• Announced the initiation of a multicenter Phase 1/2 clinical trial of CG7870, an oncolytic virus therapy for the treatment of early- stage prostate cancer, administered in combination with radiation therapy. This trial, which was prompted by encouraging results from a previous Phase 1/2 clinical trial evaluating CG7870 as a single agent, is designed to evaluate various treatment regimens combining intraprostatically administered CG7870 with external beam radiation therapy.

• Announced the acceptance of two abstracts for presentation at the 2003 American Society of Clinical Oncology (ASCO) Annual Meeting, which will take place in Chicago, Illinois from May 31 to June 3, 2003. The two accepted abstracts pertain to ongoing trials of GVAX^® prostate cancer vaccine and GVAX^® vaccine for myeloma.

• Announced encouraging updated data from the initial clinical trial of GVAX^® lung cancer vaccine, previously updated in September 2000, for the treatment of NSCLC. The data was featured in an article in the February 15th issue of the Journal of Clinical Oncology, the official journal of the American Society of Clinical Oncology.

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

Since our inception, a substantial portion of our revenues have been generated from research and licensing agreements with collaborators. Revenue under such collaboration agreements typically include upfront payments, cost reimbursements and milestone payments.

Revenue under these agreements from non-refundable upfront license fees and other payments where we continue involvement through development is recognized ratably over the development period. We recognize cost reimbursement revenue under collaborative agreements as the related research and development costs are incurred, as provided for under the terms of the agreements.

Incentive milestone payments under collaborative arrangements are recognized as revenue upon achievement of the incentive milestone events, which represent the culmination of the earnings process. Incentive milestone payments are triggered either by the results of our research efforts or by events external to Cell Genesys, such as regulatory approval to market a product or the achievement of specified sales levels by a marketing partner. As such, the incentive milestones are substantially at risk at the inception of the contract, and the values assigned thereto are commensurate with the milestone achieved. Upon the achievement of an incentive milestone event, we have no future performance obligations related to that payment.

Amounts received under license agreements relating to our intellectual property are recognized as revenue upon execution of the technology licensing agreement, if we have no future performance obligations.

Deferred revenue represents the portion of research payments received that has not been earned.

We record our obligations under facility operating lease agreements as rent expense. In the fourth quarter of 2002, we recorded a charge of approximately $6.2 million for lease exit costs associated with the move of our corporate headquarters to South San Francisco, California in March 2003 and the related vacancy in Foster City, California. This charge was estimated based upon market conditions at that time and will be adjusted as necessary based on our ability to sublease the facilities and as market conditions change.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the 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, expenses for certain outside experts and consultants, useful lives of property and equipment, and other items.

Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets.  We record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized.  We have considered anticipated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances.  If we determine that we will be able to realize our deferred tax assets in the future in excess of our net deferred tax assets, adjustments to the deferred tax assets will increase income by reducing tax expense in the period that we made such determination.  Likewise, if we determine that we will not be able to realize all or part of our net deferred tax assets in the future, adjustments to the deferred tax assets will decrease income by increasing tax expense in the period that we make such determination.

Our research and development expenses were $21.1 million and $16.6 million for the three months ended March 31, 2003 and 2002, respectively. This increase can be attributed primarily to our expanding clinical trials and other product development activities in both its GVAX^® cancer vaccines and oncolytic virus therapy programs. We expect that our research and development expenditures and headcount will continue to increase in future years to support expanded, more advanced and more numerous clinical trials, additional manufacturing and office 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 $5.0 million and $3.7 million for the three months ended March 31, 2003 and 2002, respectively. This increase resulted primarily from infrastructure expenses related to our manufacturing and corporate headquarters facilities. Future spending for general and administrative costs is expected to continue to increase in order to support our growing infrastructure needs, particularly in the areas of manufacturing and other facilities.

Interest and other income were $1.9 million and $2.4 million for the three months ended March 31, 2003 and 2002, respectively. This decrease was primarily due to lower average cash balances and lower interest rates during the period. Interest expense was $0.3 million and $0.4 million for the three months ended March 31, 2003 and 2002, respectively. The interest expense incurred during the three months ended March 31, 2003 related primarily to our leased facility in South San Francisco, California. Interest expense for the three months ended March 31, 2002 related primarily to the $60 million asset- backed collateral debt financing completed in December 2001.

The net loss for the three months ended March 31, 2003 was $17.4 million compared with $8.8 million for the three months ended March 31, 2002. Losses are expected to continue and may increase in future years as operating expenses rise, particularly as we incur expenses related to manufacturing and advanced clinical trials of our potential products.

At March 31, 2003 we had approximately $145.5 million in cash, cash equivalents and short-term investments, of which $67.3 million is classified as restricted cash primarily related to our debt financing. We have maintained our financial position through strategic management of our resources including our holdings in Abgenix common stock and by relying on funding from various corporate collaborations and licensing agreements. Additionally, in February 2003, our shelf registration statement was declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended, which allows us to offer up to $150 million of securities on short notice in one or more public offerings. However, there can be no assurance we will be able to issue such securities on acceptable terms, or at all.

Cell Genesys has financed its operations primarily through the sale of equity securities, funding under collaborative arrangements, sales of Abgenix common stock and secured financing. In 2002 and 2000, Cell Genesys received approximately $2.5 million and $243.9 million, respectively, in net proceeds from the sale of shares of Abgenix common stock. Cell Genesys did not sell any Abgenix stock in the first quarter of 2003.

In connection with the gain on sale of Abgenix common stock in 2000, we paid $41.5 million in federal and state income taxes. Since 2001 we have received $34.1 million in tax refunds from the carryback of losses. We have additional unutilized net operating loss ("NOL") carryforwards, although the future utilization of these NOL carryforwards is limited by IRS regulation Section 382, which imposes an annual limitation on taxable income that can be offset by NOLs following a change in control. For IRS purposes we experienced a change in control during our acquisition of Somatix in 1997. It is our current intention to minimize future tax liabilities on sales of Abgenix stock by offsetting gains against current operating losses and the NOL carryforwards allowed under Section 382. In addition, we have certain research and development tax credits that we may utilize to offset the tax effects of such gains. However, under some circumstances we may sell more Abgenix stock and consequently recognize more gain than we may be able to shelter from tax using these methods.

Future minimum payments under non-cancelable operating leases, capital leases and debt financing at March 31, 2003 were (in thousands):

                                                     Operating     Capital      Debt
                                                     Leases *      Leases     Financing
                                                     ----------------------------------
Years ending December 31:
  2003.........................................   $     8,039   $    4,491  $    1,035
  2004.........................................         9,970        6,156       1,380
  2005.........................................        10,278        6,369       1,380
  2006.........................................         3,924        6,460       1,380
  2007.........................................         1,877        6,511      61,380
  2008 and beyond..............................        15,698       89,286         --
                                                     ---------    ---------   ---------
  Total minimum payments (1)...................   $    49,786   $  119,273  $   66,555
                                                     =========

Less: Amount representing interest and executory costs.           ($65,756)     (6,555)
                                                                  ----------  ---------
Present value of future debt payments..........                 $  $53,517  $   60,000
Less: Current portion of future payments.......                    ($5,687)        --
Noncurrent portion of future payments..........                   ----------  ---------
                                                                $  $47,830  $  $60,000
                                                                  ==========  =========

(1) Total operating lease commitments include rent payments for the Company's Foster City facilities of which $6.2 million was accrued as of March 31, 2003 as part of the estimated facility exit co with our move to the South San Francisco, California headquarters in March 2003.

In April 2003 the Company amended the terms of its $60 million asset-backed debt financing. Under the amendment, the quarterly principal payments have been replaced with a single balloon payment in 2008 and the interest rate was reduced from LIBOR (London Interbank Offering Rate) plus ..750 percent to LIBOR plus .625 percent. As a result of this amendment, the Company classified its short-term obligation under the original asset-backed debt financing as a noncurrent debt financing obligation at March 31, 2003 as reflected above.

Capital expenditures for the three months ended March 31, 2003 were $12.2 million, relating primarily to the construction of our manufacturing facilities for our Phase 3 trials and future market launch in Hayward, California and leasehold improvements for our corporate headquarters in South San Francisco, California. Cell Genesys currently has three manufacturing facilities located in Hayward and San Diego, California and Memphis, Tennessee. We have completed the construction necessary at our manufacturing facility for non patient-specific GVAXâ cancer vaccines located in Hayward, California for initiation of our first Phase 3 trial and test manufacturing is currently underway at this facility. Expenditures associated with the completion and validation of the two buildings comprising this facility is expected to total approximately $3.0 million in 2003. In addition, we have completed the construction of a new manufacturing facility in Memphis, Tennessee that will be devoted to the manufacture of patient-specific GVAXâ cancer vaccines for lung cancer. We expect to incur approximately $1.0 million of additional costs in 2003 associated with the validation of this facility. In 2002, we completed modifications of our GMP facility in San Diego, California, in preparation for the manufacture of viral based products. In March 2003, we moved our corporate headquarters to South San Francisco, California.

While we believe that our current liquidity position will be sufficient to meet our cash needs for at least the next year, we may entertain the possibility of raising additional capital to preserve our liquidity, depending on a number of conditions, including conditions in the capital markets. The sources of liquidity available to us include the sale of Abgenix securities, asset-backed debt financing, and private or public placement of Cell Genesys equity securities, warrants, debt securities or depositary shares. We 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 us 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 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 ever receive regulatory approval or become commercially viable.

All of our potential cancer vaccines, oncolytic virus therapies and cancer 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. Our research and development efforts may not be successful and any of our future products may not be ultimately 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 cancer gene therapy programs must undergo exhaustive clinical testing and may not prove to be safe or effective. If any of our proposed products are delayed or fail, we may have to curtail our operations.

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 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. Unacceptable side effects may be discovered during preclinical and clinical testing of our potential products or thereafter. Possible side effects of gene therapy may be serious and potentially life-threatening. 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 some of our proposed products and therapies in human clinical trials, we cannot guarantee that we will be permitted to undertake human clinical trials for any of our other products or that adequate numbers of patients can be recruited for our clinical trials. 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 upfront or non-recurring license fees). We expect to continue to incur substantial losses and negative cash flow from operations and may not become profitable in the future.

We have incurred an accumulated deficit since our inception. At March 31, 2003, our accumulated deficit was approximately $107.5 million. Our accumulated deficit would be substantially higher absent the gains we have realized on sales of our Abgenix stock. For the quarter ended March 31, 2003, we recorded a net loss of $17.4 million. 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, general and administrative expenses. We also have substantial lease obligations related to our new manufacturing and headquarter facilities impacting operating 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, manufacture, commercialize or market any products. We cannot guarantee that we will ever achieve or sustain product revenues or profitability.

We will need substantial additional funds to continue operations, and our ability to generate funds depends on many factors beyond our control.

We will need substantial funds for existing and planned preclinical and clinical trials, to continue research and development activities, for lease obligations related to our manufacturing and headquarter facilities, and to establish manufacturing and marketing capabilities for any products we may develop. At some point in the future, we will also need to raise additional capital just to fund our operations. Our future capital requirements will depend on, and could increase as a result of, many factors, such as:

• the progress and scope of our internally funded research, development and commercialization activities;
• our ability to establish new collaborations and the terms of those collaborations;
• competing technological and market developments;
• the time and cost of regulatory approval;
• the extent to which we choose to commercialize our future products through our own sales and marketing capabilities;
• the costs we incur in obtaining and enforcing patent and other proprietary rights or gaining the freedom to operate under the patents of others; and
• our success in acquiring and integrating complementary products, technologies or businesses.

We plan 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, but we may not be able to do any of the foregoing on favorable terms, or at all.

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. Additional funding may not be available to us, and, if available, may not be on acceptable terms. If we raise additional funds by issuing equity securities, stockholders will incur immediate dilution. Opportunities for out-licensing technologies or for third-party collaborations may not continue to be available to us on acceptable terms, or at all. 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 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. Currently, we have no collaborative partners for the development of our GVAX^® cancer vaccines or oncolytic virus therapy products.

Our ability to manufacture our products is uncertain, which may delay or impair our ability to develop, test and commercialize our products.

We are building our own manufacturing facilities in compliance with FDA Good Manufacturing Practices regulatory requirements for the manufacture of products for clinical trials and to support the potential commercial launch of our product candidates. We are under significant lease obligations for each of our facilities. Completion of these facilities could take longer than expected, and our inability to establish and maintain the facilities within our planned time and budget could materially affect our product development timelines. Our manufacturing facilities will be subject to ongoing, periodic inspection by the FDA and state agencies to ensure compliance with Good Manufacturing Practices. We also may encounter problems with the following:

• achieving consistent production yield and costs;
• meeting product release specifications;
• quality control and assurance;
• shortages of qualified manufacturing personnel;
• shortages of raw materials;
• shortages of key contractors; and
• ongoing compliance with FDA and other regulations.

Developing advanced manufacturing techniques and process controls is required to fully utilize our expanded facilities. We may not be able to develop these techniques and process controls to manufacture our products effectively to meet demands of clinical testing and production.

If we are unable to manufacture our products for any reason, our options for outsourcing manufacturing are currently limited. We are unaware of available contract manufacturing facilities on a worldwide basis in which our product candidates can be manufactured under Good Manufacturing Practices regulations, a requirement for all pharmaceutical products. It would take a substantial period of time for a contract manufacturing facility that has not been producing our particular products to begin producing them under Good Manufacturing Practices regulations.

Our manufacturing facilities are subject to licensing requirements of the California Department of Health Services and the Tennessee Department of Commerce and Insurance, Board of Pharmacy, referred to as the Tennessee Board of Pharmacy. 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 and the Tennessee Board of Pharmacy. Failure to maintain these licenses or to meet the inspection criteria of the FDA, the California Department of Health Services or the Tennessee Board of Pharmacy would disrupt our manufacturing processes and have a material adverse effect on our business, results of operations, financial condition and cash flow.

If our proposed products are not effectively protected by issued patents or if we are not otherwise able to protect our proprietary information, we will be more vulnerable to competitors, and our business could be adversely affected.

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. As of March 31, 2003 we had approximately 353 patents issued or granted to Cell Genesys or available to us based on licensing arrangements and approximately 261 applications pending in the name off Cell Genesys or available to us based on licensing arrangements. 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 and will not 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 these licensing parties against losses incurred if our intellectual property infringes upon the rights of others.

Our intellectual property may be challenged by our competitors in the future, which may have a material adverse effect on our business, results of operations, financial condition and cash flow.

Our commercial success depends in part on not infringing the patents or proprietary rights of others and not breaching licensees granted to us. We are aware of competing intellectual property relating to both our programs in cancer vaccines and oncolytic virus therapies. While we currently believe we have freedom to operate in these areas, others may challenge our position in the future. We may be required to obtain licenses to 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, financial condition and cash flow.

We may have to engage in litigation, which could result in substantial cost, 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, patents can be revoked through opposition proceedings. These proceedings could result in an adverse decision as to the priority of our inventions.

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

• gene activation technology; and
• certain vector technologies.

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.

Our competitive positions may be adversely affected by our limited ability to protect and control unpatented trade secrets, know-how and other technological innovation.

Our competitors may independently develop similar or better proprietary information and techniques and disclose them publicly. Also, others may gain access to our trade secrets, and we may not be able to 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 relating to our business conceived by the employee while employed by us 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.

Our competitors may commercialize products more rapidly than we do, which may adversely affect our competitive position.

There are approximately 50 companies worldwide pursuing cancer programs with similar technology to ours. Some of these competitors are large pharmaceutical companies, such as Aventis and GlaxoSmithKline, which have greater experience and resources than we do in developing products, in undertaking preclinical testing and human clinical trials of new pharmaceutical products, in obtaining FDA and other regulatory approvals of products, and in manufacturing and marketing new therapies. We are also competing with other biotechnology companies with similar experience and resources to ours, but who may have programs which are in a later stage of clinical testing than ours, such as Dendreon Corporation. Our competitive position and that of our competitors can vary based on the performance of products in clinical trials. In addition, our competitors may obtain patent protection or FDA approval and commercialize products more rapidly than we do, which may impact future sales of our products. We also may not have the access that some of our competitors have to biological materials necessary to support the research, development or manufacturing of planned therapies. If we are permitted by the FDA 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; and
• sales, marketing and distribution capabilities.

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

To the extent we depend on strategic partners to sell, market or distribute our products, we will have reduced control over the success of the sales, marketing and distribution of our future products.

We have no experience in sales, marketing or distribution of biopharmaceutical products. We may in the future 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; and
• our overall strategic objectives.

We may in the future be exposed to product liability claims, which could adversely affect our business, results of operation, financial condition and cash flow.

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 sellers of our products. We currently maintain product liability insurance with respect to each of our clinical trials. We may not be able to maintain insurance or obtain sufficient coverage at a reasonable cost, given the increasing cost of insurance in today's insurance market. 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 claim, particularly resulting from a clinical trial, on any of our insurance policies or a product recall could have a material adverse effect on our business, results of operations, financial condition and cash flow.

Our business, financial condition and results of operations could suffer as a result of our strategic acquisitions and investments.

In January 2001, we 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 September 2001, we acquired Calydon, Inc., a private biotechnology company focused on the treatment of cancer using genetically engineered oncolytic virus therapies. We may not be able to fully integrate all these companies and their intellectual property or personnel. Our attempts to do so will place additional burdens on our management and infrastructure. These acquisitions will also 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 diverse 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 acquired technology sufficient to offset associated acquisition and maintenance costs.

                                                                                 Fair Value
                                                                  2008             March 31,
                      2003    2004    2005    2006     2007   Thereafter  Total      2003
                   --------  ------- ------- ------- -------- ---------- -------- ----------
Total Investments
 Securities.        $50,441  $44,505  $26,192  $4,831  $4,183     --     $130,152  $131,380

  Average Interest
  Rate............... 1.38%    3.81%   2.74%    2.71%   2.18%     --       1.88%      --

Long-term Debt, including
  Current Portion.... $ 181    $ 257    $ 230   $ 104    --     $60,000   $60,772   $60,772
  Average Interest
  Rate............(1)  2.04%   2.04%   2.04%    2.04%   --        2.04%    2.04%      --