Corgentech Inc.

(Unaudited)

(In thousands, except share and per share data)

	September 30, 2004			December 31, 2003 (Note 1)

Assets
Current assets:
Cash and cash equivalents	$	13,095		$	54,590
Short-term investments	117,626			—
Contract receivable, related party	8,602			6,941
Prepaid expenses and other current assets	2,289			2,696
Notes receivable from employees	114			79
Total current assets	141,726			64,306
Property and equipment, net	3,077			2,278
Restricted cash	669			638
Notes receivable from employees	127			168
Other long-term assets	1,244			1,933
Total assets	$	146,843		$	69,323

Liabilities, convertible preferred stock and stockholders’ equity (deficit)
Current liabilities:
Bank overdraft	$	—		$	1,322
Accounts payable	5,201			3,334
Current portion of deferred revenue, related party	7,692			7,692
Current portion of long-term debt	483			454
Accrued clinical trial liabilities	1,119			2,592
Other accrued liabilities	5,900			1,376
Refundable exercise price	529			519
Total current liabilities	20,924			17,289
Deferred revenue, related party, net of current portion	9,802			15,571
Long-term debt, less current portion	283			627
Deferred rent and accrued loss on sublease	441			322
Commitments
Convertible preferred stock, $0.001 par value; none and 18,367,259 shares authorized at September 30, 2004 and December 31, 2003, respectively; none and 17,327,139 shares designated, issued and outstanding at September 30, 2004 and December 31, 2003, respectively	—			114,332
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares and none authorized at September 30, 2004 and December 31, 2003, respectively; none issued or outstanding at September 30, 2004 and December 31, 2003, respectively	—			—
Common stock, $0.001 par value; 100,000,000 and 21,932,500 shares authorized at September 30, 2004 and December 31, 2003, respectively; 27,524,512 and 2,441,570 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively	28			2
Additional paid-in capital	261,172			41,480
Notes receivable from officers	(40		)	(43		)
Deferred stock compensation	(15,652		)	(18,300		)
Accumulated other comprehensive loss	(283		)	—
Accumulated deficit	(129,832		)	(101,957		)
Total stockholders’ equity (deficit)	115,393			(78,818		)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)	$	146,843		$	69,323

See accompanying notes to condensed financial statements.

Corgentech Inc.

Condensed Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003

Contract revenue, related party	$	9,266		$	—		$	27,651		$	—
Operating expenses:
Research and development	18,172			13,642			46,831			35,622
General and administrative	4,119			1,058			9,932			3,284
Total operating expenses	(22,291		)	(14,700		)	(56,763		)	(38,906		)
Loss from operations	(13,025		)	(14,700		)	(29,112		)	(38,906		)
Interest and other income	565			23			1,328			259

Interest and other expense	(19		)	(1,047		)	(91		)	(1,065		)

Net loss	$	(12,479	)	$	(15,724	)	$	(27,875	)	$	(39,712	)

Basic and diluted net loss per common share	$	(0.46	)	$	(7.78	)	$	(1.19	)	$	(20.19	)

Weighted average shares used to compute basic and diluted net loss per common share	27,391,031			2,020,200			23,494,728			1,967,113

See accompanying notes to condensed financials statements.

Corgentech Inc.

Condensed Statements of Cash Flows

(Unaudited, in thousands)

	For the nine months ended September 30,
	2004			2003

Net loss	$	(27,875	)	$	(39,712	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	593			321
Amortization of deferred compensation, net of reversals	4,175			394
Noncash interest expense	—			1,005
Forgiveness of notes receivable	4			—
Changes in assets and liabilities:
Prepaid expenses and other current assets	407			264
Contract receivable, related party	(1,661		)	—
Notes receivable from employees	6			(44		)
Restricted cash	(31		)	(800		)
Other long-term assets	689			(9		)
Accounts payable	1,867			2,044
Accrued clinical trial liabilities	(1,473		)	2,944
Other accrued liabilities	4,524			2,781
Deferred revenue, related party	(5,769		)	—
Deferred rent and accrual for loss on subleased property	119			124
Net cash used in operating activities	(24,425		)	(30,688		)

Investing activities
Purchase of property and equipment	(1,392		)	(647		)
Purchase of short-term investments	(210,259		)	(1,000		)
Sale of short-term investments	92,350			16,929
Net cash provided by (used in) investing activities	(119,301		)	15,282

Financing activities
Proceeds from issuance of bridge loans	—			8,000
Proceeds from issuance of equipment loans	—			1,203
Repayment of equipment loans	(337		)	(200		)
Proceeds from issuance of common stock	103,890			188
Bank overdraft	(1,322		)	(610		)
Net cash provided by financing activities	102,231			8,581
Net decrease in cash and cash equivalents	(41,495		)	(6,825		)
Cash and cash equivalents at beginning of period	54,590			13,185
Cash and cash equivalents at end of period	$	13,095		$	6,360

Supplemental schedule of cash flow information
Interest paid	$	68		$	33

See accompanying notes to condensed financial statements.

Corgentech Inc.

Notes to Unaudited Condensed Financial Statements

Summary of Significant Accounting Policies

1. Basis of Presentation

The accompanying unaudited condensed financial statements of Corgentech Inc. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management these unaudited condensed financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly Corgentech’s financial position at September 30, 2004 and Corgentech’s results of operations and cash flows for the three- and nine-month periods ended September 30, 2004 and 2003. Interim-period results are not necessarily indicative of results of operations and cash flows for a full-year period.

The year-end balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America.

These unaudited condensed financial statements and the notes accompanying them should be read in conjunction our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission. Stockholders are encouraged to review the Form 10-K for a broader discussion of Corgentech’s business and the risks inherent therein.

2. Net Loss Per Share

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration of additional potential common shares. Diluted net loss per share is computed by dividing the net loss by the weighted-average number of common shares outstanding and dilutive potential common shares for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by Corgentech, preferred stock, options, and warrants are considered to be potential common shares and are only included in the calculation of diluted net loss per common share when their effect is dilutive.

The following table sets forth the computation of Corgentech’s basic and diluted net loss per share (in thousands, except share and per share amounts). All share amounts in the following table have been restated for all periods presented to reflect the reverse stock split which occurred during the first quarter of 2004 (See Note 5).

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003

Numerator for basic and diluted net loss per share:
Net loss	$	(12,479	)	$	(15,724	)	$	(27,875	)	$	(39,712	)

Denominator for basic and diluted net loss per share:
Weighted-average shares of common stock outstanding	27,757,226			2,223,865			23,912,911			2,210,947
Less: weighted-average shares subject to repurchase	(366,195		)	(203,665		)	(418,183		)	(243,834		)

Weighted-average shares used in computing basic and diluted net loss per share	27,391,031			2,020,200			23,494,728			1,967,113

Basic and diluted net loss per share	$	(0.46	)	$	(7.78	)	$	(1.19	)	$	(20.19	)

Historical outstanding dilutive securities not included in diluted net loss per share
Options to purchase common stock	2,481,496			766,324
Warrants	—			168,284
Common stock subject to repurchase agreements	326,592			304,685
	2,808,088			1,239,293

3. Comprehensive Loss

Comprehensive loss is comprised of net loss and unrealized gains/losses on available-for-sale securities, in

accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income.

Comprehensive loss and its components for the three- and nine-month periods ended September 30, 2004 and 2003 are as follows (in thousands):

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003

Net loss	$	(12,479	)	$	(15,724	)	$	(27,875	)	$	(39,712	)
Change in unrealized loss on investments	143			—			(283		)	(81		)
Comprehensive loss	$	(12,336	)	$	(15,724	)	$	(28,158	)	$	(39,793	)

4. Stock-Based Compensation

Corgentech accounts for employee stock-based compensation using the intrinsic-value method in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25, and related interpretations and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123.

We estimate the fair value of our stock-based awards to employees using the Black-Scholes option-pricing model with the following weighted average assumptions:

	For the three months ended September 30,							For the nine months ended September 30,
	2004		2003		2004		2003	2004		2003		2004		2003
	Stock option plans				ESPP			Stock option plans				ESPP
Dividend yield	—		—		—		—	—		—		—		—
Risk-free interest rate	3.10	%	2.87	%	1.39	%	—	3.03	%	2.87	%	1.39	%	—
Volatility	80	%	80	%	80	%	—	80	%	80	%	80	%	—
Expected life	4 years		4 years		6 months		—	4 years		4 years		6 months		—

The following table illustrates the effect on net loss and net loss per common share had we applied the fair value provisions of SFAS No. 123 to employee stock compensation (in thousands, except per share numbers):

	For the three months ended September 30,						For the nine months ended September 30,
	2004			2003			2004			2003

Net loss, as reported	$	(12,479	)	$	(15,724	)	$	(27,875	)	$	(39,712	)
Add: Stock-based employee compensation expense, included in reported net loss	1,274			207			3,845			380
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards	(1,768		)	(257		)	(4,701		)	(539		)

Pro forma net loss under fair value method for all awards	$	(12,973	)	$	(15,774	)	$	(28,731	)	$	(39,871	)

Loss per share (basic and diluted):
As reported	$	(0.46	)	$	(7.78	)	$	(1.19	)	$	(20.19	)
Pro forma	$	(0.47	)	$	(7.81	)	$	(1.22	)	$	(20.27	)

Stock compensation expense, which is a non-cash charge, results from stock option grants at exercise prices below the deemed fair value of the underlying common stock. Stock compensation is amortized on a straight-line basis over the vesting period of the underlying option, generally four years. From inception through September 30, 2004, we recorded deferred stock compensation expense of $20.8 million, which is amortized over the vesting period of the options using the straight-line method. At September 30, 2004, we had a total of $15.7 million remaining to be amortized.

The total unamortized deferred stock compensation recorded for all option grants through September 30, 2004, is expected to be amortized as follows: $1.3 million during the remainder of the year ending December 31, 2004, $5.1 million during the year ending December 31, 2005, $5.0 million during the year ending December 31, 2006 and $4.2 million during the year ending December 31, 2007 and $34,000 during the year ending December 31, 2008.

5. Reverse Stock Split

In January 2004, the Board of Directors and stockholders approved a one-for-four reverse stock split of Corgentech’s outstanding shares of common stock and preferred stock and on January 23, 2004, we filed an amended and restated certificate of incorporation and increased the number of authorized shares of common stock and preferred stock to 100,000,000 and 18,367,259, respectively. All issued and outstanding common stock, preferred stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this stock split.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, including particularly the sections entitled “Business Risks” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipates,” “believes,” “continue,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” “will,” or the negative of these terms or other comparable terminology. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Quarterly Report on Form 10-Q is filed with the Securities and Exchange Commission.

Overview

Corgentech is a biopharmaceutical company focused on the discovery, development and commercialization of a novel class of therapeutics called transcription factor decoys, or TF decoys, that treat disease through the regulation of gene expression. Transcription factor decoys bind to and inactivate transcription factors, which regulate gene expression and control biological processes. We are initially focusing our TF decoy discovery efforts on cardiovascular disease, inflammatory disease, and cancer. Our most advanced product, E2F Decoy, a combination drug and delivery device, is in two Phase 3 clinical trials for the prevention of vein graft failure. In September 2003, we completed patient enrollment for both of our Phase 3 clinical trials. We expect results from our Peripheral Bypass Graft, or PBG, trial in the fourth quarter of 2004 and results from our Coronary Artery Bypass Graft, or CABG, trial in the first quarter of 2005. Our Phase 3 clinical trials in CABG and PBG are separate trials with unique designs conducted with different patient populations and indications. Clinical data could differ materially from one trial to the other, and the results of one trial may not be seen in the other. If the data from one or both of our Phase 3 clinical trials is not satisfactory, we may not proceed with our planned filing of an application for approval or we may be forced to delay the filing or narrow the indication for which we are seeking marketing approval. In May 2004, we initiated a Phase 1/2 clinical trial for our E2F Decoy in a new indication, the prevention of arterio-venous, or AV, graft failure. In September 2004, we announced that we planned to initiate a Phase 1/2 clinical trial in the first half of 2005 in eczema with NF-Kappa-B Decoy (NF – κB Decoy), a selective inhibitor of inflammatory response. We were incorporated in January 1999 and we have incurred significant losses each year.

In October 2003, we entered into global collaboration agreements with Bristol-Myers Squibb Company, or BMS, for the development and commercialization of E2F Decoy for all indications. We and BMS will co-promote E2F Decoy in the United States and share equally in profits and losses. We have granted BMS the exclusive right to commercialize E2F Decoy outside the United States pursuant to a royalty-bearing license. Under our agreements with BMS, BMS is obligated to fund a majority of the ongoing development costs associated with E2F Decoy.

In September 2004, we licensed a novel peptide delivery system from Cyclacel Limited, or Cyclacel, for potential use to assist in the systemic delivery of TF Decoys. The license grants Corgentech use of Cyclacel’s proprietary Penetratin delivery technology with TF Decoys. We paid Cyclacel an up-front payment and will pay Cyclacel milestone payments and royalties if licensed products are commercialized.

Financial Operations Overview

Revenues

We have not generated any revenues from sales of commercial products since our inception and do not expect to generate any revenue, other than contract revenues and milestone payments, until at least 2005. BMS will have the right to record all United States product sales.

Research and Development Expenses

During the three and nine months ended September 30, 2004, we incurred research and development expenses for E2F Decoy of approximately $13.5 million and $37.7 million, respectively. During the three and nine months ended September 30, 2004, we also incurred $4.6 million and $9.1 million respectively in non-E2F related research and development expenses. In October 2003, we entered into our collaboration agreement with BMS, under which BMS is obligated to fund a majority of the ongoing costs of developing E2F Decoy for CABG, PBG and AV graft failure. During the three and nine months ended September 30, 2004, we recorded approximately $7.4 million and $21.9 million, respectively, in reimbursable expenses due from BMS, as contract revenue, related party.

We currently have one clinical product candidate, E2F Decoy. A majority of the expenses related to completion of our two Phase 3 clinical trials and post-approval trials for E2F Decoy will be reimbursed by BMS pursuant to our collaboration agreement. Due to the significant risks and uncertainties inherent in the clinical development, manufacturing and regulatory approval process, the cost to complete our development of E2F Decoy for AV graft failure, NF – κB Decoy for eczema and other product candidates is not accurately predictable. Results from clinical trials and manufacturing development may not be favorable. Further, data from clinical trials is subject to varying interpretation and may be deemed insufficient by the regulatory bodies reviewing applications for marketing approvals.

General and Administrative Expenses

General and administrative expenses consist of compensation, professional services and other expenses related to facilities, legal, finance and information systems.

Critical Accounting Policies and Significant Judgments and Estimates

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

We believe that the following accounting policies relating to revenue recognition, stock compensation and clinical trial accounting are most critical to a full understanding and evaluation of our reported financial results.

Revenue Recognition

Revenues associated with our collaboration with BMS consist of non-refundable, up-front license fees and reimbursement of development expenses.

We use revenue recognition criteria outlined in Staff Accounting Bulletin No. 104, Revenue Recognition and Emerging Issues Task Force Issue 00-21 Revenue Arrangements with Multiple Deliverables, or EITF 00-21. Accordingly, revenue arrangements with multiple deliverable items are divided into separate units of accounting if certain criteria are met, including whether the delivered item has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Revenues from licensing agreements are recognized based on the performance requirements of the agreement. Non-refundable up-front fees, where we have an ongoing

involvement or performance obligation, are generally recorded as deferred revenue in the balance sheet and amortized into license fees in the statements of operations over the estimated term of the performance obligation.

To date we have received $25.0 million from BMS in non-refundable up-front fees in consideration for license and distribution rights of E2F Decoy. In determining the term of performance obligation, we took into account the estimated period to complete clinical trials and receive regulatory approvals for commercialization of E2F Decoy in CABG, PBG and AV grafts based upon the most recent development plans for each product. If such plans are modified, the timing of recognition of deferred revenue will change. In addition, the manufacturing and co-promotion arrangements were not considered to be deliverables as defined under EITF 00-21.

Stock Compensation

We account for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards Board, or FASB, Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25, and related interpretations and have adopted the disclosure-only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. We have elected to continue to follow the intrinsic value method of accounting as prescribed by APB No. 25. The information regarding net loss as required by SFAS No. 123, presented in Note 4 to our financial statements, has been determined as if we had accounted for our employee stock options under the fair value method of that statement. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years’ vesting.

Clinical Trial Accounting

We record accruals for estimated clinical study costs, comprising payments for work performed by contract research organizations and participating hospitals. These costs are a significant component of research and development expenses. We accrue costs for clinical studies performed by contract research organizations based on estimates of work performed under the contracts. Costs of setting up hospital sites for participation in trials are accrued immediately. Hospital costs related to patient enrollment are accrued as patients are entered in the trial. Payments to hospitals for post-surgery patient angiograms are accrued at the time of the performance of the angiogram.

Results of Operations

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Contract Revenue, Related Party. Contract revenue, related party increased to $9.3 million for the three months ended September 30, 2004 from $0 for the three months ended September 30, 2003. The increase of $9.3 million in revenue was attributable to the reimbursement by BMS of $7.4 million in expenses associated with E2F Decoy research and development and the recognition of $1.9 million of deferred revenue from BMS.

Research and Development Expenses. Research and development expenses increased to $18.2 million for the three months ended September 30, 2004 from $13.6 million for the three months ended September 30, 2003. The increase in research and development expenses of $4.6 million was primarily the result of an increase of $2.9 million in personnel, material and outside services expenses associated with the expansion of our research pipeline in inflammatory disease and cancer, $1.2 million in expenses associated with higher payroll and non-cash stock compensation expenses and related expenses, and $380,000 in professional services related to E2F Decoy development. We expect that research and development costs will trend up slightly in the last quarter of 2004.

General and Administrative Expenses. General and administrative expenses increased to $4.1 million for the three months ended September 30, 2004 from $1.0 million for the three months ended September 30, 2003. The increase of $3.1 million was primarily attributable to higher payroll and non-cash stock compensation expenses and related expenses of $1.5 million, $970,000 related to increased marketing expenses and $370,000 in higher expenses related to operating as a public company.

We expect our general and administrative expenses to increase substantially due to the costs associated with being a publicly traded company and the infrastructure necessary to support the potential commercialization of E2F Decoy. We also expect to incur marketing expenses during the fourth quarter of 2004 related to pre-launch activities associated with E2F Decoy.

Interest and Other Income. Interest and other income increased to $565,000 for the three months ended September 30, 2004 from $23,000 for the three months ended September 30, 2003 as a result of higher average cash, cash equivalent and short-term investment balances from proceeds from our initial public offering.

Interest and Other Expense. Interest and other expense decreased to $19,000 for the three months ended September 30, 2004 from $1.0 for the three months ended September 30, 2003. Interest expense decreased due to the decrease in non-cash interest expense from the bridge loan in 2003.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Contract Revenue, Related Party. Contract revenue, related party increased to $27.7 million for the nine months ended September 30, 2004 from $0 for the nine months ended September 30, 2003. The increase of $27.7 million in revenue was attributable to the reimbursement by BMS of $21.9 million in expenses associated with E2F Decoy research and development and the recognition of $5.8 million of deferred revenue from BMS.

Research and Development Expenses. Research and development expenses increased to $46.8 million for the nine months ended September 30, 2004 from $35.6 million for the nine months ended September 30, 2003. The increase in research and development expenses of $11.2 million was primarily the result of an increase of $5.9 million in personnel, material and outside services expenses associated with the expansion of our research pipeline in inflammatory disease and cancer, $2.8 million in expenses associated with higher payroll and non-cash stock compensation expenses and related expenses, and $2.3 million in expenses related to E2F drug and device development.

General and Administrative Expenses. General and administrative expenses increased to $9.9 million for the nine months ended September 30, 2004 from $3.3 million for the nine months ended September 30, 2003. The increase of $6.6 million was primarily attributable to higher payroll and non-cash stock compensation expenses and related expenses of $3.8 million, $1.7 related to increased marketing expenses and $830,000 in higher expenses related to operating as a public reporting company.

Interest and Other Income. Interest and other income increased to $1.3 million for the nine months ended September 30, 2004 from $259,000 for the nine months ended September 30, 2003 as a result of higher average cash, cash equivalent and short-term investment balances from proceeds from our initial public offering.

Interest and Other Expense. Interest and other expense decreased to $91,000 for the nine months ended September 30, 2004 from $1.0 million for the nine months ended September 30, 2003. Interest expense decreased due to the decrease in non-cash interest expense from the bridge loan in 2003.

Liquidity and Capital Resources

Sources of Liquidity

Since our inception, we have financed our operations primarily through the issuance of equity securities, capital equipment financing and payments from BMS pursuant to our collaboration. Through September 30, 2004, we had received net proceeds of $217.1 million from the issuance of shares of common stock and preferred stock, $1.4 million from capital equipment financing and $45.4 million from BMS. At September 30, 2004, we had $130.7 million in cash, cash equivalents and short-term investments and had $669,000 of restricted cash pledged as collateral for letters of credit for our leased facilities. In February 2004, we issued 6,900,000 shares of common stock at $16.00 per share upon the closing of our initial public offering in which we raised approximately $100.8 million, net of underwriting discounts and commissions and expenses.

Pursuant to our collaboration agreement, BMS has agreed to fund a majority of ongoing development costs incurred towards the development of E2F Decoy for the prevention of bypass graft failure and prevention of AV graft failure. We believe that our available cash, cash equivalents and short-term investments will be sufficient to fund anticipated levels of operations through the end of 2005.

Cash Flows

Net cash used in operating activities was $24.4 million and $30.7 million for the nine months ended September 30, 2004 and 2003, respectively. The decrease of cash used in operations of $6.3 million was primarily due to an $11.8 million decrease in the net loss arising from the recognition of revenue from our collaboration agreement with BMS, offset by a $5.8 million decrease in deferred revenue.

Net cash provided by/used in investing activities was cash used of $119.3 million for the nine months ended September 30, 2004 compared to cash provided by investment activities of $15.3 million for the nine months ended September 30, 2003. The decrease in net cash provided by investing activities of $134.6 million was primarily due to a net increase in purchases of short-term investments of $133.8 million.

Net cash provided by financing activities was $102.2 million and $8.6 million for the nine months ended September 30, 2004 and 2003, respectively. The increase in net cash provided by financing activities of $93.6 million was primarily due to receipt of net proceeds of $100.8 million from the sale of common stock in our initial public offering in February 2004 and proceeds of $3.1 million from the exercise of warrants, stock options and the purchase of shares through our Employee Stock Purchase Plan, compared to the proceeds from the issuance of bridge loan of $8.0 million in September 2003.

Credit Facility

In February 2003, we entered into an equipment line of credit with GE Capital Corporation providing funding of up to $1.5 million. At September 30, 2004, we had drawn down $1.4 million on the line of credit. Amounts under the line of credit are secured by the equipment purchased.

Operating Capital and Capital Expenditure Requirements

We expect to devote substantial resources to continue our research and development efforts and to expand our sales, marketing and manufacturing programs associated with the commercialization and launch of E2F Decoy and our future products.

We do not expect to generate significant additional funds, other than reimbursements and milestone payments that we receive from our collaboration with BMS, until we successfully obtain marketing approval for, and begin selling, E2F Decoy. We believe that the key factors that will affect our internal and external sources of cash are:

• the success of our clinical and preclinical development programs;

• our ability to successfully obtain marketing approval for and to commercially launch E2F Decoy;

• our ability to maintain our collaboration with BMS and enter into other strategic collaborations with biotechnology and pharmaceutical companies and the success of such collaborations; and

• the receptivity of the capital markets to financings by biotechnology companies.

If our available cash, cash equivalents and short-term investments, net proceeds from our initial public offering, expected reimbursements of development costs and the first regulatory milestone payment from BMS (payable upon our first U.S. New Drug Application filing for E2F Decoy) are insufficient to satisfy our liquidity requirements or if we develop or acquire additional product candidates, we may need to raise additional external funds through the sale of additional equity or debt securities. The sale of additional equity and debt securities may result in additional dilution to our stockholders. Additional financing may not be available in amounts or on terms acceptable to us or at all. If we are unable to obtain this additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our business.

Contractual Obligations

Our outstanding contractual obligations relate to our equipment debt financings, facilities leases, and obligations under our agreement with our third-party contract manufacturer. Our contractual obligations as of September 30, 2004 were as follows (in millions):

	Payments Due by Period
Contractual Obligations	Total		Less than One Year		One to Three Years		Four to Five Years		After Five Years

Equipment financing	$	0.8	$	0.5	$	0.3	$	—	$	—
Operating leases	4.0		2.0		1.9		0.1		—
Manufacturing development agreement	1.2		1.0		0.1		0.1		—

Total contractual cash obligations	$	6.0	$	3.5	$	2.3	$	0.2	$	—

The contractual summary above reflects only payment obligations that are fixed and determinable. We also have contractual payment obligations, the timing of which is contingent on future events. We are obligated to make certain payments under our license agreements with The Board of Trustees of the Leland Stanford Junior University and The Brigham and Women’s Hospital, Inc. if milestones relating to the development and regulatory approval of E2F Decoy are achieved. In addition, if E2F Decoy is successfully commercialized we will pay royalties pursuant to these license agreements. These royalty rates are in the low single digits. Please see “Business—License Agreements” in our form 10-K for the year ended December 31, 2003 for a further description of these agreements.

We have also entered into letters of credit totaling $669,000 securing our operating lease obligations.

BUSINESS RISKS

Risks Related to Our Business

We will depend heavily on the success of our lead product candidate, E2F Decoy, which is still in development. If we are unable to commercialize E2F Decoy or experience significant delays in doing so, we may have to cease operations.

We have invested a significant portion of our time and financial resources since our inception in the development of E2F Decoy. We anticipate that in the near term our ability to generate revenues will depend solely on the successful development, approval and commercialization of E2F Decoy. If we are not successful in the completion of clinical trials for the development, approval and commercialization of E2F Decoy, we may never generate any revenues and may be forced to cease operations. All of our other product candidates are in preclinical development, and we do not expect to seek regulatory approval of these products for many years, if at all.

The commercial success of E2F Decoy will depend upon successful completion of clinical trials, manufacturing commercial supplies, obtaining marketing approval, successfully launching the product and acceptance of the product by the medical community and third party payors as clinically useful, cost-effective and safe. Our Phase 3 clinical trials in CABG and PBG are separate trials with unique designs conducted with different patient populations and indications. Clinical data could differ materially from one trial to the other, and the results of one trial may not be seen in the other. If the data from one or both of our Phase 3 clinical trials is not satisfactory, we may not proceed with our planned filing of an application for approval or we may be forced to delay the filing or narrow the indication for which we are seeking marketing approval.

Our E2F Decoy consists of a drug and a delivery device, both of which must be approved to commercialize E2F Decoy. Even if we file an application for approval with satisfactory clinical data, the FDA may not accept our filing, or may request additional information, including data from additional clinical trials. The FDA may also approve the device but not the drug or vice versa, may approve E2F Decoy for very limited purposes with many restrictions on its use, may delay approval, or ultimately, may not grant marketing approval for E2F Decoy. Even if we do receive the approval of the FDA, we may be unable to gain market acceptance by the medical community and third-party payors.

If BMS terminates our collaboration, or if there are any adverse developments in our relationship with BMS, we could be prevented from successfully commercializing E2F Decoy.

In October 2003, we entered into agreements with BMS relating to the development, regulatory approval and commercialization of E2F Decoy. Based on the terms of our collaboration, we expect to receive significant development funding and milestone payments from BMS. BMS may terminate the collaborative agreement upon six months prior Agreement, after which BMS will not be obligated to fund our development and commercialization costs or make milestone payments. The collaboration is governed by a joint steering committee, consisting of an equal number of representatives of us and BMS. There are also working groups with representation from both parties that have responsibility over development and regulatory, manufacturing, finance and commercialization matters. Ultimate decision-making authority is vested in us as to some matters and in BMS as to other matters. A third category of decisions require the approval of both us and BMS. Outside the United States, ultimate decision-making authority as to most matters is vested in BMS. Any loss of BMS as a commercial partner for E2F Decoy, dispute over the terms of the collaboration, disagreements over decisions made with respect to the collaboration or other adverse developments in our relationship with BMS would harm our business and would require us to seek additional capital.

We have limited manufacturing capabilities and manufacturing personnel and expect to depend on third parties to manufacture E2F Decoy and any future products. We are dependent on single suppliers for E2F Decoy intermediates and components of the pressure device used to administer E2F Decoy.

We have limited personnel with experience in, and we do not own facilities for, manufacturing any clinical or commercial products. We rely on third parties to supply us with E2F Decoy and its related device for our clinical trials. We do not have agreements with these third parties which obligate them to provide us with any products for future clinical trials or future commercial sales. We are in the process of negotiating agreements with these third parties for the production of the active pharmaceutical ingredient of E2F Decoy, for the filling, finishing, labeling and distribution of the final E2F Decoy product, and for the manufacture of the pressure device, for clinical supply

and commercial sale. These manufacturers will be our single suppliers. There are a limited number of manufacturers that are capable of manufacturing the active ingredient of E2F Decoy or its related device and are willing to do so. If we are unable, for whatever reason, to obtain E2F Decoy and its related device from these suppliers, we may not be able to obtain alternate manufacturers in a timely manner, if at all, to meet our requirements for clinical trials and, subject to receipt of regulatory approvals, commercial sale. We also depend on third-party contract laboratories to perform quality control testing of E2F Decoy and its device.

The third-party manufacturer of the active pharmaceutical ingredient of E2F Decoy plans to produce commercial quantities of E2F Decoy at a different site than the sites used to manufacture this ingredient for clinical trial use. Because of this change of site, the FDA may require us to conduct a study to demonstrate that changing the manufacturing location has not affected the product. If we cannot establish that the products are equivalent or if the FDA disagrees with the results of our study, commercial launch of E2F Decoy would be delayed.

In order to produce E2F Decoy in the quantities that we anticipate will be required to meet anticipated market demand, we need to increase, or scale up, the production process by a significant factor over the current level of production of the active pharmaceutical ingredient. If we are unable to do so, we may not be able to produce E2F Decoy in sufficient quantities to meet the requirements for the launch of the product or to meet future demand. In addition, if the scaled up production process is not efficient, our gross margins may be reduced.

We may in the future elect to manufacture certain of our products in our own manufacturing facilities. We would need to invest additional funds and recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

If our third-party manufacturers’ facilities do not follow current good manufacturing practices, our product development and commercialization efforts may be harmed.

There are a limited number of manufacturers that operate under the FDA’s and European Union’s good manufacturing practices regulations and are capable of manufacturing E2F Decoy. Our third-party manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages of qualified personnel. A failure of our third-party manufacturers to follow current good manufacturing practices or other regulatory requirements and to document their adherence to such practices may lead to significant delays in the availability of products for commercial use or clinical study, the termination of, or hold on a clinical study, or may delay or prevent filing or approval of marketing applications for our products. In addition we could be subject to sanctions being imposed on us, including fines, injunctions and civil penalties. Changing manufacturers may require revalidation of the manufacturing process and procedures in accordance with FDA mandated current good manufacturing practices and will require FDA approval. This revalidation may be costly and time consuming. If we are unable to arrange for third-party manufacturing of our products, or to do so on commercially reasonable terms, we may not be able to complete development of our products, including E2F Decoy, or market them.

Our competitors currently offer and may develop therapies that reduce the size of our markets.

There are a growing number of approved therapies for the prevention or treatment of cardiovascular disease and end stage renal disease, or ESRD. These include cholesterol lowering agents, agents to prevent or disrupt blood clots, drug eluting stents, balloon angioplasty, arterial bypass grafts and synthetic conduits used for bypass and use of AV fistulae to provide vascular access for ESRD patients. Some or all of these treatments could reduce the size of the CABG, PBG and AV graft markets. These treatments are marketed by major pharmaceutical and/or medical device companies. In particular, drug eluting stents were only approved for use in 2003 and could potentially result in a significant decrease in bypass graft procedure volumes. Two drug eluting stents have been approved in the United States and are being marketed by Johnson & Johnson and Boston Scientific Corporation, two companies with significant financial and marketing resources. In February 2004, Guidant Corporation and Johnson & Johnson announced a co-promotion agreement pursuant to which Guidant will co-promote Johnson & Johnson’s CYPHER drug eluting stent. In addition, various other treatments for cardiovascular disease are in various stages of preclinical or clinical testing by other companies. These therapies could also affect the size of the CABG, PBG and/or AV graft markets or could result in pricing pressure if we receive marketing approval for E2F Decoy.

If we fail to obtain an adequate level of reimbursement for our products by third-party payors, there may be no commercially viable markets for our products or the markets may be much smaller than expected.

The availability and levels of reimbursement by governmental and other third party payors affect the market for our products. The efficacy, safety and cost-effectiveness of our products as well as the efficacy, safety and cost-effectiveness of any competing products will determine the availability and level of reimbursement. These third-party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for healthcare products and services. In certain countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to twelve months or longer after the receipt of regulatory marketing approval for a product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a

clinical trial that compares the cost-effectiveness of our products, including E2F Decoy, to other available therapies. If reimbursement for our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels, our revenues would be reduced.

Because E2F Decoy treatment occurs during bypass graft surgery, and many of these patients are over 65 years of age and likely to be covered by Medicare, we will seek to have the level of reimbursement for bypass surgery incorporating E2F Decoy treatment increased by the Centers for Medicaid and Medicare Services, or CMS. CMS is the federal agency that administers Medicare and makes coverage and reimbursement decisions for Medicare beneficiaries. This is a time consuming and expensive process. In addition, many private insurers adopt CMS’ coverage and reimbursement decisions for their insureds. If CMS does not increase the level of reimbursement to hospitals associated with E2F Decoy treatment on a timely basis, or at all, or establishes an unsatisfactory level of reimbursement, E2F Decoy may never obtain market acceptance or generate meaningful revenues.

The Fast Track designation for development of E2F Decoy may not actually lead to a faster development or regulatory review or approval process.

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA Fast Track designation. Marketing applications filed by sponsors of products in fast track development may qualify for expedited review under policies or procedures offered by the FDA, but the Fast Track designation does not assure such qualification. We have been granted Fast Track designation from the FDA for E2F Decoy for the prevention of bypass graft failure and AV graft failure. E2F Decoy’s Fast Track designation may be withdrawn by the FDA if the FDA believes that it is no longer supported by data from our clinical development program. In addition, E2F Decoy’s Fast Track designation does not guarantee that we will be able to take advantage of the expedited review procedures and does not increase the likelihood that the FDA will ultimately approve E2F Decoy.

If our preclinical tests or clinical trials with respect to our TF decoys for bypass graft failure, AV graft failure, inflammatory diseases or cancer do not meet safety or efficacy endpoints in these evaluations, or if we experience significant delays in these tests or trials, our ability to commercialize products and our financial position will be impaired.

Clinical development, including preclinical testing, is a long, expensive and uncertain process and is subject to delays. It may take us several years to complete our testing, and failure can occur at any stage of testing. Patient enrollment in future clinical trials and completion of patient follow-up in our current Phase 3 clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the proximity of patients to clinical sites and the eligibility criteria for the study and patient compliance. Delays in patient enrollment or failure of patients to continue to participate in a study may cause an increase in costs and delays, or result in the failure of the trial.

The results of preclinical or clinical studies do not necessarily predict future clinical trial results, and acceptable results in early studies might not be seen in later studies. Any preclinical or clinical test may fail to produce results satisfactory to the FDA or foreign regulatory authorities. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Drug-related adverse events during a clinical trial could cause us to repeat a trial, terminate a trial or cancel the program. In addition, we are required by the FDA to conduct additional preclinical studies, including toxicology, while our clinical studies are ongoing.

We have a limited operating history and if we do not generate significant revenues, we will not be able to achieve profitability.

We do not have any products approved for marketing. We have a limited history of operations and have focused primarily on clinical trials of E2F Decoy. We have incurred net losses since our inception. As of September 30, 2004, we had an accumulated deficit of approximately $129.9 million. We expect to incur substantial net losses to further develop and commercialize E2F Decoy and do not know whether or when we will become profitable. If we are unable to generate significant revenues from E2F Decoy or attain profitability, we will not be able to sustain our operations.

We will need additional financing, which may be difficult to obtain. If we fail to obtain necessary financing or do so on unattractive terms, our development programs and other operations could be harmed.

Our products are based on a new technology, TF decoys, and we have only limited experience in regulatory affairs, which may affect our ability or the time required to obtain necessary regulatory approvals.

All of our product candidates, including E2F Decoy, are based on our TF decoy technology. Because there are currently no approved products based on this technology, the regulatory requirements governing this type of product may be more rigorous or less clearly established than for already approved classes of therapeutics. We must provide the FDA and foreign regulatory authorities with preclinical and clinical data that demonstrate that our products are safe and effective before they can be approved for commercial sale. We, not BMS, have primary responsibility for compiling this data and submitting the application for regulatory approval of E2F Decoy in the United States. We have only limited experience in filing and prosecuting the applications necessary to gain regulatory approvals. As a result, we may experience a longer regulatory process in connection with obtaining regulatory approvals for our product candidates.

If our post-approval follow up trial of CABG patients does not show a difference in major cardiac events between treated and untreated patients the FDA could withdraw or limit the approval of E2F Decoy.

If E2F Decoy is approved by the FDA, we will be required by the FDA to monitor the CABG patients for up to five years after enrollment to track major cardiac events such as death, heart attack, the need for a repeat CABG surgery or the need for surgical intervention to rescue a failed or failing graft. Even if E2F Decoy is approved for the prevention of bypass graft failure, the FDA may subsequently withdraw or limit such approval if we cannot show a difference in major cardiac events between CABG patients treated with E2F Decoy and CABG patients receiving a placebo.

If third-party clinical research organizations do not perform in an acceptable and timely manner, our clinical trials could be delayed or unsuccessful.

We do not have the ability to conduct all of our clinical trials independently. We rely on clinical investigators, third-party clinical research organizations and consultants to perform substantially all of these functions. If we cannot locate acceptable contractors to run our clinical trials or enter into favorable agreements with them, or if these third parties do not successfully carry out their contractual duties, satisfy FDA requirements for the conduct of clinical trials or meet expected deadlines, we will be unable to obtain required approvals and will be unable to commercialize our products, including E2F Decoy, on a timely basis, if at all. Our agreements are generally cancelable by either party with 30 to 90 days Agreement, with or without cause.

We may fail to obtain FDA clearance or approval of the pressure device used to deliver E2F Decoy.

We will need to obtain clearance of the pressure device used to deliver the drug by the FDA’s Center for Devices and Radiological Health, or CDRH, under a 510(k) premarket notification establishing that the pressure device is substantially equivalent to one or more marketed predicate devices. We expect to file such notification in 2004. In the event we cannot establish such substantial equivalence, we will need to request that the FDA classify the pressure device as a Class I or Class II device that can be marketed without premarket approval or, failing that, obtain premarket approval of the pressure device by CDRH. The FDA classifies medical devices into three classes based on the regulatory control deemed necessary by the FDA to reasonably ensure safety and effectiveness. A Class I device is subject to general controls, including compliance with the FDA’s good manufacturing practices regulations and labeling regulations. A Class II device is subject to general controls and special controls, which may include special labeling requirements, mandatory performance standards and post-market surveillance. A Class III device is subject to pre-market approval requiring the independent demonstration that the new medical device is safe and effective. If we are unable to obtain clearance or approval of the pressure device, the commercialization of E2F Decoy could be delayed or possibly prevented.

Even if our products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which

Failure to obtain regulatory approval in foreign jurisdictions will prevent us from marketing our products abroad.

We intend to market our products in international markets. In order to market our products in the European Union and many other foreign jurisdictions, we must obtain separate regulatory approvals. In the case of E2F Decoy, we have had limited interactions with foreign regulatory authorities, and BMS has responsibility to obtain regulatory approvals outside the United States. We will be dependent on BMS to obtain these approvals. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market.

If we do not find collaborators for our other product candidates, we may have to reduce or delay our rate of product development and/or increase our expenditures.

Our strategy to develop, manufacture and commercialize our products includes entering into various relationships with pharmaceutical companies with respect to some programs to advance such programs and reduce our expenditures on such programs. To date, we have entered into one collaboration agreement regarding E2F Decoy. Our other product candidates will target highly competitive therapeutic markets in which we have limited experience and expertise. If we are unable to develop this expertise ourselves, we will need to enter into agreements with a larger biotechnology or pharmaceutical company to provide us with the necessary resources and experience for the development and commercialization of products in these markets. There are a limited number of companies with the resources necessary to develop our future products commercially, and we may be unable to attract any of these firms. A company that has entered into a collaboration agreement with one of our competitors may choose not to enter into a collaboration agreement with us. We may not be able to negotiate any collaborations on acceptable terms or at all. If we are not able to establish collaborative arrangements, we may have to reduce or delay further development of some of our programs and/or increase our expenditures and undertake the development activities at our own expense. If we elect to increase our expenditures to fund our development programs, we will need to obtain additional capital, which may not be available on acceptable terms or at all.

In addition, there have been a significant number of recent business combinations among large biotechnology and pharmaceutical companies that have reduced the number of potential future collaborators. If business combinations involving BMS or other potential collaborators were to occur, the effect could be to diminish, terminate or cause delays in one or more of our product development programs.

We depend on our officers and key employees, and if we are not able to retain them or recruit additional qualified personnel, our business will suffer.

We are highly dependent on our President and Chief Executive Officer, John P. McLaughlin and other officers and key employees. Due to the specialized knowledge each of our officers and key employees possesses with respect to E2F Decoy and our operations, the loss of service of any of our officers or key employees could delay or prevent the successful completion of our Phase 3 clinical trials or the commercialization of E2F Decoy. We do not carry key man life insurance on our officers or key employees except for Mr. McLaughlin.

We have employment agreements with Mr. McLaughlin, Richard P. Powers, our Vice President and Chief Financial Officer, Todd J. Lorenz, our Chief Medical Officer, Leslie M. McEvoy, our Vice President, Research, James Z. Huang, our Vice President, Business Development and Commercial Operations, and Patrick Broderick, our Vice President and General Counsel. Each of our officers and key employees may terminate their employment without notice and without cause or good reason. We currently are not aware that any officer or key employee is planning to leave or retire.

In addition, our growth will require hiring a significant number of qualified scientific, commercial and administrative personnel. Accordingly, recruiting and retaining such personnel in the future will be critical to our success. There is intense competition from other companies and research and academic institutions for qualified personnel in the areas of our activities. Our offices are located in the San Francisco Bay Area, where competition for personnel with biopharmaceutical skills is intense. If we fail to identify, attract, retain and motivate these highly skilled personnel, we may be unable to continue our development and commercialization activities.

If we are unable to manage our expected growth, we may not be able to commercialize our product candidates, including E2F Decoy.

We are rapidly expanding our operations and expect to continue to grow our research and development, product development and administrative operations. We expanded our workforce, located in both California and Pennsylvania from 72 full-time employees on December 31, 2003 to 121 full-time employees on September 30, 2004. To manage any further growth and to commercialize E2F Decoy, we will be required to improve existing and implement new operational and financial systems, procedures and controls and expand, train and manage our growing employee base. There can be no assurance that our current and planned personnel, systems, procedures and controls will be adequate to support our anticipated growth. If we are unable to manage our growth effectively, our business could be harmed.

Risks Related to Our Industry

We face the risk of product liability claims and may not be able to obtain insurance.

Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing, and marketing of drugs and related devices. Although we have product liability and clinical trial liability insurance that we believe is appropriate, this insurance is subject to deductibles and coverage limitations. We may not be able to obtain or maintain adequate protection against potential liabilities. In addition, if any of our product candidates are approved for marketing, we may seek additional insurance coverage. If we are unable to obtain insurance at acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity or reduced acceptance of our products in the market.

Our operations involve hazardous materials and we must comply with environmental laws and regulations, which can be expensive.

Our research and development activities involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We are subject to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of these materials. We generally contract with third parties for the disposal of such substances and store certain low-level radioactive waste at our facility until the materials are no longer considered radioactive. We cannot eliminate the risk of accidental contamination or injury from these materials. We may be required to incur substantial costs to comply with current or future environmental and safety regulations. If an accident or contamination occurred, we would likely incur significant costs associated with civil penalties or criminal fines and in complying with environmental laws and regulations. We do not have any insurance for liabilities arising from hazardous materials. Compliance with environmental laws and regulations is expensive, and current or future environmental regulation may impair our research, development or production efforts.

The life sciences industry is highly competitive and subject to rapid technological change.

The life sciences industry is highly competitive and subject to rapid and profound technological change. Our present and potential competitors include major pharmaceutical companies, as well as specialized biotechnology and life sciences firms in the United States and in other countries. Most of these companies have considerably greater financial, technical and marketing resources than we do. Additional mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated in our competitors. Our existing or prospective competitors may develop processes or products that are more effective than ours or be more effective at implementing their technologies to develop commercial products faster. Our competitors may succeed in obtaining patent protection and/or receiving regulatory approval for commercializing products before us. Developments by our competitors may render our product candidates obsolete or non-competitive.

We also experience competition from universities and other research institutions, and we frequently compete with others in acquiring technology from those sources. These industries have undergone, and are expected to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technical advances in each field are made and become more widely known. There can be no assurance that others will not develop technologies with significant advantages over those that we are seeking to develop. Any such development could harm our business.

Legislative or regulatory reform of the healthcare system may affect our ability to sell our products profitably.

In both the United States and certain foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system in ways that could impact upon our ability to sell our products profitably. In the United States in recent years, new legislation has been proposed at the federal and state levels that would effect major changes in the healthcare system, either nationally or at the state level. These proposals have included prescription drug benefit proposals for Medicare beneficiaries introduced in Congress. Legislation creating a prescription drug benefit and making certain changes in Medicare reimbursement has recently been enacted by Congress. Given this legislation’s recent enactment, it is still too early to determine its impact on the pharmaceutical industry and our business. Further federal and state proposals are likely. More recently, administrative proposals are pending that would change the method for calculating the reimbursement of certain drugs. The potential for adoption of these proposals may affect our ability to raise capital, obtain additional collaborators or market our products. Such proposals, if enacted, may reduce our revenues, increase our expenses or limit the markets for our products. In particular, we expect to experience pricing pressures in connection with the sale of our products due to the trend toward managed health care, the increasing influence of health maintenance organizations and additional legislative proposals.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain protection for the intellectual property incorporated into our products, the value of our technology and products will be adversely affected.

Our success will depend in large part on our ability or the ability of our licensors to obtain and maintain protection in the United States and other countries for the intellectual property incorporated into our products. As of September 30, 2004, we had 41 issued United States and foreign patents and 43 pending United States and foreign patent applications. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves complex legal and scientific questions. Neither we nor our licensors may be able to obtain additional issued patents relating to our technology. Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of the term of patent protection we may have for our products. In addition, our patents and our licensors’ patents may not afford us protection against competitors with similar technology. Because patent applications in the United States and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.

We also rely on trade secret protection and confidentiality agreements to protect our interests in proprietary know-how that is not patentable and for processes for which patents are difficult to enforce. We cannot be certain that we will be able to protect our trade secrets adequately. Any leak of confidential data into the public domain or to third parties could allow our competitors to learn our trade secrets.

If we lose our licenses from Stanford University or Brigham and Women’s Hospital we will not be able to continue our business.

We hold licenses from The Board of Trustees of the Leland Stanford Junior University and The Brigham and Women’s Hospital, Inc. for patents, patent applications and know-how covering our technology generally and E2F Decoy specifically. These license agreements impose various diligence, commercialization, sublicensing, royalty, insurance, and other obligations on us. If we fail to comply with the obligations in the license agreements, the licensor may have the right to terminate the license and we may not be able to market products that were covered by the license including E2F Decoy. To date, we have met all of our obligations under these agreements.

We may incur substantial costs enforcing our patents, defending against third-party patents, invalidating third-party patents or licensing third-party intellectual property, as a result of litigation or other proceedings relating to patent and other intellectual property rights.

We may not have rights under some patents or patent applications that would be infringed by technologies that we use in our research, drug targets that we select, or product candidates that we seek to develop and commercialize. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit. We or our collaborators therefore may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators

were able to obtain a license, the rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations, as a result of patent infringement claims, which could harm our business.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. Although we are not currently a party to any patent litigation or any other adversarial proceeding, including any interference proceeding declared before the United States Patent and Trademark Office, regarding intellectual property rights with respect to our products and technology, we may become so in the future. We are not currently aware of any actual or potential infringement claim involving our intellectual property rights. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. The outcome of patent litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party, especially in biotechnology related patent cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. If a patent or other proceeding is resolved against us, we may be enjoined from researching, developing, manufacturing or commercializing our products without a license from the other party and we may be held liable for significant damages. We may not be able to obtain any required license on commercially acceptable terms or at all.

Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could harm our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

We may not be successful in our efforts to expand our portfolio of products and develop additional delivery technologies.

A key element of our strategy is to discover, develop and commercialize a portfolio of new drugs in addition to E2F Decoy, and technologies to deliver those drugs safely and efficiently. We are seeking to do so through our internal research programs and in-licensing, such as our recent agreement with Cyclacel Limited. A significant portion of the research that we are conducting involves new and unproven technologies. Research programs to identify new disease targets, product candidates and delivery technologies require substantial technical, financial and human resources whether or not any candidates or technologies are ultimately identified. Our research programs may initially show promise in identifying potential product candidates or delivery technologies, yet fail to yield product candidates or delivery technologies for clinical development for any of the following reasons:

• research methodology used may not be successful in identifying potential product candidates;

• potential delivery technologies may not safely or efficiently deliver our drugs; and

• product candidates may on further study be shown to have harmful side effects or other characteristics that indicate they are unlikely to be effective drugs.

If we are unable to discover suitable potential product candidates or develop additional delivery technologies through internal research programs or in-license suitable products or delivery technologies on acceptable business terms, our business prospects will suffer.

Other Risks

Changes in, or interpretations of, accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.

Accounting methods and policies for biopharmaceutical companies, including policies governing revenue recognition, expenses, accounting for stock options and in-process research and development costs are subject to further review, interpretation and guidance from relevant accounting authorities, including the Securities and Exchange Commission. Changes to, or interpretations of, accounting methods or policies in the future may require us to reclassify, restate or otherwise change or revise our financial statements, including those contained in this prospectus. We currently are not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. The Financial Accounting Standards Board has proposed recording expense for the fair value of stock options granted and purchases under employee stock purchase plans beginning July 1, 2005. If we were to change our accounting policy to record expense for the fair value of stock options granted and shares purchased, then our operating expenses would increase. We rely heavily on stock options to motivate existing employees and attract new employees. If we are required to expense stock options, we may then choose to reduce our reliance on stock options as a motivation tool. If we reduce our use of stock options, it may be more difficult for us to attract and retain qualified employees. If we did not reduce our reliance on stock options, our reported losses would increase.

Anti-takeover defenses that we have in place could prevent or frustrate attempts by stockholders to change the direction or management of the company.

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

• establish a classified board of directors, so that not all members of our board may be elected at one time;

• set limitations on the removal of directors;

• limit who may call a special meeting of stockholders;

• establish advance Agreement requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;

• prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

• provide our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

These provisions may have the effect of entrenching our management team and may deprive you of the opportunity to sell your shares to potential acquirors at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

Our principal stockholders and management own a significant percentage of our stock and will be able to exercise significant influence.

Our (a) executive officers and (b) directors and principal stockholders, together with their affiliates, as of September 30, 2004 beneficially owned approximately 7.5% and 44.7 % of our voting stock, respectively, including shares subject to outstanding options. Our executive officers are not affiliated with any of our directors, principal stockholders or their affiliates. These stockholders will likely be able to determine the composition of our board of directors, possess the voting power to approve all matters requiring stockholder approval, and continue to have significant influence over our operations. The interests of these stockholders may be different than the interests of other stockholders on these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The price for our common stock may be influenced by many factors, including:

• results of our clinical trials;

• failure of any of our product candidates, if approved, to achieve commercial success;

• developments concerning our collaboration with BMS;

• regulatory developments in the United States and foreign countries;

• developments or disputes concerning patents or other proprietary rights;

• ability to manufacture our products to commercial standards;

• public concern over our products;

• litigation;

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is principally limited to our cash equivalents and investments that have maturities of less than two years. We maintain an investment portfolio of investment grade, liquid debt securities that limits the amount of credit exposure to any one issue, issuer or type of instrument. The securities in our investment portfolio are not leveraged, are classified as available-for-sale and are therefore subject to interest rate risk. We currently do not hedge interest rate exposure. If market interest rates were to increase by 100 basis points, or 1%, from September 30, 2004 levels, the fair value of our portfolio would decline by approximately $520,000. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes ending fair values include principal plus accrued interest.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

Based on their evaluation as of September 30, 2004, our chief executive officer and chief financial officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and Form 10-Q.

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Limitations on the effectiveness of controls.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Corgentech have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 2. Unregistered Sales of Equity Securities and Issuer Purchases of Equity

Unregistered Sales of Equity Securities

In August 2004, we issued 8,642 shares of our common stock to a financial institution pursuant to the net-exercise of a warrant to purchase 12,500 shares of common stock at an exercise price of $4.32 per share.

Use of Proceeds.

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-110923) that was declared effective by the Securities and Exchange Commission on February 11, 2004 and a Registration Statement on Form S-1 filed pursuant to Rule 462 (File No. 333-112734) on February 12, 2004, pursuant to which we sold all 6,900,000 shares of our common stock registered.

Our initial public offering of common stock commenced on February 12, 2004 and was completed after all of the shares of common stock that were registered were sold. The managing underwriters in our initial public offering were Credit Suisse First Boston LLC, Lehman Brothers Inc., CIBC World Markets Corp. and Piper Jaffray & Co. The aggregate offering price of the 6,900,000 shares registered and sold was $110.4 million. Of this amount, $7.7 million was paid in underwriting discounts and commissions, and an additional $1.9 million of expenses was incurred, of which approximately $900,000 was incurred during the year ended December 31, 2003 and $1.0 million was incurred during the nine months ended September 30, 2004. None of the expenses were paid, directly or indirectly, to directors, officers or persons owning 10% or more of our common stock, or to our affiliates.

We intend to use the net proceeds of the offering primarily for research and development of novel transcription factor decoys, to initiate, enroll and complete a Phase 1/2 trial for E2F Decoy in AV graft and to complete our two Phase 3 clinical trials for E2F Decoy.

As of September 30, 2004, we had applied the estimated aggregated net proceeds of $100.8 million from our initial public offering as follows:

Working capital:		$	51.9 million
Temporary investments:		$	48.9 million

The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No such payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates, other than payments to officers for salaries in the ordinary course of business.

Issuer Purchases of Equity.

During the three months ended September 30, 2004, we repurchased 6,679 shares of our common stock from two employees at an average price of $0.39 per share pursuant to our right of repurchase upon such employee’s termination of employment.

Item 3. Defaults upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Approval of Non-Audit Services

Consistent with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, Corgentech is responsible for disclosing the nature of the non-audit services approved by our Audit Committee during a quarter to be performed by Ernst & Young LLP, our independent auditor. Non-audit services are services other than those provided by Ernst & Young LLP in connection with an audit or a review of our financial statements. During the nine months ended September 30, 2004 our Audit Committee approved the engagement of Ernst & Young LLP to perform tax compliance services.

Cyclacel Licensing Agreement

Item 6. Exhibits

Exhibit Number		Description of Document

10.32		Forms of Notice and Forms of Agreement for Stock Option and Restricted Stock Grants.

10.33†		Licensing Agreement, dated September 27, 2004, with Cyclacel Limited.

31.1		Certification of President and Chief Executive Officer, as required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.

31.2		Certification of Vice President and Chief Financial Officer, as required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as amended.

32.1*		Certification of President and Chief Executive Officer, as required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

32.2*		Certification of Vice President and Chief Financial Officer, as required by Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

* The certifications attached as Exhibit 32.1 and Exhibit 32.2 accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Corgentech Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

† Confidential treatment has been requested for portions of this exhibit.

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2004

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Delaware		77-0503399
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

650 Gateway Boulevard South San Francisco, California 94080 (650) 624-9600
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Dated: November 10, 2004


	Corgentech Inc.


	/s/ John P. McLaughlin
	John P. McLaughlin
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ Richard Powers
	Richard P. Powers
	Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

PART I – FINANCIAL INFORMATION
Item 1.		Unaudited Financial Statements
		Condensed Balance Sheets
		Condensed Statements of Operations
		Condensed Statements of Cash Flows
		Notes to Unaudited Condensed Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults upon Senior Securities
Item 4.		Submission of Matters to a Vote to Security Holders
Item 5.		Other Information
Item 6.		Exhibits
		Signatures