895 per share. The total value of such common shares as of the date of conversion was approximately $2.4 million.

Our operations are vulnerable to interruption of fire, earthquake, power loss, telecommunications failure, terrorist activity and other events beyond our control. Our facilities in California have, in the past, been subject to electrical blackouts as a result of a shortage of available electrical power. In the event that these or other of our facilities are subject to future blackouts, they could disrupt the operations of the affected facilities. In addition, we do not carry sufficient business interruption insurance to compensate us for losses that may occur and any losses or damages incurred by us could have a material adverse effect on our business.

Our stock price is greatly influenced by the market price of Abgenix stock, which has been highly volatile. Our retained ownership of approximately nine million shares of Abgenix common stock represents a material portion of the total assets on our balance sheet. Abgenix stock prices have proven to be highly volatile. The value of our nine million shares of Abgenix common stock was approximately $87.8 million at June 30, 2002 versus approximately $301 million at December 31, 2001. Movements in the price of Abgenix stock, up or down, exert corresponding influences on the market price of our stock.

Our business could suffer as a result of our strategic acquisitions and investments. In January 2001, the Company acquired the principal operating assets of Chiron Corporation's gene therapy business, a fully equipped and staffed manufacturing facility. Also in January 2001, we launched Ceregene, Inc., formed through the acquisition of Neurologic Gene Therapeutics, a private San Diego-based start-up company. Finally, in August 2001, we acquired Calydon, Inc., a private biotechnology company focused on the treatment of cancer using genetically engineered oncolytic viruses. The integration processes for such acquisitions often take several years to be completed. We may not be able to fully integrate all these companies, their intellectual property or personnel, and our attempts to do so will place additional burdens on our management and infrastructure. These acquisitions will subject us to a number of risks, including:

• the loss of key personnel and business relationships;
• difficulties associated with assimilating and integrating the new personnel and operations of the acquired companies;
• the potential disruption of our ongoing business;
• the expense associated with maintenance of uniform standards, controls, procedures, employees and clients;
• the diversion of resources from the development of our own proprietary technology; and
• our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.

There can be no assurance that we will be successful in overcoming these risks or any other problems encountered in connection with our acquisitions.

We may engage in future acquisitions or investments that could dilute our existing stockholders, or cause us to incur contingent liabilities, debt or significant expense. From time to time, in the ordinary course of business, we may evaluate potential acquisitions of or investments in related businesses, products or technologies. Future acquisitions could result in the issuance of dilutive equity securities or the incurrence of debt or contingent liabilities. There can be no assurance that any strategic acquisition or investment will succeed. Any future acquisition or investment could harm our business, financial condition and results of operations.

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. However, as mentioned under "Liquidity and Capital Resources" and the "Other Factors Affecting Future Operations" sections of the Company's Management Discussion and Analysis of Financial Condition and Results of Operations above, the Company is subject to risk associated with its retained ownership in Abgenix shares.

The Company has not entered into any financial instruments that would give rise to foreign currency exchange risk, commodity pricing risk or equity pricing risk.

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, Sterling Capital Management, JP Morgan Chase H & Q and Fleet National Bank.

The Company does not currently hold any derivative financial instruments nor has it entered into hedging transactions or activities.

Interest Rate Sensitivity

Principal Amount by Expected Maturity

Average Interest Rate

 (in thousands)
                                                                                                Fair Value
                                                                                                  June 30,
                                  2003       2004       2005       2006     Thereafter   Total      2002
                                ---------  ---------  ---------  ---------  ---------  ---------  ---------
Total Investments
  Securities.................. $  53,750  $  46,092  $  36,991  $   8,326  $   2,013  $ 147,172  $ 148,946

Total Restricted Investment
  Securities.................. $  33,425  $  27,117        --         --         --   $  60,542  $  60,735

  Average Interest Rate.......      3.18%      3.92%      4.44%      5.46%      3.85%      4.17%       --

Long-term Debt, including
  Current Portion............. $   8,889  $   8,889  $   8,889  $   8,889  $  24,444  $  60,000  $  60,000
  Average Interest Rate.......      2.90%      2.90%      2.90%      2.90%      2.90%      2.90%      2.90%

Part II. OTHER INFORMATION

The following table shows the results of the voting on these matters.


   (i)   Director                     For        Withheld
      David W. Carter             31,561,955     164,829
      Nancy M. Crowell            31,529,745     197,039
      James M. Gower              31,551,412     175,372
      John T. Potts Jr., M.D.     31,572,636     154,148
      Thomas E. Shenk, Ph. D.     31,560,524     166,260
      Stephen A. Sherwin, M.D.    31,543,468     183,316
      Eugene L. Step              31,556,086     170,698
      Inder M. Verma, Ph.D.       31,558,182     168,602

  (ii)     For         Against     Abstained   Broker Non-Votes
        30,883,307     755,854      87,622          0

 (iii)     For         Against     Abstained   Broker Non-Votes
        31,091,625     603,973      31,185          0




 
 
 
Item 6.  Exhibits and Reports On Form 8-K

	a)   Exhibits




  Exhibit
  Number                             Exhibit Description
- -----------     -------------------------------------------------------------
     10.21      License agreement dated June 7, 2002 between Transkaryotic Therapies,
                Inc. and Cell Genesys, Inc.

      99.1      Certification of Chief Executive Officer and Chief Financial Officer



	b)   Reports on From 8-K


      Current Report on Form 8-K filed January 27, 2000.











SIGNATURES
	Pursuant to the requirements of Section 13 or 15 (d)
of the Securities Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized in Foster
City, California, on August 14, 2002.



  

    

    

  

    
 
    


                                CELL GENESYS, INC.



  

    

    

  

    
 
    


(Registrant)




  

    

    

    

  

    
 

     By: 
    


/s/ Matthew J. Pfeffer




  

    

    

  

    
 
    

      

    
  

    
 
    


                                  Matthew J. Pfeffer

  

    
 
    


                                  Vice President and
                                  Chief Financial Officer

  

    
 
    


                                  (Principal Financial and Accounting Officer)
  





  

    

    

  

    
 
    


                                    Date: August 14, 2002