Under the terms of the agreement, we made an initial license fee payment of $1 million to Abgenix. Two additional milestone payments of $1 million are due to Abgenix under the terms of the agreement contingent on achievement of certain milestones. The license fee payment and the milestone payments, if any are paid to Abgenix, will be non-refundable and non-creditable against any future obligations under this agreement.

If ABX-CBL receives regulatory approval and is launched, we will reimburse Abgenix for one-half of its development expenses incurred prior to January 1, 2000 up to a maximum reimbursement of $6.1 million provided that we don't have any obligation to reimburse Abgenix until the first anniversary of the launch of ABX-CBL and the timing of reimbursement varies depending on ABX-CBL's sales. We have also agreed to reimburse Abgenix for one-half of the development costs for ABX-CBL from January 1, 2000 to August 8, 2000, with our share being approximately $1.9 million. We must reimburse Abgenix for this amount over a two-year period commencing with a $1 million payment, which has already been paid, and two equal payments of the remaining amount payable by the end of June 2001 and 2002. The license fee and the initial reimbursement of development expenses are recorded as research and development expenses.

We entered into a Distribution Agreement with Aventis in May 1999 that expires March 31, 2002. Aventis is our exclusive distributor for Thymoglobulin and Lymphoglobuline for most countries outside of North America, Europe and Japan (where Thymoglobuline and Lymphoglobuline are distributed by Aventis Pharma). The contract has minimum purchase requirements. If Aventis does not meet these minimums, the agreement becomes non-exclusive, which means we can sell to another distributor in the same country. Aventis sells these products either through its local subsidiary or through a distributor that often distributes other Aventis products. We are currently re-negotiating this distribution agreement to allow us to contract directly with distributors in countries in which Aventis has no direct presence (e.g. Israel and certain Asian countries). Aventis also performs certain steps in the manufacturing process of Thymoglobulin and Lymphoglobuline. See "Manufacturing". In addition, pursuant to the purchase of IMTIX on September 30, 1998, we pay Aventis royalties on Thymoglobulin and Lymphoglobuline contingent upon the sales of these products. In 1999 and 2000, royalty payments on Lymphoglobuline to Aventis totaled approximately $646,000 and $622,000 respectively. We expect these royalty payments to increase in future years since we will begin paying royalties on Thymoglobulin commencing on the third anniversary of the purchase of IMTIX (October 1, 2001).

Amgen, Inc. ("Amgen") is the exclusive distributor for our cyclosporine products in Australia, New Zealand, China and Taiwan. Amgen is responsible for obtaining the registrations and marketing the products. Amgen made an initial payment plus other milestone payments in 1998 and 1999. There are no more milestones due under the agreement. If Amgen is sued for patent infringement based upon its sales of our cyclosporine products in these countries, we will control and pay for such litigation.

We also have a worldwide, exclusive license from Stanford University to make, sell or otherwise distribute products covered by patents and patent applications on certain HLA peptides. Stanford University has no obligation to conduct any further research with respect to such peptides. Our exclusive right to these patents expires in October 2007. Additionally, under the terms of this agreement, we pay Stanford University annual license fees and, if we obtain regulatory approval and start selling a product covered by the agreement, we will pay Stanford University a royalty on sales of this product.

We have been working with the University of North Carolina (UNC) since 1994. UNC does formulation work for us on cyclosporine formulations. Under the terms of our license agreement with UNC, we pay UNC a royalty on sales of SangCya Oral Solution in return for a worldwide exclusive license. Should UNC's work on other formulations result in a product, we may pay UNC a royalty for such products.

• product utility
• therapeutic benefits
• ease of use
• pricing, and
• effective marketing

We believe we compete favorably with respect to all of these factors. Gengraf, however, is a generic drug, which means we compete favorably against the branded drug, Neoral, on pricing, but some physicians may be reluctant to prescribe generic drugs.

Competitive products with respect to our material products include the following:

Competitive products with respect to our product candidates include the following:

Our cyclosporine products are generic and compete against the branded cyclosporine products as well as other generic cyclosporine products that have been or may be approved. These products also compete against Prograf, marketed by Fujisawa Pharmaceutical Co. Ltd, which was approved by the FDA to be taken instead of cyclosporine. Roche's Cellcept® is indicated as a conjunctive therapy, to be taken with cyclosporine rather than instead of cyclosporine. As noted above, Thymoglobulin competes with OKT3, ATGAM, Simulect, and Zenapax. In the US, Thymoglobulin has been successful in establishing a market share against these products, which were all previously on the market. In Europe, Novartis and Roche have just started selling Simulect and Zenapax, respectively, and we believe that the launch of these two products may impact sales of Thymoglobulin and Lymphoglobuline in Europe.

ABX-CBL is expected to compete against two products that are also in clinical trials for the treatment of GVHD: Medimmune/BioTransplant's MEDI-507 and Protein Design Labs' Nuvion. In addition, other products are used for the prevention of GVHD and would therefore eliminate the need to use ABX-CBL for treatment.

RDP58 is an inhibitor of TNF-alpha synthesis. TNF-alpha is a cytokine released in excess in various autoimmune disorders. For that reason, many companies are pursuing development of a TNF-alpha inhibitor and we believe there could be substantial competition in this area. In addition, Immunex/AHP's Enbrel and Johnson & Johnson's Remicade are both TNF-alpha inhibitors that are currently approved for rheumatoid arthritis and Crohn's disease respectively.

We have a number of issued patents and pending patent applications in the US and in corresponding countries with respect to the products we are selling, the products we have in development and our research areas. We aggressively seek patent protection on our inventions and our policy is to enforce our intellectual property rights. We have no issued patents covering Thymoglobulin and Lymphoglobuline and rely on our manufacturing know-how to protect these products. We have issued patents covering Celsior. SangCya Oral Solution and our cyclosporine capsules have formulation patent protection both issued and pending, but the cyclosporine compound is no longer patent-protected and there are several generics on the market in the US. We are pursuing patent protection for RDP58 and we believe that an issued patent may give us a competitive advantage.

We have twenty-nine issued patents and sixteen pending patent applications in the US and are pursuing corresponding patent applications in other countries.

• Two issued patents and three pending patent applications relating to our peptide program.
• Two issued patents and two pending patent applications in the heme oxygenase area.
• Two issued patents relating to Celsior.
• Three issued patents and four pending patent application in the general therapeutics area, including our complexine technology.
• One issued patent and two pending patent applications relating to Anti-LFA1.
• Four issued patents and three pending patent applications that cover our cyclosporine formulations technology for developing multiple formulations and dosage forms of cyclosporine.
• Fifteen issued patents and one pending patent application in the diagnostic or monitoring area.
• One pending patent application relating to the CycloTech device.

Our patents expire on various dates beginning in the year 2008 and ending in the year 2017.

In addition, as discussed above, we have also licensed in certain patents and patent technology. We have an exclusive, worldwide license from Stanford University for certain issued patents and pending patent applications in the HLA and peptide area. We have licensed from Abgenix certain patents and patent applications that relate to ABX-CBL. We have licensed additional patents relating to cyclosporine from several groups. The licensor for each of these licenses is primarily responsible for prosecution of these patents and patent applications.

Patent applications in the US are maintained in secrecy until patents issue. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we were the first to discover compositions covered by our pending patent applications or the first to file patent applications on such compositions. There can be no assurance that our pending patent applications will result in issued patents, that any of our issued patents will afford protection against a competitor or that our products will not infringe on other patents.

We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our employees and consultants.

We have registered or applied for registration of the names of all of our marketed products and plan to register the names of our products under development once a name has been selected for the product candidate.

Manufacturing pharmaceutical products is a highly regulated process. The FDA and other regulatory agencies require that manufacturing be done in accordance with current Good Manufacturing Practices ("GMP"). Additionally, products can only be manufactured in facilities approved by the applicable regulatory authorities. Because of these and other factors, we may not be able to quickly and efficiently replace our manufacturing capacity in the event that we are unable to manufacture Thymoglobulin or Lymphoglobuline or one of our manufacturers is unable to manufacture one of our other products for us. See "Risk Factors - We may not be able to manufacture or obtain sufficient quantities of our products, which could lead to product shortages and harm our business," and "Risk Factors - Our reliance on third parties for manufacturing may delay product approval or once approved, result in a product shortage, which would reduce our revenues."

We have no other manufacturing facility and the Lyon facility could not be used for products other than biologics. Therefore, we rely on third parties to manufacture our other products, both those that we sell and those in development. We depend on such third parties to perform their obligations in compliance with all regulatory requirements and on a timely basis. If any of our contract manufacturers fail to perform, such failure may delay our clinical development or submission of products for regulatory approval or result in product shortages with respect to our marketed products.

Abgenix is responsible for the manufacturing of ABX-CBL. If the supplier they have chosen fails to perform, it would have the same results discussed above: such failure may delay our clinical development or submission of products for regulatory approval or result in product shortages with respect to our marketed products.

With respect to raw materials, we have agreements for commercial scale production of cyclosporine bulk material with Gensia Sicor ("Sicor") and Abbott. Our Sicor agreement runs until October 31, 2013 and has an automatic five-year term renewal unless one party gives notice. Our Abbott agreement terminates December 31, 2004 and is automatically renewed until one party gives notice. Bulk cyclosporine is difficult to manufacture since it must be extracted from whole cells and carefully purified. We have an obligation to purchase a certain percentage of our future bulk cyclosporine requirements from Sicor and a minimum fixed amount from Abbott, subject to certain conditions being met. We believe we have sufficient quantities of bulk cyclosporine to meet our current needs. We believe we also have sufficient quantities of raw materials for our other products and product candidates.

Our research and development activities, preclinical studies and clinical trials, and ultimately the manufacturing, marketing and labeling of our products, are subject to extensive regulation by the FDA and other regulatory authorities in the US and other countries ("Regulatory Agencies"). The US Federal Food, Drug, and Cosmetic Act (the "Act") and the regulations promulgated thereunder and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising, promotion, import and export of our products and product candidates. Preclinical study and clinical trial requirements and the regulatory approval process typically take years and require the expenditure of substantial resources. Additional government regulation may be established that could prevent or delay regulatory approval of our product candidates. Delays or rejections in obtaining regulatory approvals would harm our ability to commercialize any product candidates we develop and our ability to receive product revenues. If regulatory approval of a product candidate is granted, the approval may include significant limitations on the indicated uses for which the product may be marketed.

The steps ordinarily required before a drug or biological product may be marketed in the US include the following:

• preclinical studies,
• the submission to the FDA of an Investigational New Drug application ("IND"), which must become effective before human clinical trials may commence,
• adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug,
• the submission to the FDA of a New Drug Application ("NDA"), or Biological License Application ("BLA"), if applicable, and
• FDA approval of the application, including approval of all product labeling.

Preclinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. Laboratories that comply with FDA regulations regarding Good Laboratory Practice must conduct these preclinical safety tests. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA before the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. Submission of an IND may not result in FDA authorization to commence clinical trials or the lack of an objection may not mean that the FDA will ultimately approve an application for marketing approval.

Clinical trials are typically conducted in three sequential phases, but the phases may overlap.  

Our clinical trials may not be completed successfully or within any specified time period. Either the FDA or we may suspend clinical trials at any time, if either of us concludes that clinical subjects are being exposed to an unacceptable health risk, or for other reasons. The conduct of clinical trials is complex and difficult, especially in Phase III. The design or the performance of the Phase III clinical trial protocols may not be successful.

The results of preclinical studies and clinical trials, if successful, are submitted in an application to seek FDA approval to market the drug or biological product for a specified use. The testing and approval process requires substantial time and effort, and there can be no assurance that any approval will be granted for any product or that approval will be granted according to any schedule. The FDA may refuse to approve an application if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy of the drug. Moreover, if regulatory approval of a drug product is granted, the approval will be limited to specific indications. Our product candidates may not receive regulatory approvals for marketing, or if approved, that approval may not be for the indications that we requested.

Other Regulatory Agencies follow similar procedures to those required by the FDA and require that the safety and efficacy of our pharmaceutical product candidates be supported through adequate and well-controlled clinical trials. If the results of our pivotal clinical trials submitted in application for approval do not establish the safety and efficacy of our product candidate to the satisfaction of any Regulatory Agency, we will not receive the approvals necessary to market our product candidate in that country.

In the European Union ("EU"), the registration process for products can be done through a decentralized procedure. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more Member States, certify that the dossier is identical to that on which the first approval was based or explain any differences and certify that identical dossiers are being submitted to all Member States from which recognition is sought. Within 90 days of receiving the application and assessment report, each Member State must decide whether to recognize the approval. The procedure encourages Member States to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. If such disputes cannot be resolved within the 90-day period provided for review, the application will be subject to a binding arbitration procedure.

Following approval, Regulatory Agencies continue to regulate our approved and marketed products. We must report adverse drug events associated with our products to Regulatory Agencies. In addition, Regulatory Agencies also inspect on a regular basis the equipment and facilities used to manufacture our products. A Regulatory Agency may suspend the manufacturing facilities (and order a recall of our products manufactured in that facility) if the Regulatory Agency believes that the product has not been manufactured in compliance with regulations. See "Manufacturing."

In connection with our research and development activities we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens, and wastes. Although we believe that we have complied with these laws, regulations and policies in all material respects and have not been required to take any action to correct any noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and infectious biological specimens. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources.

Our operating results will depend in part on the availability of adequate reimbursement for our products from third-party payers, such as government entities, private health insurers and managed care organizations. Third-party payers increasingly are seeking to negotiate the pricing of medical services and products. In some cases, third-party payers will pay or reimburse a user or supplier of a prescription drug product only a portion of the purchase price of the product. In the case of our prescription products, payment or reimbursement by third-party payers of only a portion of the cost of such products could make such products less attractive, from a cost perspective, to users, suppliers and prescribing physicians. Reimbursement, if available, may not be adequate. If government entities or other third-party payers for our products do not provide adequate reimbursement levels, our results of operations would be harmed.

A number of legislative and regulatory proposals aimed at changing the US health care system have been proposed in recent years. While we cannot predict whether any such proposals will be adopted, or the effect that any such proposals may have, such proposals, if enacted, could harm our business operations.

We face an inherent risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in adverse effects. Such risk exists even with respect to those products that are manufactured in licensed and regulated facilities or that otherwise received regulatory approval for commercial sale. We could be subject to significant product liability claims. We currently have product liability insurance in the amount of $25.0 million per claim and $25.0 million in the aggregate on a claims-made basis. Many of our customers require that we maintain product liability insurance coverage as a condition to their conducting business with us. As the loss of such insurance coverage could result in a loss of such customers, we intend to take all reasonable steps necessary to maintain such insurance coverage. However, insurance coverage may not be available in the future on commercially reasonable terms. Such insurance may not be adequate to cover potential product liability claims and the loss of insurance coverage or the assertion of a product liability claim or claims could harm our operating results.

As of December 31, 2000, we employed 287 people worldwide, of which 133 are in the US and Canada and 154 are in Europe, which includes approximately 65 employees in our manufacturing facility in Lyon, France, most of whom are represented by labor unions. 31 of our US employees work at The Transplant Pharmacy, which we expect to sell by April 30, 2001. We believe that we maintain good relations with our employees.

Jean-Jacques Bienaimé, 47, has been our President and Chief Operating Officer since June 1998 and became Chief Executive Officer on February 1, 1999. He was elected to the Board of Directors in March 1999. Mr. Bienaimé became Chairman of the Board of Directors in October 2000. From September 1992 to May 1998 Mr. Bienaimé was with Rhone Poulenc Rorer, Inc., a pharmaceutical company, rising to the position of Senior Vice President, Corporate Marketing and Business Development. He is currently a member of the board of Fox Chase Cancer Center and Aerogen Inc. Mr. Bienaimé received his degree in economics from Ecole Superieure de Commerce de Paris in France and an M.B.A. from the Wharton School, University of Pennsylvania.

Christophe M. Bianchi, M.D., 39, has been the President of our IMTIX-SangStat subsidiary and our Senior Vice President, Global Marketing and Business Development since January 2000. From 1989 to December 1999, Dr. Bianchi held various positions with Rhône-Poulenc Rorer, Inc., serving most recently as Vice President and Head, Global Marketing. Dr. Bianchi received an M.D. from the University of Reims in France, a degree from Ecole De Hautes Etudes Commerciales (EDHEC graduate school of management), and a Masters of Business Administration from the Wharton School, University of Pennsylvania.

Steve Aselage, 49, has been our Senior Vice President, North American Sales since February 1999. From 1995 to January 1999, Mr. Aselage was the Director of Sales and Marketing at Advanced Tissue Sciences, a tissue engineering company. Mr. Aselage received a B.S. in biology from the University of Notre Dame.

Roland Buelow, Ph.D., 42, has been our Senior Vice President of Research and Development since April 2000 and was Vice President of Research and Development from 1993 until 2000. Dr. Buelow received a Ph.D. in Biology from the Max- Planck Institute for Biology in Tuebingen, Germany. Dr. Buelow visited the University of Texas as a Fulbright scholar and spent two years at Stanford Medical School.

Stephen G. Dance, 50, has been our Senior Vice President, Finance since April 1999. From July 1998 to April 1999, Mr. Dance was Director of Financial Accounting, Planning and Reporting at Plantronics, Inc., a telecommunications company. From 1983 to July 1998, Mr. Dance held various positions with Syntex Corporation, a pharmaceutical company, which was acquired by Roche Holding Ltd., also a pharmaceutical company, in 1994, serving most recently as Controller, Syntex Laboratories, Inc. Mr. Dance holds a B.A. in French from Leeds University in England, is a Certified Public Accountant in the State of California and a fellow of the Institute of Chartered Accountants in England and Wales.

Ralph E. Levy, 52, has been our Senior Vice President, Operations since 1995 and Vice President, Operations from 1990 until 1995. Mr. Levy received a B.S. in chemistry from the City College of New York and an M.S. in chemistry from Seton Hall University.

Carole L. Nuechterlein, 40, has been our Senior Vice President and General Counsel since February 2001 and was Vice-President and General Counsel from October 1998 to January 2001. From 1991 to October 1998, Ms. Nuechterlein held various positions with Roche Bioscience and Syntex Corporation, which was acquired by Roche Holding Ltd. in 1994, serving most recently as Director of Legal Affairs. Ms. Nuechterlein received a B.A. in 1983 from Valparaiso University and a J.D. in 1986 from the University of Michigan.

Raymond J. Tesi, M.D., 45, has been our Senior Vice President, Medical Affairs and Clinical Development since August 1999. From May 1997 to August 1999, Dr. Tesi served as our Senior Vice President of Marketing. From 1994 until 1997, Dr. Tesi was an associate professor of surgery and director of the extra- renal transplantation program at Tulane Medical School in New Orleans, Louisiana. He was a transplantation surgical fellow at the Ohio State University Hospital. Dr. Tesi received an M.D. from the Washington University School of Medicine in St. Louis, Missouri.

Randell J. Correia, Pharm.D, 42, has been Vice President, The Transplant Pharmacy® of SangStat Medical Corporation since 1995. Dr. Correia received a doctor of pharmacy degree from the University of the Pacific in Stockton, California.

We have a history of operating losses and our future profitability is uncertain. We were incorporated in 1988 and have experienced significant operating losses since that date. As of December 31, 2000, our accumulated deficit was $177,636,000. Our operating expenses from continuing operations have increased from approximately $50.1 million to $74.0 million to $103.2 million over the three year period ended December 31, 2000. Total revenues from continuing operations have increased from approximately $11.3 million to $44.3 million to $63.1 million, while losses from continuing operations decreased from approximately $38.8 million to $29.7 million and increased to $40.0 million over the three year period ended December 31, 2000. We expect to continue to incur significant losses for the foreseeable future and we may not ever achieve significant revenues from product sales and we may not achieve profitable operations.

We may need to raise additional funds within the next 12 months and may not be able to secure adequate funds on terms acceptable to us. Within the next twelve months, we may need to raise additional funds through financings and collaborative research and development arrangements with corporate partners. We may not be able to raise funds on favorable terms, if at all, and our discussions with potential collaborative partners may not result in any agreements. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain technologies, product candidates or products that we would not otherwise relinquish. To raise funds, we may also be required to sell shares of our common stock, which may be at prices below the price at which you may have purchased shares. Such sales would also cause a dilution of your percent ownership of SangStat.

Our future growth depends on sales of key products. We expect to derive most of our future revenues from sales of Thymoglobulin, Lymphoglobuline, and Gengraf. We have limited experience selling our products in the US. Our sales of Thymoglobulin began in the US in February 1999. We began distributing Gengraf in May 2000. We are marketing Gengraf in the US under a co- promotion agreement with Abbott Laboratories. We cannot guarantee that Abbott will be able to effectively market Gengraf, and its failure to do so may adversely impact sales of these products.

Any factor adversely affecting the sales of Thymoglobulin, Lymphoglobuline, and Gengraf individually or together, or regulatory approval of our cyclosporine capsule product would harm our business and results of operations. The following factors could adversely affect the sale or approval of these products:

• the timing of regulatory approval and market entry relative to competitive products;
• the availability of alternative therapies;
• perceived clinical benefits and risks;
• the price of our products relative to alternative therapies;
• manufacturing or supply interruptions;
• competitive changes;
• regulatory issues;
• ease of use;
• changes in the prescribing practices of transplant physicians;
• the availability of third-party reimbursement; or
• product liability claims.

In particular, with respect to Gengraf, sales may be affected by the following:

• perceptions of both patients and physicians regarding use of a generic version of a critical, life-saving therapeutic;
• perception of bioequivalence;
• other generic competitors;
• number of contracts with managed care providers and group purchasing organizations;
• our recall of SangCya Oral Solution in July 2000; and
• intense competitive pressure from Novartis and Novartis' litigation with Abbott.

We may not be able to manufacture or obtain sufficient quantities of our products, which could lead to product shortages and harm our business. Our manufacturing facility in Lyon must meet FDA standards of Good Manufacturing Practices and other regulatory guidelines. The FDA and other regulatory authorities inspect our manufacturing facility to ensure that it meets regulatory standards. If the FDA believes that we are not complying with its guidelines, it can issue a warning letter or prevent the import of Thymoglobulin into the US, which would reduce our revenues. In addition, Thymoglobulin and Lymphoglobuline are biologics and consequently difficult to manufacture. We acquired the IMTIX division of Aventis in 1998, including certain manufacturing capabilities with respect to Thymoglobulin and Lymphoglobuline. Before the acquisition, certain batches of Thymoglobulin did not meet manufacturing specifications, resulting in a shortage of Thymoglobulin for commercial sale. We still rely on Aventis for certain important manufacturing services, including quality assurance, quality control, and lyophilization. Aventis may not continue to effectively and continuously provide us these critical manufacturing services. In addition, we may experience manufacturing difficulties with respect to Thymoglobulin or Lymphoglobuline in the future that may impair our ability to deliver products to our customers, which could reduce our revenues and harm our business.

If our products do not receive regulatory approvals, or if we do not otherwise comply with government regulations, our business would be harmed. Our research, preclinical development, clinical trials, manufacturing, marketing and distribution of our products in the US and other countries are subject to extensive regulation by numerous governmental authorities including, but not limited to, the FDA. In order to obtain regulatory approval of a drug product, we must demonstrate to regulatory agencies, among other things, that the product is safe and effective for its intended uses and that the manufacturing facilities are in compliance with Good Manufacturing Practices requirements. The process of obtaining FDA and other required regulatory approvals is lengthy and will require the expenditure of substantial resources, and we do not know if we will obtain the necessary approvals for our product candidates. Moreover, for our approved products, the marketing, distribution and manufacture of our products remains subject to extensive regulatory requirements administered by the FDA and other regulatory bodies. Failure to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval, withdrawal of approvals and criminal prosecution of SangStat and our employees.

Our reliance on third parties for manufacturing may delay product approval or once approved, result in a product shortage, which would reduce our revenues. Except for Thymoglobulin and Lymphoglobuline, third parties manufacture all of our products and product candidates. There are three main risks associated with using third parties for manufacturing:

• The manufacturer may not pass a pre-approval inspection, or once approved, may not continue to manufacture to FDA's and other regulatory authorities' standards.
• The manufacturer may not deliver adequate supplies of a sufficiently high quality product in the time-line that we need to meet our clinical time-lines or to meet product demand.
• We may not be able to obtain commercial quantities of a product at an economically viable price.

In addition, we may not be able to enter into commercial scale manufacturing contracts on a timely or commercially reasonable basis, or at all, for our product candidates. Abgenix, from whom we have licensed ABX-CBL, remains responsible for entering into and maintaining the manufacturing agreement with a third party for the manufacturing of this product candidate. For some of our potential products, we will need to develop our production technologies further for use on a larger scale to conduct human clinical trials and produce such products for sale at an acceptable cost.

If our manufacturers fail to perform their obligations effectively and on a timely basis, these failures may delay clinical development or submission of products for regulatory approval, or once a product is approved, result in product shortages, any of which would impair our competitive position either because of the delays or because of a loss of revenues. Additionally, because our products can only be manufactured in facilities approved by the applicable regulatory authorities, we may not be able to replace our manufacturing capacity quickly or efficiently in the event that our manufacturers are unable to manufacture their products.

A change in marketing strategy and a delay in product approval have created excess perishable inventories that may result in significant reductions in our future gross margins. We have significant amounts of bulk cyclosporine active ingredient inventory that we are not using to manufacture finished product in the amount anticipated. This inventory was originally purchased for use in cyclosporine finished products to be sold in the US and Europe. However, since we are now distributing Gengraf in the US and we have withdrawn SangCya Oral Solution from the US market, we are dependent on the European market to use this inventory. Although we plan to obtain marketing approval for a cyclosporine capsule product in Europe, the inherent uncertainty of the approval process makes it very difficult to forecast a launch date for this product. We currently expect approval of a cyclosporine capsule product in the UK in 2002. If the approval and product launch are delayed, we may not be able to convert all the inventory into finished product and sell it before its expiration date. As a result, we could write off portions of our bulk active ingredient in the future, which could significantly reduce the gross margin reported for that future period.

If we do not develop and market new products, our business will be harmed. To achieve profitable operations, we must successfully develop, obtain regulatory approval for, manufacture, introduce and market new products and product candidates. We may not be able to successfully do this. Our product candidates will require extensive development and testing, as well as regulatory approval before marketing to the public. Our cyclosporine capsule product candidate in Europe has been delayed and we do not anticipate having approval of a cyclosporine capsule product in Europe until 2002. In addition, cost overruns and product approval delays could occur due to the following:

• unanticipated regulatory delays or demands;
• unexpected adverse side effects; or
• insufficient therapeutic efficacy.

These events would prevent or substantially slow down the development effort and ultimately would harm our business. Furthermore, there can be no assurance that our product candidates under development will be safe, effective or capable of being manufactured in commercial quantities at an economical cost, or that our products will not infringe the proprietary rights of others or will be accepted in the marketplace.

Our recall of SangCya Oral Solution in the US in July 2000 could result in an FDA investigation and negative marketing by our competitors. We recalled all lots of SangCya Oral Solution from the US wholesalers in July 2000 and at the same time announced its withdrawal from the US market. In addition to the loss of anticipated SangCya Oral Solution revenues, the FDA may conduct an investigation into the circumstances that led to the SangCya Oral Solution recall. Responding to an FDA investigation could be costly, time consuming, and may distract senior management from other tasks. Negative marketing may reduce sales of Gengraf or Thymoglobulin as competitors attempt to use the recall in marketing against our products and us. The FDA or other regulatory authorities may review our future drug approval applications more carefully, which may result in slower approval times. If approvals are delayed, revenues from these products would also be delayed.

Our business exposes us to the risk of product liability claims for which we may not be adequately insured. We face an inherent business risk of exposure to product liability claims in the event that the use of our products results in adverse effects during research, clinical development or commercial use. We cannot guarantee we will avoid significant product liability exposure. Our product liability insurance coverage is currently limited to $25 million, which may not be adequate to cover potential liability exposures. Moreover, we cannot assure you that adequate insurance coverage will be available at an acceptable cost, if at all, or that a product liability claim would not harm our results of operations.

Our inability to attract or retain key personnel could negatively affect our business. Our ability to develop our business depends in part upon our attracting and retaining qualified management and scientific personnel. As the number of qualified personnel is limited, competition for such personnel is intense. We cannot assure you that we will be able to continue to attract or retain such people. The loss of our key personnel or the failure to recruit additional key personnel could significantly impede attainment of our objectives and harm our financial condition and results of operations.

Operation of The Transplant Pharmacy may suffer while we are trying to sell the business, resulting in a lower sales price or inability to sell the business. On October 16, 2000, we announced that we hoped to sell The Transplant Pharmacy, or TTP, our mail order pharmacy business. We have put a retention program in place to encourage employees to stay while we are selling the division. If we cannot successfully retain employees, it will be very difficult to replace employees and we may be forced to use temporary employees. Loss of employees or use of temporary employees could adversely affect operations of TTP. If TTP operations are disrupted, TTP would likely produce lower revenues and lower collections of accounts receivable, which, if either occurred, could result in a lower sale price for TTP or an inability to sell TTP. We are in advanced negotiations with a potential buyer and expect to complete the sale of TTP by April 30, 2001, however there can be no assurance that this sale will occur.

Our litigation with Novartis may be resolved adversely and will be a drain on time and resources. While we have settled our patent litigation with Novartis regarding SangCya Oral Solution, we are involved in litigation with Novartis in the US and the UK, which could potentially harm sales of Gengraf in the US (due to the US regulatory litigation which would impact the labeling for all generic cyclosporine products), and SangCya Oral Solution and our cyclosporine capsule product candidates in Europe. The course of litigation is inherently uncertain and we may not achieve a favorable outcome. The litigation, whether or not resolved favorably to us, is likely to be expensive, lengthy and time consuming, and divert management's attention.

Novartis' patent lawsuit against Abbott with respect to Gengraf may be resolved adversely. Novartis sued Abbott in August 2000 claiming that Gengraf infringes certain Novartis patents. Novartis' complaint includes a plea for injunctive relief to prevent the sale of Gengraf in the US. The course of litigation is inherently uncertain: Novartis may choose to name us in this suit, Abbott may not prevail, or Abbott may choose to settle on terms adverse to our interests. Should we be named in this suit, we may incur expenses before reimbursement, if any, by Abbott who is obligated under our agreement to indemnify us against such suits. Should Novartis succeed in obtaining a preliminary or permanent injunction, Gengraf may be temporarily or permanently removed from the market. If Abbott or we were forced to remove Gengraf from the market before our co-promotion agreement with Abbott expires on December 31, 2004, our revenues would be decreased materially.

We may have a charge against earnings if we lose a breach of contract lawsuit. In August 2000, two affiliated suppliers sued our French subsidiary, IMTIX-SangStat SAS, for breach of contract because we ordered lower quantities than were anticipated by the agreements. The suppliers are asking for damages of $5 million for lost profits and reimbursement of capital expenditures. A hearing was held in late December 2000 and we currently anticipate a ruling in mid-April 2001. The course of litigation is inherently uncertain and we may not achieve a favorable outcome. If the court finds in the suppliers' favor, we would suffer a one-time charge against earnings, which could be material if these parties are awarded the full amount requested.

Our future success depends on our ability to successfully manage growth. We continue to expand our operations, which places a strain upon our management, systems and resources. Our ability to compete effectively and to manage future growth, if any, will require us to continue to, on a timely basis, improve our financial and management controls, reporting systems and procedures and expand, train and manage an increasing number of employees. Our failure to do so would harm our results of operations.

Failure to protect our intellectual property will adversely affect our business. Our success depends in part on our ability to obtain and enforce patent protection for our products and to preserve our trade secrets. We hold patents and pending patent applications in the US and abroad. Some of our patents involve specific claims and thus do not provide broad coverage. There can be no assurance that our patent applications or any claims of these patent applications will be allowed, be valid or enforceable. These patents or claims of these patents may not provide us with competitive advantages for our products. Our competitors may successfully challenge or circumvent our issued patents and any patents issued under our pending patent applications. We have not conducted extensive patent and art searches with respect to our product candidates and technologies, and we do not know if third-party patents or patent applications exist or filed in the US, Europe or other countries. This would have an adverse effect on our ability to market our products. We do not know if claims in our patent applications would be allowed, be valid or enforceable, or that any of our products would not infringe on others' patents or proprietary rights in the US or abroad. We also have patent licenses from third parties whose patents and patent applications are subject to the same risks as ours.

We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our employees and consultants. We cannot guarantee these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known or independently developed by competitors.

We have registered or applied for trademark registration of the names of all of our marketed products and plan to register the names of our products under development once a name has been selected for the product candidate. We have registered or applied for trademark registration of the names of most of our products under development or commercialized for research and development use. However, these trademark registrations may not be granted to us or may be challenged by competitors.

We face substantial competition, which could adversely affect our revenues and results of operations. The drugs we develop compete with existing and new drugs being created by pharmaceutical, biopharmaceutical, biotechnology companies and universities. Many of these entities have significantly greater research and development capabilities, as well as substantial marketing, manufacturing, financial and managerial resources and represent significant competition. The principal factors upon which our products compete are product utility, therapeutic benefits, ease of use, effectiveness, marketing, distribution and price. With respect to our products, we are competing against large companies that have significantly greater financial resources and established marketing and distribution channels for competing products.

The drug industry is intensely price competitive and we expect we will face this and other forms of competition. Developments by others may render our products or technologies obsolete or noncompetitive, and we may not be able to keep pace with technological developments. Many of our competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for products that compete with our own. Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic effect than our products and may be more effective and less costly. In addition, many of these competitors have significantly greater experience than we do in undertaking preclinical testing and human clinical trials of pharmaceutical products and obtaining regulatory approvals of such products. Accordingly, our competitors may succeed in commercializing products more rapidly than we can.

Other treatments for the problems associated with transplantation that our products seek to address are currently available and under development. To the extent these therapeutics or monitoring products address the problems associated with transplantation on which we have focused, they may represent significant competition.

We depend on collaborative relationships and any failure by our strategic partners to perform could adversely affect our competitive position. We have a number of strategic relationships for the development and distribution of our products. In particular, we have entered into a multi- year co-promotion, distribution and research agreement for Gengraf in the US with Abbott. We are dependent upon Abbott for certain regulatory, manufacturing, marketing, and sales activities under the agreement. Abbott may not perform satisfactorily and any such failure may impair our ability to deliver products on a timely basis, or otherwise impair our competitive position, which would harm our business. We have also entered into a Co- Development, Supply and License Agreement with Abgenix, Inc. with respect to the development, marketing and sale of ABX-CBL. We are dependent upon Abgenix for certain development and manufacturing activities under the agreement. Abgenix may not perform satisfactorily and any such failure may delay regulatory approval, product launch, impair our ability to deliver products on a timely basis, or otherwise impair our competitive position, which would harm our business. We may enter into additional collaborative relationships with corporate and other partners to develop and commercialize certain of our potential products. We cannot assure you that we will be able to negotiate acceptable collaborative arrangements in the future, that such collaborations will be available to us on acceptable terms or that any such relationships, if established, will be scientifically or commercially successful.

Fluctuations in quarterly and annual operating results may adversely affect our stock price. Our quarterly and annual operating results may fluctuate due to a variety of factors. We therefore believe that quarter-to-quarter comparisons of our operating results may not be a good indication of our future performance, and you should not rely on them to predict our future performance or the future performance of our stock. Our operating losses have been substantial each year since inception. We also expect losses to continue in the near future as a result of a number of factors, including:

• the uncertainty in the timing and the amount of revenue we earn upon product sales;
• our achievement of research and development milestones;
• our funding obligations under collaborative research agreements; and
• expenses we incur for product development, clinical trials and marketing and sales activities.

Our operating results may also fluctuate significantly as a result of other factors, including:

• the introduction of new products by our competition;
• regulatory actions;
• market acceptance of our products;
• manufacturing capabilities;
• cost of litigation; and
• third-party reimbursement policies.

Fluctuations in our operating results have affected our stock price in the past and are likely to continue to do so in the future. In particular, the realization of any of the risks described herein could have a significant and adverse impact on the market price for our stock.

Our stock price as well as the stock prices for competitors in our industry has historically been volatile. The market prices for securities of pharmaceutical and biotechnology companies, including ours, are highly volatile. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price for our common stock may fluctuate as a result of factors such as:

• announcements of new therapeutic products by us or our competitors;
• announcements regarding collaborative agreements;
• governmental regulations;
• clinical trial results;
• developments in patent or other proprietary rights;
• public concern as to the safety of drugs developed by us or others;
• comments made by securities analysts; and
• general market conditions.

The uncertainty of pharmaceutical pricing and reimbursement may negatively impact our results of operations. Our ability to successfully commercialize our products may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. The pricing, availability of distribution channels and reimbursement status of newly approved healthcare products is highly uncertain and we cannot assure you that adequate third-party coverage will be available for us to maintain price levels sufficient for realization of an appropriate return on our investment in product development. In certain foreign markets, pricing or profitability of healthcare products is subject to government control. In the US, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. In addition, an increasing emphasis on managed care in the US has and will continue to increase the pressure on pharmaceutical pricing. While we cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on our business, the announcement of such proposals or efforts could harm our ability to raise capital, and the adoption of such proposals or efforts could harm our results of operations. Further, to the extent that such proposals or efforts harm other pharmaceutical companies that are our prospective corporate partners, our ability to establish corporate collaborations may be adversely affected. In addition, third-party payers are increasingly challenging the prices charged for medical products and services. We do not know whether our products and product candidates, if approved, will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive basis.

Our use of hazardous materials could result in unexpected costs or liabilities. In connection with our research and development activities and operations, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. We cannot assure you that we will not incur significant costs to comply with environmental and health and safety regulations. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and infectious biological specimens. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our ability to pay.

Our charter documents, stockholder rights plan and Delaware law may serve to deter a takeover. Certain provisions of our Certificate of Incorporation and our Bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock. Our board of directors has the authority to issue up to 5 million shares of preferred stock and to determine the price, rights preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Further, we have adopted a stockholder rights plan. Under this plan we may issue a dividend to stockholders who hold rights to acquire our shares or, under certain circumstances, an acquiring corporation, at less than half their fair market value. The plan could have the effect of delaying, deferring or preventing a change in control. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control.

Our global headquarters are located in Fremont, California. Floor space in Fremont is approximately 44,000 square feet, including offices, laboratory space, storage area and specialized areas for some pilot production and preclinical testing. The lease for the Fremont building space will expire in 2005 and may be renewed for subsequent years.

Our European headquarters are located in Lyon, France. We lease approximately 38,300 square feet from Aventis in Marcy L'Etoile (just outside of Lyon), France for administration and manufacturing. The leases for non-manufacturing operations expire at various dates up to 2006 and may be renewed for subsequent years. The manufacturing lease expires in 2013 but may be terminated at our option upon giving one year's notice. In addition, we lease 12,400 square feet in Lyon, France for sales, marketing, finance, clinical, and administration, and lease administrative offices in various other countries.

We believe that our current facilities are suitable and adequate to meet our needs for the foreseeable future and anticipate that we will be able to expand our facilities to nearby locations as the need develops.

The following is a description of our current litigation. The course of litigation is inherently uncertain and we may not achieve a favorable outcome. See "Item 1 - Risk Factors - Our litigation with Novartis may be resolved adversely and will be a drain on time and resources."

On July 27, 2000, we entered into a global settlement agreement with Novartis AG and Novartis Pharmaceuticals Corporation with respect to the patent infringement lawsuits filed against us regarding SangCya^® Oral Solution, USP [MODIFIED] as well as the counterclaim we filed against Novartis Pharmaceuticals Corporation in the US. As part of the settlement, we have entered into a global license agreement pursuant to which Novartis shall license US patent #5,389,382 and its foreign counterparts to us and we shall pay Novartis a royalty on sales of SangCya Oral Solution. The settlement and license applies only to SangCya Oral Solution and does not apply to cyclosporine capsule products. We do not expect the terms of the settlement to have a material financial impact on us in the foreseeable future.

Novartis has sued Abbott claiming that Gengraf^® (cyclosporine capsule, USP, MODIFIED), infringes certain Novartis patents. Novartis' complaint includes a plea for injunctive relief to prevent the sale of Gengraf in the US, but to date they have not moved for a preliminary injunction. The trial date has been set for October 1, 2001. The discovery schedule is still before the court pending resolution of differences between the parties' proposals. Abbott has informed us that it does not believe it infringes the Novartis patents. We have not been named a defendant in this lawsuit, and under our agreement with Abbott, Abbott is obligated to indemnify us against such suits. The course of litigation is inherently uncertain, however; Novartis may choose to name us in this suit, Abbott may not prevail, or Abbott may choose to settle on terms adverse to our interests. Should we be named in this suit, we may incur expenses prior to reimbursement (if any) by Abbott pursuant to its indemnity obligation. Should Novartis succeed in obtaining a preliminary or permanent injunction, Gengraf may be temporarily or permanently removed from the market.

Novartis US sued the FDA on February 11, 1999 in the United States District Court for the District of Columbia (case number 1: 99CV-00323) alleging that the FDA did not follow its own regulations in approving SangCya Oral Solution in October 1998. The lawsuit alleges that because Neoral oral solution and SangCya Oral Solution are based on different formulation technologies, they should be classified as different dosage forms. Novartis asks that the court (i) allow Novartis to keep its microemulsion labeling; (ii) declare microemulsion to be a separate dosage form; and (iii) rescind the AB rating that was given to SangCya Oral Solution. We intervened in this lawsuit. The parties have all filed motions for summary judgment with the Court and are awaiting a final ruling. The Court has dismissed the counts that relate specifically to the approval of SangCya Oral Solution, but Novartis may appeal this decision. Because we permanently withdrew SangCya Oral Solution from the US market in July 2000, we do not believe that this lawsuit will have any material impact on SangStat.

On October 18, 1999, Novartis UK was granted leave to seek judicial review of the decision by the Medicines Control Agency (the "MCA") to approve SangCya Oral Solution (Case No. HC- 1969/99). On March 30, 2000, the High Court in London dismissed Novartis' application for judicial review and ruled that the MCA acted properly in granting the SangCya Oral Solution marketing authorization. Novartis appealed the High Court's decision and the hearing was held before the Court of Appeal on November 13 and 14, 2000. The Court of Appeal has stayed ruling on this matter pending the answer of certain questions of law to be submitted to the European Court of Justice ("ECJ"). We estimate that the ECJ will issue its ruling in approximately eighteen to twenty four months. Following the ECJ ruling, the parties would go back to the Court of Appeal who will then apply the ECJ ruling on the law to the facts of this case.

In November 1999, Novartis filed a request with the High Court in London for judicial review of the refusal by MCA to state that it would not reference Neoral data in approving any cyclosporine capsule application. An agreement was reached between the parties in which Novartis agreed to stay the judicial review until the earlier of (i) the decision on the judicial review of SangCya Oral Solution or (ii) MCA's approval of a marketing authorization for a cyclosporine capsule product, and in return, we agreed that we would not launch or commence mutual recognition procedures in relation to the cyclosporine capsule marketing authorization (including a request to MCA to prepare an assessment report) for a period of 28 days commencing on the day on which we notify Novartis' solicitors of capsule approval. The parties had agreed to continue the stay until the appeal of the High Court decision with respect to the judicial review of SangCya Oral Solution. The stay of this application for judicial review will remain in place pending the ECJ ruling on the questions of law and resulting Court of Appeal judgment.

Novartis has also indicated that it will seek an injunction to prevent our cyclosporine capsule from being sold in the United Kingdom until final resolution of the judicial review relating to our cyclosporine capsule. Because the High Court ruled in favor of the MCA with respect to the SangCya Oral Solution marketing authorization and the Court of Appeal has referred questions of law to the ECJ, we believe that it is unlikely that a court would grant Novartis a preliminary injunction with respect to our cyclosporine capsule marketing authorization. If the Court of Appeals reverses the High Court's ruling following the ECJ's decisions on questions of law, either the MCA could still approve our cyclosporine capsule as supra-bioavailable to Sandimmune without referencing Neoral data or the MCA could decide not to approve our cyclosporine capsule marketing authorization until the expiration of the ten year data exclusivity period for Neoral capsules (approximately 2004).

On May 5, 2000, Novartis Farma S.p.A. ("Novartis Italy") served IMTIX SangStat s.r.l., our Italian subsidiary, and IMTIX SangStat Ltd. with a summons to the Milan Tribunal. Novartis Italy alleges that by requesting mutual recognition from the Italian Health Authorities of the SangCya Oral Solution dossier approved by the MCA, we implicitly requested that the Italian Health Authorities review the Neoral dossier. Novartis alleges that this request is an act of unfair competition in that (i) the Neoral data has ten year exclusivity and (ii) the data is secret and by requesting mutual recognition, we are responsible for the Health Authorities act of unfair competition following use of the Neoral dossier in reviewing the SangCya Oral Solution dossier. While the summons acknowledges that the UK High Court did not invalidate the SangCya Oral Solution marketing authorization, it does not acknowledge that the High Court ruled that the MCA could review the Neoral data. To the best of our knowledge, Novartis Italy has not filed suit against the Italian Health Authorities. The initial appearance of the parties before the Milan Tribunal was scheduled for January 2001. We filed our response to the complaint at that time and the hearing was postponed until September 2001.

We do not yet have marketing approval for SangCya Oral Solution in Italy. Novartis Italy is seeking damages and an injunction to prevent the sale by SangStat of SangCya Oral Solution, or any other product for which we may obtain approval based upon a reference to the Neoral dossier, which we believe is intended to block our cyclosporine capsule from sale in Italy. We believe that resolution of this matter will depend on the resolution of the UK regulatory litigation, since the MCA's actions are the basis for the Italian lawsuit.

In August 2000, two affiliated suppliers, IFFA CREDO and Elevage Scientifique des Dombes, sued our French subsidiary, IMTIX-SangStat SAS, for breach of contract because we ordered lower quantities than were anticipated by the agreements. They claim that the quantities set forth in the agreements were fixed orders; we believe that they were forecasts only. We believe that the agreements provide that if we purchased less than the forecast amounts, we would pay a penalty equal to a percentage of the difference between the amount ordered and the amount forecast. The suppliers claim this provision only applied during the first year of the agreement. The suppliers are asking for damages of 37 million French Francs (approximately $5 million) for lost profits and reimbursement of capital expenditures. Under our interpretation, we would owe them 2.2 million French Francs (approximately $300,000) for 2000 and 1.6 million French Francs (approximately $200,000) in 2001, presuming no further orders are placed with these suppliers. The claim was filed under a "Fast Track" provision in the Lyon Commercial Courts and a hearing on the merits occurred at the end of December 2000. We currently anticipate a ruling in mid-April 2001. If the plaintiffs were to prevail, the court would likely appoint an expert to assess the exact amount of damages suffered by the plaintiffs.

None

Our common stock commenced trading publicly on the Nasdaq National Market on December 14, 1993 and is traded under the symbol SANG. The following table sets forth for the periods indicated the high and low daily closing prices for our common stock:

                                              HIGH      LOW
                                            --------  --------
  Fiscal year ended December 31, 1999
    First Quarter......................... $ 32.125  $ 12.375
    Second Quarter........................   17.438    11.813
    Third Quarter.........................   22.750    14.875
    Fourth Quarter........................   30.625    18.438

  Fiscal year ended December 31, 2000
    First Quarter.........................   48.000    25.875
    Second Quarter........................   33.813    21.813
    Third Quarter.........................   29.875    12.813
    Fourth Quarter........................   14.500     6.500

                                                          Year Ended December 31,
                                         -----------------------------------------------------
                                           2000       1999       1998       1997       1996
                                         ---------  ---------  ---------  ---------  ---------
                                                     (in thousands, except per share data)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
  Revenues:
     Net sales......................... $  60,447  $  42,243  $  10,202  $   2,456  $   2,266
     Collaborative agreements..........     2,698      2,060      1,092        750         --
                                         ---------  ---------  ---------  ---------  ---------
          Total revenues...............    63,145     44,303     11,294      3,206      2,266
                                         ---------  ---------  ---------  ---------  ---------
  Operating expenses:
     Cost of sales.....................    39,246     18,989      5,110      2,646      2,737
     Research and development..........    20,788     14,470     17,688     16,210      8,330
     Selling, general and
       administrative..................    41,766     39,170     23,707      9,442      5,652
     Acquired in-process research
       and development.................         --         --     3,218         --         --
     Amortization of intangible assets.     1,392      1,398        351         --         --
                                         ---------  ---------  ---------  ---------  ---------
          Total operating expenses.....   103,192     74,027     50,074     28,298     16,719
                                         ---------  ---------  ---------  ---------  ---------
  Loss from continuing operations......   (40,047)   (29,724)   (38,780)   (25,092)   (14,453)
     Other income (expense), net.......    (1,602)      (913)     3,053      5,506      2,123
                                         ---------  ---------  ---------  ---------  ---------
  Loss from continuing operations
    before income taxes................   (41,649)   (30,637)   (35,727)   (19,586)   (12,330)
  Income taxes.........................      (368)      (345)      (257)        --         --
                                         ---------  ---------  ---------  ---------  ---------
  Net loss from continuing operations..   (42,017)   (30,982)   (35,984)   (19,586)   (12,330)
  Loss from operations of
    discontinued operation.............    (2,342)    (2,025)    (2,480)    (1,394)      (444)
                                         ---------  ---------  ---------  ---------  ---------
          Net loss..................... $ (44,359) $ (33,007) $ (38,464) $ (20,980) $ (12,774)
                                         =========  =========  =========  =========  =========
  Net loss per share - basic
    and diluted(1)
      Continuing operations............ $   (2.35) $   (1.83) $   (2.24) $   (1.27) $   (0.99)
      Discontinued operation...........     (0.13)     (0.12)     (0.15)     (0.09)     (0.04)
                                         ---------  ---------  ---------  ---------  ---------
                                        $   (2.48) $   (1.95) $   (2.39) $   (1.36) $   (1.03)
                                         =========  =========  =========  =========  =========
  Shares used in per share
    computations(1)....................    17,910     16,888     16,080     15,376     12,405




                                                               December 31,
                                         -----------------------------------------------------
                                           2000       1999       1998       1997       1996
                                         ---------  ---------  ---------  ---------  ---------
                                                               (in thousands)
CONSOLIDATED BALANCE SHEET DATA:
   Cash, cash equivalents and
     short-term investments............ $  20,607  $  26,519  $  29,660  $  92,036  $  41,321
   Working capital.....................    39,774     63,991     46,828     93,812     40,727
   Total assets........................   114,316    117,297    107,327    104,354     44,750
   Long-term obligations, excluding
     current portion...................    44,689     49,496     16,402      1,557      1,100
   Accumulated deficit.................  (177,636)  (133,277)  (100,270)   (61,806)   (40,826)
   Total stockholders' equity..........    21,924     41,009     59,587     97,470     40,955

                                                         December 31,
                                                    ----------------------
                                                       2000        1999
                                                    ----------  ----------
                             ASSETS
CURRENT ASSETS:
  Cash and cash equivalents....................... $   19,046  $   16,862
  Short-term investments..........................      1,561       9,657
  Accounts receivable (net of allowance for
   doubtful accounts $3,128 in 2000 and
   $1,469 in 1999)................................     17,569      12,782
  Other receivables...............................      2,333       2,906
  Inventories.....................................     40,056      46,270
  Prepaid expenses and other current assets.......      6,912       2,306
                                                    ----------  ----------
          Total current assets....................     87,477      90,783
PROPERTY AND EQUIPMENT -- net.....................      6,539       5,574
INTANGIBLE ASSETS -- net of accumulated
   amortization of $3,141 in 2000
   and $1,749 in 1999.............................     11,142      12,534
OTHER ASSETS......................................      9,158       8,406
                                                    ----------  ----------
          TOTAL................................... $  114,316  $  117,297
                                                    ==========  ==========

             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable................................ $   17,553  $   11,851
  Accrued liabilities.............................     13,938       5,511
  Capital lease obligations -- current portion....        257         700
  Deferred revenue -- current portion.............      3,158       4,426
  Notes payable -- current portion................     12,797       4,304
                                                    ----------  ----------
          Total current liabilities...............     47,703      26,792
                                                    ----------  ----------
CAPITAL LEASE OBLIGATIONS.........................        535         125
DEFERRED REVENUE..................................      9,475       9,304
NOTES PAYABLE.....................................     34,679      40,067

COMMITMENTS AND CONTINGENCIES (Notes 9 and 18)

STOCKHOLDERS' EQUITY:
  Preferred stock, $.001 par value, 5,000
    shares authorized; none outstanding...........         --          --
  Common stock, $.001 par value, 35,000,000
    shares authorized; outstanding: 2000,
    18,942 shares; 1999, 17,354 shares............    201,766     174,990
  Accumulated deficit.............................   (177,636)   (133,277)
  Accumulated other comprehensive loss............     (2,206)       (704)
                                                    ----------  ----------
          Total stockholders' equity..............     21,924      41,009
                                                    ----------  ----------
          TOTAL................................... $  114,316  $  117,297
                                                    ==========  ==========

                                                 Year Ended December 31,
                                           ----------------------------------
                                              2000        1999        1998
                                           ----------  ----------  ----------
REVENUES:
  Net sales.............................. $   61,319  $   42,243  $   10,202
  Product recall returns.................       (872)         --          --
  Revenue from collaborative
    agreements (Note 9)..................      2,698       2,060       1,092
                                           ----------  ----------  ----------
     Total revenues......................     63,145      44,303      11,294
                                           ----------  ----------  ----------

COSTS AND OPERATING EXPENSES:
  Cost of sales:
    Cost of product sales and
      manufacturing expenses.............     27,472      18,989       5,110
    Product recall charges...............     11,774          --          --
  Research and development
     (including product recall expenses
     of $50 for the year ended
     December 31, 2000)..................     20,788      14,470      17,688
  Selling, general and administrative
     (including product recall expenses
     of $379 for the year ended
     December 31, 2000)..................     41,766      39,170      23,707
  Acquired in-process research and
    development..........................         --          --       3,218
  Amortization of intangible assets......      1,392       1,398         351
                                           ----------  ----------  ----------
     Total costs and operating
       expenses..........................    103,192      74,027      50,074
                                           ----------  ----------  ----------
     Loss from continuing operations.....    (40,047)    (29,724)    (38,780)
                                           ----------  ----------  ----------
OTHER INCOME (EXPENSE):
  Interest income........................      2,016       1,865       3,611
  Interest expense.......................     (4,368)     (3,034)       (404)
  Other income (expense), net............        750         256        (154)
                                           ----------  ----------  ----------
     Other income (expense), net.........     (1,602)       (913)      3,053
                                           ----------  ----------  ----------
LOSS FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES...........................    (41,649)    (30,637)    (35,727)
INCOME TAX PROVISION.....................       (368)       (345)       (257)
                                           ----------  ----------  ----------
NET LOSS FROM CONTINUING OPERATIONS......    (42,017)    (30,982)    (35,984)

NET LOSS FROM OPERATIONS OF
  DISCONTINUED OPERATION.................     (2,342)     (2,025)     (2,480)
                                           ----------  ----------  ----------
NET LOSS................................. $  (44,359) $  (33,007) $  (38,464)
                                           ==========  ==========  ==========

NET LOSS PER SHARE - basic and
  diluted (Note 1):
     Continuing operations............... $    (2.35) $    (1.83) $    (2.24)
     Discontinued operation..............      (0.13)      (0.12)      (0.15)
                                           ----------  ----------  ----------
                                          $    (2.48) $    (1.95) $    (2.39)
                                           ==========  ==========  ==========

WEIGHTED AVERAGE COMMON SHARES...........     17,910      16,888      16,080
                                           ==========  ==========  ==========

                                                Year Ended December 31,
                                           ----------------------------------
                                              2000        1999        1998
                                           ----------  ----------  ----------
Net loss................................. $  (44,359) $  (33,007) $  (38,464)
Reversal of unrealized gain on marketable
  securities sold during the period......       (644)         --          --
Unrealized gains (losses) on
  marketable securities classified
  as available for sale in the
  current period.........................         40       1,078        (494)
Foreign currency translation
  adjustments............................       (898)     (1,388)         89
                                           ----------  ----------  ----------
Total comprehensive loss................. $  (45,861) $  (33,317) $  (38,869)
                                           ==========  ==========  ==========

                                                                               Accumu-
                                                                                lated
                                                                                Other
                                               Common Stock       Accumu-      Compre-
                                        -----------------------    lated       hensive
                                          Shares       Amount     Deficit       Loss       Total
                                        -----------  ----------  ----------   ---------  ---------
Balances, January 1, 1998.............  16,009,531  $  159,265  $  (61,806)  $      11  $  97,470
Exercise of stock options.............     205,320         869           --          --       869
Stock option compensation expense.....         --          117           --          --       117
Accumulated translation adjustment....         --            --          --         89         89
Unrealized loss on investments........         --            --          --       (494)      (494)
Net loss..............................         --            --    (38,464)          --   (38,464)
                                        -----------  ----------  ----------   ---------  ---------
Balances, December 31, 1998...........  16,214,851     160,251    (100,270)       (394)    59,587
Issuance of common stock..............     893,996      12,661           --          --    12,661
Exercise of stock options.............     244,927       1,859           --          --     1,859
Issuance of stock for services........         --          160           --          --       160
Stock option compensation expense.....         --           59           --          --        59
Accumulated translation adjustment....         --            --          --     (1,388)    (1,388)
Unrealized gain on investments........         --            --          --      1,078      1,078
Net loss..............................         --            --    (33,007)          --   (33,007)
                                        -----------  ----------  ----------   ---------  ---------
Balances, December 31, 1999...........  17,353,774     174,990    (133,277)       (704)    41,009
Issuance of common stock..............   1,345,928      23,401           --          --    23,401
Exercise of stock options.............     242,644       2,631           --          --     2,631
Warrant issued in connection
  with financing......................         --          744           --          --       744
Accumulated translation adjustment....         --            --          --       (898)      (898)
Reversal of unrealized gain on
  marketable securities sold
  during the period, net..............         --            --          --       (604)      (604)
Net loss..............................         --            --    (44,359)          --   (44,359)
                                        -----------  ----------  ----------   ---------  ---------
Balances, December 31, 2000...........  18,942,346  $  201,766  $ (177,636)  $  (2,206) $  21,924
                                        ===========  ==========  ==========   =========  =========

                                                        Year Ended December 31,
                                                    -------------------------------
                                                      2000       1999       1998
                                                    ---------  ---------  ---------
OPERATING ACTIVITIES:
  Net loss from continuing operations............. $ (42,017) $ (30,982) $ (35,984)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization.................     3,780      2,921      1,873
    Non-cash interest expense.....................     1,365      1,476         --
    Acquired in-process research and development..        --         --      3,218
    Loss on disposal of property and equipment....       836        167         --
    Stock compensation expense....................        --        219        117
    Deferred income taxes.........................       130         88        257
    Changes in assets and liabilities:
      Accounts receivable.........................    (4,787)    (1,819)    (4,163)
      Other receivables...........................       573       (465)      (656)
      Inventories.................................     6,214    (12,895)   (18,980)
      Prepaid expenses............................    (4,606)      (579)     1,465
      Accounts payable............................     5,702    (13,973)    15,132
      Accrued liabilities.........................     8,297      2,227       (816)
      Deferred revenue............................    (1,097)    13,730         --
                                                    ---------  ---------  ---------
     Net cash used in continuing operating activit   (25,610)   (39,885)   (38,537)
     Net cash used in discontinued operation......    (2,223)    (1,917)    (2,415)
                                                    ---------  ---------  ---------
     Net cash used in operating activities........   (27,833)   (41,802)   (40,952)
                                                    ---------  ---------  ---------
INVESTING ACTIVITIES:
  Purchases of property and equipment.............    (3,790)    (4,020)    (1,384)
  Maturities of short-term investments............     7,492      8,517     34,210
  Purchase of short-term investments..............        --     (3,721)    (6,674)
  Business acquired in purchase transaction,
       net of cash acquired.......................        --         --    (10,737)
  Other assets....................................        (8)     3,469     (8,926)
                                                    ---------  ---------  ---------
      Net cash provided by investing activities  .     3,694      4,245      6,489
                                                    ---------  ---------  ---------
FINANCING ACTIVITIES:
  Sale of common stock............................    26,032     14,520        869
  Note payable borrowings.........................     6,574     28,513        216
  Notes payable repayments........................    (4,834)    (3,079)      (676)
  Repayment of capital lease obligations..........      (551)      (433)      (380)
                                                    ---------  ---------  ---------
      Net cash provided by financing activities...    27,221     39,521         29
                                                    ---------  ---------  ---------

EFFECT OF EXCHANGE RATE CHANGES ON CASH...........      (898)    (1,388)        89
                                                    ---------  ---------  ---------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS.....................................     2,184        576    (34,345)
CASH AND CASH EQUIVALENTS, Beginning of year......    16,862     16,286     50,631
                                                    ---------  ---------  ---------
CASH AND CASH EQUIVALENTS, End of year............ $  19,046  $  16,862  $  16,286
                                                    =========  =========  =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for interest.......... $   1,158  $   1,401  $     225
                                                    =========  =========  =========

NONCASH INVESTING AND FINANCING ACTIVITIES:
  Warrants issued in connection with financing.... $     744  $      --  $      --
                                                    =========  =========  =========

  Property acquired under capital leases.......... $     518  $     493  $     291
                                                    =========  =========  =========

  Unrealized gain (loss) on investments........... $     604  $   1,078  $    (494)
                                                    =========  =========  =========

On September 30, 1998, the Company acquired IMTIX (see Note 2).
In conjunction with the acquisition, liabilities were assumed as follows:
    Fair value of assets acquired.................                       $  35,139
    Acquired in-process research and development..                           3,218
    Cash paid.....................................                         (11,662)
    Discounted note payable.......................                         (16,208)
                                                                          ---------
         Liabilities assumed......................                       $  10,487
                                                                          =========

                                                 Year Ended December 31,
                                           ----------------------------------
                                              2000        1999        1998
                                           ----------  ----------  ----------
Net loss (numerator)
  Continuing operations.................. $  (42,017) $  (30,982) $  (35,984)
  Discontinued operation.................     (2,342)     (2,025)     (2,480)
                                           ----------  ----------  ----------
                                          $  (44,359) $  (33,007) $  (38,464)
                                           ==========  ==========  ==========

Shares (denominator)
  Weighted average common shares
    outstanding..........................     17,910      16,888      16,080
                                           ==========  ==========  ==========

Net loss per share - basic and diluted:
  Continuing operations.................. $    (2.35) $    (1.83) $    (2.24)
  Discontinued operation.................      (0.13)      (0.12)      (0.15)
                                           ----------  ----------  ----------
                                          $    (2.48) $    (1.95) $    (2.39)
                                           ==========  ==========  ==========

                                                       December 31,
                                           ----------------------------------
                                              2000        1999        1998
                                           ----------  ----------  ----------
Unrealized gain (loss) on investments.... $        6  $      609  $     (469)
Accumulated translation adjustments......     (2,212)     (1,313)         75
                                           ----------  ----------  ----------
   Total................................. $   (2,206) $     (704) $     (394)
                                           ==========  ==========  ==========

                                       December 31, 2000
                        --------------------------------------------------
                                     Unrealized   Unrealized   Estimated
                         Amortized     Gain on      Loss on       Fair
                           Cost      Investments  Investments     Value
                        -----------  -----------  -----------  -----------
  Corporate bonds .... $     1,415  $         6  $       --   $     1,421
  One year CD ........         140          --           --           140
                        -----------  -----------  -----------  -----------
  Total............... $     1,555  $         6          --         1,561
                        ===========  ===========  ===========  ===========


                                       December 31, 1999
                        --------------------------------------------------
                                     Unrealized   Unrealized   Estimated
                         Amortized     Gain on      Loss on       Fair
                           Cost      Investments  Investments     Value
                        -----------  -----------  -----------  -----------
  Corporate bonds .... $     6,040  $       --   $        33  $     6,007
  Commercial paper....       1,002          --             2        1,000
  One year CD ........         140          --           --           140
                        -----------  -----------  -----------  -----------
  Short-term
   investments........       7,182          --            35        7,147
  Corporate equity
   securities.........       1,866          644          --         2,510
                        -----------  -----------  -----------  -----------
  Total............... $     9,048  $       644  $        35  $     9,657
                        ===========  ===========  ===========  ===========

                                                       December 31,
                                                  ----------------------
                                                     2000        1999
                                                  ----------  ----------
     Raw materials.............................. $   18,860  $   26,710
     Work in process............................     14,107       9,498
     Finished goods.............................      7,089      10,062
                                                  ----------  ----------
           Total................................ $   40,056  $   46,270
                                                  ==========  ==========

                                                       December 31,
                                                  ----------------------
                                                     2000        1999
                                                  ----------  ----------
     Machinery and equipment.................... $    8,072  $    7,779
     Capitalized software.......................      3,011          --
     Furniture and fixtures.....................        392         555
     Projects in process........................        107         881
     Leasehold improvements.....................      1,440       1,415
                                                  ----------  ----------
     Total......................................     13,022      10,630
     Accumulated depreciation and amortization..     (6,483)     (5,056)
                                                  ----------  ----------
     Property and equipment--net................ $    6,539  $    5,574
                                                  ==========  ==========

                                                       December 31,
                                                  ----------------------
                                                     2000        1999
                                                  ----------  ----------
     Salaries and related benefits.............. $    3,689  $    3,814
     Interest payable...........................      1,894         178
     Research and development expenses (Note 9).      2,420          --
     Marketing and development expenses (Note 9)      2,436          --
     Other taxes payable........................        475         363
     Deferred rent..............................        359         153
     Other accrued liabilities..................      2,665       1,003
                                                  ----------  ----------
              Total............................. $   13,938  $    5,511
                                                  ==========  ==========

                                                           December 31,
                                                   ------------------------
                                                      2000         1999
                                                   -----------  -----------
    Note payable to Aventis...................... $    15,000  $    18,000
    Discount on note payable to Aventis..........      (1,707)      (2,989)
    Convertible note.............................       9,691        9,609
    Note payable to Abbott Laboratories..........      16,000       16,000
    Note payable to FINOVA.......................       5,000           --
    Other debt...................................       3,492        3,751
                                                   -----------  -----------
    Total........................................      47,476       44,371
    Less current portion.........................     (12,797)      (4,304)
                                                   -----------  -----------
    Long-term.................................... $    34,679  $    40,067
                                                   ===========  ===========

 Years Ending December 31,
- ---------------------------------
  2001........................................... $    12,797
  2002...........................................       4,930
  2003...........................................       3,756
  2004...........................................      25,993
                                                   -----------
              Total.............................. $    47,476
                                                   ===========

                                      December 31, 2000     December 31, 1999
                                     --------------------  --------------------
                                     Carrying     Fair     Carrying     Fair
                                      Amount      Value     Amount      Value
                                     ---------  ---------  ---------  ---------
Note payable to Aventis............ $  13,293  $  12,592  $  15,011  $  14,175
Note payable to Abbott
   Laboratories....................    16,000     15,366     16,000     15,242
Note payable to FINOVA.............     5,000      5,000         --         --
Convertible debt...................     9,691      8,796      9,609     16,400
Other debt.........................     3,492      3,492      3,751      3,751
                                     ---------  ---------  ---------  ---------
    Total.......................... $  47,476  $  45,246  $  44,371  $  49,568
                                     =========  =========  =========  =========

                                                     Capital     Operating
 Years Ending December 31,                           Leases       Leases
- ---------------------------------                  -----------  -----------
  2001........................................... $       305  $     1,626
  2002...........................................         204        1,621
  2003...........................................         168        1,591
  2004...........................................         166        1,397
  2005...........................................          --          990
  Thereafter.....................................          --        4,466
                                                   -----------  -----------
  Total minimum lease payments...................         843  $    11,691
  Less amounts representing interest.............         (51)  ===========
                                                   -----------
  Present value of minimum lease payments........         792
  Less current portion...........................        (257)
                                                   -----------
  Capital lease obligations...................... $       535
                                                   ===========

                                                                       Weighted
                                                                       Average
                                                          Number of    Exercise
                                                            Shares      Price
                                                          ----------  ----------
Balances, January 1, 1998................................ 1,501,189  $    11.78
Options granted (weighted average fair value of $16.43).. 1,363,757       25.64
Options exercised........................................  (205,320)       4.24
Options canceled.........................................  (103,983)      22.31
                                                          ----------
Balances, December 31, 1998 (1,308,819 vested at a
  weighted average exercise price of $17.34)............. 2,555,643       19.32
Options granted (weighted average fair value of $19.16)..   913,394       18.11
Options exercised........................................  (244,927)       7.59
Options canceled.........................................  (413,151)      25.19
                                                          ----------
Balances, December 31, 1999 (1,258,563 vested at a
  weighted average exercise price of $19.62)............. 2,810,959       19.43
Options granted (weighted average fair value of $18.11).. 1,331,725       21.19
Options exercised........................................  (242,644)      10.84
Options canceled.........................................  (702,266)      23.15
                                                          ----------
Balances, December 31, 2000.............................. 3,197,774  $    19.97
                                                          ==========

                  Options Outstanding and Exercisable      Vested Options
                 -------------------------------------- -----------------------
                              Weighted Avg.  Weighted                Weighted
                               Remaining      Average                 Average
     Range of      Number     Contractual    Exercise     Number     Exercise
 Exercise Prices Outstanding   Life (yrs)      Price      Vested       Price
- ---------------- -----------  ------------  ----------- ----------  -----------
 $0.00 -  $5.00     116,050           1.4  $      3.72    116,050  $      3.72
  5.01 -  10.00     176,874           5.2         6.77     88,415         5.96
 10.01 -  15.00     502,407           8.4        11.73    101,775        13.48
 15.01 -  20.00     865,137           5.6        19.04    461,791        19.64
 20.01 -  25.00     848,806           8.0        22.79    225,604        22.35
 25.01 -  30.00     392,567           7.4        27.23    160,759        27.29
 30.01 -  35.00     272,933           4.7        32.46    150,643        32.96
 35.01 -  45.00      23,000           9.2        42.84         --          --
                 -----------                            ----------
                  3,197,774           6.7  $     19.97  1,305,037  $     19.77
                 ===========                            ==========

                                                 Year Ended December 31,
                                           ----------------------------------
                                              2000        1999        1998
                                           ----------  ----------  ----------
Net loss (numerator)
  Continuing operations.................. $   44,418  $   36,148  $   42,188
  Discontinued operation.................      2,704       2,158       2,601
                                           ----------  ----------  ----------
                                          $   47,122  $   38,306  $   44,789
                                           ==========  ==========  ==========

Shares (denominator)
  Weighted average common shares
    outstanding..........................     17,910      16,888      16,080
                                           ==========  ==========  ==========

Net loss per share - basic and diluted:
  Continuing operations.................. $     2.48  $     2.14  $     2.62
  Discontinued operation.................       0.15        0.13        0.16
                                           ----------  ----------  ----------
                                          $     2.63  $     2.27  $     2.79
                                           ==========  ==========  ==========

                                                    December 31,
                                        ----------------------------------
                                           2000        1999        1998
                                        ----------  ----------  ----------
  Loss from continuing operations
    before income taxes:
      Domestic........................ $  (38,448) $  (28,023) $  (33,137)
      Foreign.........................     (3,201)     (2,614)     (2,590)
  Net loss from operations of
    discontinued operation:
      Domestic........................     (2,342)     (2,025)     (2,480)
  Provision for income taxes:
   Domestic...........................         --          --          --
   Foreign............................        368         345         257
                                        ----------  ----------  ----------
  Net loss............................ $  (42,017) $  (30,982) $  (35,984)
                                        ==========  ==========  ==========

                                                         December 31,
                                                    ----------------------
                                                       2000        1999
                                                    ----------  ----------
  Deferred tax assets:
   Net operating loss carryforwards............... $   47,999  $   36,122
   General business credits.......................      5,604       4,312
   Deferred revenue...............................      5,032       6,494
   Capitalized research and
     development..................................      3,299       3,227
   Accruals and reserves deductible
     in different periods.........................      8,524       2,361
   Depreciation...................................      2,584         932
                                                    ----------  ----------
                                                       73,042      53,448
  Valuation allowance.............................    (72,739)    (53,147)
                                                    ----------  ----------
        Total..................................... $      303  $      301
                                                    ==========  ==========

                                                                 Rest of
                                   United                          the
                                   States     Europe    Canada    World    Consolidated
                                  ---------  --------  --------  --------  ------------
   Year ended December 31, 2000:
      Sales to unaffiliated
         customers.............. $  41,272     14667  $  1,289  $  5,917  $     63,145
                                  =========  ========  ========  ========  ============


      Long-lived assets......... $   5,003  $ 12,669  $      9  $      -- $     17,681
                                  =========  ========  ========  ========  ============


   Year ended December 31, 1999:
      Sales to unaffiliated
         customers.............. $  18,094  $ 22,428  $  1,401  $  2,380  $     44,303
                                  =========  ========  ========  ========  ============


      Long-lived assets......... $   4,909  $ 13,184  $     15  $      -- $     18,108
                                  =========  ========  ========  ========  ============


   Year ended December 31, 1998:
      Sales to unaffiliated
         customers.............. $   3,272  $  4,885  $  1,356  $  1,781  $     11,294
                                  =========  ========  ========  ========  ============


      Long-lived assets......... $   2,295  $ 14,957  $     33  $      -- $     17,285
                                  =========  ========  ========  ========  ============

                                           First     Second      Third     Fourth
                                          Quarter    Quarter    Quarter    Quarter
                                         ---------  ---------  ---------  ---------
Year ended December 31, 2000:
Net revenues...........................    11,978     15,991     16,894     18,282
Gross profit...........................     7,509     (3,519)    10,578      9,331

Net loss:
  Continuing operations................     7,094     19,836     10,366      4,721
  Discontinued operation...............       695        382        512        753
                                         ---------  ---------  ---------  ---------
                                            7,789     20,218     10,878      5,474
                                         =========  =========  =========  =========

Net loss per share - basic and diluted:
  Continuing operations................      0.40       1.11       0.58       0.26
  Discontinued operation...............      0.04       0.02       0.03       0.04
                                         ---------  ---------  ---------  ---------
                                             0.44       1.13       0.60       0.30
                                         =========  =========  =========  =========

Year ended December 31, 1999:
Net revenues...........................     7,475     11,108     11,116     14,604
Gross profit...........................     4,273      6,520      6,408      8,113

Net loss:
  Continuing operations................     9,211      8,199      7,252      6,320
  Discontinued operation...............       512        384        501        628
                                         ---------  ---------  ---------  ---------
                                            9,723      8,583      7,753      6,948
                                         =========  =========  =========  =========

Net loss per share - basic and diluted:
  Continuing operations................      0.56       0.49       0.42       0.39
  Discontinued operation...............      0.03       0.02       0.03       0.04
                                         ---------  ---------  ---------  ---------
                                             0.60       0.51       0.45       0.43
                                         =========  =========  =========  =========

                                          Additions
                                Balance   charged                           Balance
                                   at        to                               at
                                beginning costs and                         end of
                                of period expenses  Deductions    Other     period
                                --------  --------  ---------    -------    -------
1998
Allowance for doubtful account $    139  $    773  $     231 (1)$   248 (2)$   929

1999
Allowance for doubtful account $    929  $  1,126  $     586 (1)$          $ 1,469

2000
Allowance for doubtful account $  1,469  $  3,789  $   2,130 (1)$          $ 3,128