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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2002
OR

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

For the transition period from  to
.

Commission file number: 000-24207

ABGENIX, INC.

(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

94-3248826(IRS employer
Identification number)6701 Kaiser Drive, Fremont, CA(Address of principal executive office)

94555(Zip Code)


(510) 608-6500(Registrant's telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding in 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o

As
of July 31, 2002 there were 87,370,317 shares of the Registrant's Common Stock outstanding.

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TABLE OF CONTENTS

|                              |  |                                                                                                                  |  | Page No.
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --------
|PART I. Financial Information |  |                                                                                                                 
|ITEM 1.                       |  | Financial Statements                                                                                             |  |         
|                              |  | Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001                                     |  | 3       
|                              |  | Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2002 and 2001 |  | 4       
|                              |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001                  |  | 5       
|                              |  | Notes to Condensed Consolidated Financial Statements                                                             |  | 6       
|ITEM 2.                       |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                            |  | 11      
|ITEM 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                       |  | 43      
|PART II. Other Information    |  |                                                                                                                 
|ITEM 1.                       |  | Legal Proceedings                                                                                                |  | 45      
|ITEM 2.                       |  | Changes in Securities and Use of Proceeds                                                                        |  | 45      
|ITEM 3.                       |  | Defaults upon Senior Securities                                                                                  |  | 45      
|ITEM 4.                       |  | Submission of Matters to a Vote of Security Holders                                                              |  | 45      
|ITEM 5.                       |  | Other Information                                                                                                |  | 45      
|ITEM 6.                       |  | Exhibits and Reports on Form 8-K                                                                                 |  | 45      
|SIGNATURES                    |  | 46                                                                                                              

2

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ABGENIX, INC.  CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)

|                                     |                                                                                                                                                                              | June 30, 2002              |         | December 31, 2001 |        
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | -------
|
|ASSETS                               |                                                                                                                                                                             
|Current assets:                      |                                                                                                                                                                              |                            |         |                   |        
|                                     | Cash and cash equivalents                                                                                                                                                    |                            | $       | 196,531           |        
|                                     | Marketable securities                                                                                                                                                        |                            |         | 349,948           |        
|                                     | Interest receivable                                                                                                                                                          |                            |         | 3,514             |        
|                                     | Accounts receivable, net                                                                                                                                                     |                            |         | 1,763             |        
|                                     | Prepaid expenses and other current assets                                                                                                                                    |                            |         | 16,590            |        
|                                     |                                                                                                                                                                              |                            |         |                   |        
|                                     |                                                                                                                                                                              | Total current assets       |         |                   | 568,346
|Property and equipment, net          |                                                                                                                                                                              |                            | 168,319 |                   |        
|Long-term investments                |                                                                                                                                                                              |                            | 22,888  |                   |        
|Goodwill, net                        |                                                                                                                                                                              |                            | 34,780  |                   |        
|Identified intangible assets, net    |                                                                                                                                                                              |                            | 95,977  |                   |        
|Deposits and other assets            |                                                                                                                                                                              |                            | 29,267  |                   |        
|                                     |                                                                                                                                                                              |                            |         |                   |        
|                                     |                                                                                                                                                                              | $                          | 919,577 |                   | $      
|                                     |                                                                                                                                                                              |                            |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                             
|Current liabilities:                 |                                                                                                                                                                              |                            |         |                   |        
|                                     | Accounts payable                                                                                                                                                             |                            | $       | 22,160            |        
|                                     | Deferred revenue                                                                                                                                                             |                            |         | 3,499             |        
|                                     | Accrued liabilities                                                                                                                                                          |                            |         | 17,112            |        
|                                     | Acquisition liabilities                                                                                                                                                      |                            |         | 2,003             |        
|                                     |                                                                                                                                                                              |                            |         |                   |        
|                                     |                                                                                                                                                                              | Total current liabilities  |         |                   | 44,774 
|Deferred rent                        |                                                                                                                                                                              |                            | 3,305   |                   |        
|Convertible subordinated notes       |                                                                                                                                                                              |                            | 200,000 |                   |        
|Commitments                          |                                                                                                                                                                              |                            |         |                   |        
|Stockholders' equity:                |                                                                                                                                                                              |                            |         |                   |        
|                                     | Preferred stock, $0.0001 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                  |                            |         |                  |        
|                                     | Common stock, $0.0001 par value; 220,000,000 shares authorized; 87,165,846 and 86,835,165 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively |                            |         | 9                 |        
|                                     | Additional paid-in capital                                                                                                                                                   |                            |         | 963,104           |        
|                                     | Accumulated other comprehensive income (loss)                                                                                                                                |                            |         | 3,994             |        
|                                     | Accumulated deficit                                                                                                                                                          |                            |         | (295,609          | )      
|                                     |                                                                                                                                                                              |                            |         |                   |        
|                                     |                                                                                                                                                                              | Total stockholders' equity |         |                   | 671,498
|                                     |                                                                                                                                                                              |                            |         |                   |        
|                                     |                                                                                                                                                                              | $                          | 919,577 |                   | $      
|                                     |                                                                                                                                                                              |                            |         |                   |        

See
accompanying notes.

3

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ABGENIX, INC.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)  (unaudited)

|                                                              |                                                                                   | Three Months Ended
June 30, |         | Six Months Ended
June 30, |       
|------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------- | ------- | ------------------------- | ------
|
|Revenues:                                                     |                                                                                   |                             |         |                           |       
|                                                              | Contract revenue                                                                  |                             | $       | 2,501                     |       
|                                                              | Interest and other income                                                         |                             |         | 5,121                     |       
|                                                              |                                                                                   |                             |         |                           |       
|                                                              |                                                                                   | Total revenues              |         |                           | 7,622 
|Costs and expenses:                                           |                                                                                   |                             |         |                           |       
|                                                              | Research and development                                                          |                             |         | 38,940                    |       
|                                                              | Amortization of goodwill                                                          |                             |         |                          |       
|                                                              | Amortization of identified intangible assets, related to research and development |                             |         | 1,815                     |       
|                                                              | General and administrative                                                        |                             |         | 7,220                     |       
|                                                              | Impairment of investments                                                         |                             |         | 37,498                    |       
|                                                              | Interest expense                                                                  |                             |         | 1,858                     |       
|                                                              |                                                                                   |                             |         |                           |       
|                                                              |                                                                                   | Total costs and expenses    |         |                           | 87,331
|                                                              |                                                                                   |                             |         |                           |       
|Net loss                                                      |                                                                                   | $                           | (79,709 | )                         | $     
|                                                              |                                                                                   |                             |         |                           |       
|Basic and diluted net loss per share                          |                                                                                   | $                           | (0.92   | )                         | $     
|                                                              |                                                                                   |                             |         |                           |       
|Shares used in computing basic and diluted net loss per share |                                                                                   |                             | 87,063  |                           |       
|                                                              |                                                                                   |                             |         |                           |       

See
accompanying notes.

4

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ABGENIX, INC.  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)  (unaudited)

|                                                                            |                                              | Six Months Ended June 30,                 |         
|--------------------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | --------
|
|Operating activities                                                        |                                              |                                           |         
|Net loss                                                                    |                                              | $                                         | (136,160
|Adjustments to reconcile net loss to net cash used in operating activities: |                                              |                                           |         
|                                                                            | Depreciation and other amortization          |                                           |         
|                                                                            | Amortization of goodwill                     |                                           |         
|                                                                            | Amortization of identified intangible assets |                                           |         
|                                                                            | Impairment of investments                    |                                           |         
|                                                                            | Changes for certain assets and liabilities:  |                                           |         
|                                                                            |                                              | Interest receivable                       |         
|                                                                            |                                              | Accounts receivable                       |         
|                                                                            |                                              | Prepaid expenses and other current assets |         
|                                                                            |                                              | Deposits and other assets                 |         
|                                                                            |                                              | Accounts payable                          |         
|                                                                            |                                              | Deferred revenue                          |         
|                                                                            |                                              | Accrued liabilities                       |         
|                                                                            |                                              | Deferred rent                             |         
|                                                                            |                                              |                                           |         
|Net cash used in operating activities                                       |                                              |                                           | (55,502 
|                                                                            |                                              |                                           |         
|Investing activities                                                        |                                              |                                           |         
|Purchases of marketable securities                                          |                                              |                                           | (105,768
|Maturities of marketable securities                                         |                                              |                                           | 96,696  
|Sales of marketable securities                                              |                                              |                                           | 52,314  
|Purchases of property and equipment                                         |                                              |                                           | (86,365 
|Purchases of long-term investments                                          |                                              |                                           |        
|Payments for acquisition liabilities                                        |                                              |                                           | (155    
|                                                                            |                                              |                                           |         
|Net cash provided by (used in) investing activities                         |                                              |                                           | (43,278 
|                                                                            |                                              |                                           |         
|Financing activities                                                        |                                              |                                           |         
|Net proceeds from issuance of convertible subordinated notes                |                                              |                                           | 194,000 
|Net proceeds from issuances of common stock                                 |                                              |                                           | 1,648   
|Payments on long-term debt                                                  |                                              |                                           |        
|                                                                            |                                              |                                           |         
|Net cash provided by financing activities                                   |                                              |                                           | 195,648 
|                                                                            |                                              |                                           |         
|Net increase (decrease) in cash and cash equivalents                        |                                              |                                           | 96,868  
|Cash and cash equivalents at beginning of period                            |                                              |                                           | 99,663  
|                                                                            |                                              |                                           |         
|Cash and cash equivalents at end of period                                  |                                              | $                                         | 196,531 
|                                                                            |                                              |                                           |         

See
accompanying notes.

5

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ABGENIX, INC.    NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    June 30, 2002

1.    Basis of Presentation and Summary of Significant Accounting Policies

Basis of PresentationThe unaudited condensed consolidated financial statements of
Abgenix, Inc. (the "Company" or "Abgenix") included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information
or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial information included therein. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31,
2001, and accompanying notes included in the Company's Annual Report as filed on Form 10-K with the Securities and Exchange Commission. The results of operations for the three and
six months ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year or for any other future period.

Revenue RecognitionThe Company receives payments from customers for license, option, service and milestone fees. These
payments are generally non-refundable but are reported as deferred revenue until they are recognizable as revenue. The Company follows the following principles in recognizing revenue:



Net Loss Per ShareBasic net loss per share is calculated based on the weighted average number of shares outstanding during
the period. The impact of common stock options and warrants was

6

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excluded from the computation of diluted net loss per share, as their effect is antidilutive for the periods presented.

Accounting ChangeEffective January 1, 2002, the company completed the adoption of Statement of Financial Accounting
Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after
June 30, 2001, to be accounted for using the purchase method of accounting. As required by SFAS No. 142, the company discontinued amortizing the remaining balances of goodwill as of
January 1, 2002. All remaining and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist, using a
fair-value-based approach. All other intangible assets will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." In conjunction with the implementation of SFAS No. 142, the company has completed a goodwill impairment review as of the
beginning of 2002 and found no impairment.

Upon
adoption of the new Business Combination rules, acquired workforce no longer meets the definition of an identified intangible asset. As a result, the net balance of $120,000 has
been reclassified
to goodwill in 2002. During the three and six months ended June 30, 2002, no goodwill was acquired, impaired or written off.

A
reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization is as follows (in thousands, except per share
amounts):

|                                          |  | Three Months Ended June 30, |         | Six Months Ended June 30, |  
|----------------------------------------- |  | --------------------------- | ------- | ------------------------- | -
|
|Reported net loss                         |  | $                           | (79,709 | )                         | $
|Goodwill and workforce amortization       |  |                             |        |                           |  
|                                          |  |                             |         |                           |  
|Adjusted net loss                         |  | $                           | (79,709 | )                         | $
|                                          |  |                             |         |                           |  
|                                          |  |                             |         |                           |  
|Reported basic and diluted loss per share |  | $                           | (0.92   | )                         | $
|Goodwill and workforce amortization       |  |                             |        |                           |  
|                                          |  |                             |         |                           |  
|Adjusted basic and diluted loss per share |  | $                           | (0.92   | )                         | $
|                                          |  |                             |         |                           |  

|                                          |  | Year Ended December 31, |        
|----------------------------------------- |  | ----------------------- | -------
|
|Reported net loss                         |  | $                       | (60,856
|Goodwill and workforce amortization       |  |                         | 2,548  
|                                          |  |                         |        
|Adjusted net loss                         |  | $                       | (58,308
|                                          |  |                         |        
|                                          |  |                         |        
|Reported basic and diluted loss per share |  | $                       | (0.71  
|Goodwill and workforce amortization       |  |                         | 0.03   
|                                          |  |                         |        
|Adjusted basic and diluted loss per share |  | $                       | (0.68  
|                                          |  |                         |        

ReclassificationsCertain prior period balances have been reclassified to conform to the current period presentation.

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2.    Comprehensive Income (Loss)

Other comprehensive income (loss) consists of unrealized gains or losses on available-for-sale securities. The components of comprehensive
income (loss) were as follows (in thousands):

|                            |                                                                     | Three Months Ended
June 30, |         | Six Months Ended
June 30, |  
|--------------------------- | ------------------------------------------------------------------- | --------------------------- | ------- | ------------------------- | -
|
|Net loss                    |                                                                     | $                           | (79,709 | )                         | $
|                            |                                                                     |                             |         |                           |  
|Other comprehensive income: |                                                                     |                             |         |                           |  
|                            | Unrealized holding gain (losses) arising during period              |                             |         | (28,478                   | )
|                            | Less: reclassification adjustment for losses recognized in net loss |                             |         | 30,390                    |  
|                            |                                                                     |                             |         |                           |  
|                            | Net unrealized gains on securities                                  |                             |         | 1,912                     |  
|                            |                                                                     |                             |         |                           |  
|Comprehensive income (loss) |                                                                     | $                           | (77,797 | )                         | $
|                            |                                                                     |                             |         |                           |  

3.    Identified Intangible Assets

During the three and six months ended June 30, 2002, no identified intangible assets were acquired, impaired or written off.

Identified
intangible assets as of June 30, 2002 and December 31, 2001 consisted of the following:

|                                         |  | Gross
Assets |         | Accumulated
Amortization |   | Net   
|---------------------------------------- |  | ------------ | ------- | ------------------------ | - | ------
|
|As of June 30, 2002:                     |  |              |         |                          |   |       
|Acquisition-related developed technology |  | $            | 106,183 |                          | $ | 13,075
|Other intangible assets                  |  |              | 3,016   |                          |   | 147   
|                                         |  |              |         |                          |   |       
|Identified intangible assets             |  | $            | 109,199 |                          | $ | 13,222
|                                         |  |              |         |                          |   |       
|As of December 31, 2001:                 |  |              |         |                          |   |       
|Acquisition-related developed technology |  | $            | 106,183 |                          | $ | 9,546 
|Other intangible assets                  |  |              | 3,016   |                          |   | 127   
|                                         |  |              |         |                          |   |       
|Identified intangible assets             |  | $            | 109,199 |                          | $ | 9,673 
|                                         |  |              |         |                          |   |       

Amortization
of acquisition-related intangibles was $1.8 million and $3.5 million, respectively, for the three and six months ended June 30, 2002, and
$1.4 million and $2.8 million, respectively, for the three and six months ended June 30, 2001. Amortization of other intangible assets was $46,000 and $93,000, respectively, for
the three and six months ended June 30, 2002. All of the company's acquired identified intangibles other than goodwill are subject to amortization.

Expected
amortization expense related to identified intangible assets for the six-month period from July 1, 2002, to December 31, 2002, and each of the fiscal
years thereafter is as follows:

|                                |  | Periods Ending December 31, |       |  |   |      
|------------------------------- |  | --------------------------- | ----- |  | - | -----
|
|
|Acquisition-related intangibles |  | $                           | 3,537 |  | $ | 7,076
|Other intangible assets         |  | $                           | 91    |  | $ | 182  

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4.    Convertible Subordinated Notes

In March 2002, the Company issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are
convertible into shares of Abgenix common stock at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and the Company is
obligated to pay interest on March 15 and September 15 of each year, beginning on September 15, 2002. The notes will mature on March 15, 2007, and are redeemable at the
Company's option on or after March 20, 2005, or earlier if the price of the Company's common stock exceeds specified levels. In addition, the holders of the notes may require the Company to
repurchase the notes if the Company undergoes a change in control. If a shelf registration statement for the notes and the shares into which they are convertible is not declared effective by the
Securities and Exchange Commission by August 30, 2002, additional interest will accrue at a rate of 0.5% per annum. The shelf registration statement filed by the Company in May 2002 has not yet
been declared effective.

5.    Impairment of Investments

The Company purchased an aggregate amount of $80.0 million of common stock of CuraGen Corporation and ImmunoGen, Inc. as strategic investments.
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and
are reported at fair value on the Company's balance sheet. Unrealized holding gains and losses for available-for-sale securities generally are excluded from earnings and
reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to be other than temporary, the cost basis
of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge. Under the Company's accounting policy,
marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the contrary. At March 31,
2002, the Company's investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, at which time the Company deemed that an impairment of these
investments had occurred. Additionally, at June 30, 2002, these same investments were trading below their March 31, 2002 values, at which time the Company determined that a further
impairment had occurred. Accordingly, the Company recorded impairment charges of $34.7 million and $30.4 million, in the first and second quarters of 2002, respectively, which are
recorded in the Company's results of operations. The amount of the charge in the first quarter was based on the difference between the market price of the securities as of March 31, 2002, and
the Company's original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30, 2002, and the Company's
cost basis as of March 31, 2002. As of June 30, 2002, the cost basis of these investments reflected the public trading prices on June 30, 2002, which is recorded in
long-term investments on the balance sheet. If the Company deems these investments further impaired at the end of any future period, the Company may incur an additional impairment charge
on these investments.

In
addition, the Company invested $15.0 million in MDS Proteomics Inc., a privately held company, in connection with the Company's collaboration with that company. Because
MDS Proteomics is a private company and its securities are not publicly traded, the value of this investment is inherently more difficult to estimate than an investment in a publicly traded company.
As of June 30, 2002, the Company estimated that the value of its investment had declined to $7.9 million and that an impairment of this investment had occurred. Accordingly, the Company
recorded an impairment charge of $7.1 million in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined
by Abgenix management and the Company's original cost basis. As of June 30, 2002, the cost basis of this investment reflected the new estimated value, which is recorded in long-term
investments on the balance sheet. If the Company

9

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deems its investment in MDS Proteomics further impaired at the end of any future period, the Company may incur an additional impairment charge on this investment. The Company understands that MDS
Proteomics is in the process of undergoing a reorganization, which may result in a further decrease in the estimated valuation of the Company's investment in MDS Proteomics. Depending on this ongoing
reorganization and other relevant factors, the Company may deem its investment further impaired at the end of a subsequent period.

6.    Segment Information

The operations of the Company and its wholly owned subsidiaries constitute one business segment.

Revenues
from three customers represented 38%, 32%, and 15%, respectively, of contract revenues for the three months ended June 30, 2002, compared with the same period in 2001, in
which three customers represented 62%, 14%, and 13%, respectively, of contract revenues. Revenues from two customers represented 63% and 10%, respectively, of contract revenues for the six months
ended June 30, 2002, compared with the same period in 2001, in which three customers represented 49%, 23%, and 10%, respectively, of contract revenues.

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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements
based upon current expectations that involve risks and uncertainties. In this Quarterly Report on Form 10-Q, the words "intend," "anticipate," "believe," "estimate," "plan" and "expect" and
similar expressions as they relate to Abgenix are included to identify forward-looking statements. Our actual results and the timing of certain events could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those set forth below and under the heading "Additional Factors that Might Affect Future Results".

Overview

We are a biopharmaceutical company that develops and intends to commercialize antibody therapeutic products for the treatment of a variety of disease conditions,
including cancer, inflammatory and autoimmune disorders, transplant-related diseases, cardiovascular disease and infectious diseases. We have proprietary technologies that facilitate rapid generation
of highly specific, antibody therapeutic product candidates that contain fully human protein sequences and that bind to disease targets appropriate for antibody therapy. In this Quarterly Report on
Form 10-Q we refer to these candidates as fully human antibody therapeutic product candidates. We developed our XenoMouse® technology, a technology using genetically
modified mice to generate fully human antibodies. We also own a technology that enables the rapid identification of antibodies with desired function and characteristics, referred to as
SLAM technology. In our XenoMax technology, we use SLAM technology to select and isolate antibodies with particular function and characteristics from antibody-producing cells
generated by XenoMouse animals. We believe XenoMax technology enhances our capabilities in product development and flexibility in manufacturing. We intend to use our technologies to build a large and
diversified product portfolio that we expect to develop and commercialize through joint development and licensing arrangements with pharmaceutical companies and others, and through internal product
development programs. We have entered into a variety of contractual arrangements with multiple pharmaceutical, biotechnology and genomics companies involving our XenoMouse technology. Two of our
customers, Pfizer, Inc. and Amgen, Inc., have initiated clinical trials with fully human antibodies generated from XenoMouse animals. In addition, as of June 30, 2002, we had four
proprietary antibody product candidates in clinical trials, one of which we had agreed to co-develop and commercialize with Immunex Corporation (recently acquired by Amgen, Inc.)
and one of which we had agreed to co-develop and commercialize with SangStat Medical Corporation.

As
of June 30, 2002, we had entered into contracts covering numerous antigen targets with thirty-one customers to use our XenoMouse technology to generate and/or
develop the resulting fully human antibodies. As of June 30, 2002, we had also entered into one agreement in which we licensed our SLAM technology to one party on a non-exclusive
basis for the purpose of generating and using antibodies other than antibodies derived from XenoMouse technology or other technology that involves the use of non-human animals, and on a
co-exclusive basis for the purpose of antigen discovery. We do not currently intend to license our SLAM technology for use by any other parties. Pursuant to our XenoMouse contracts, we and
our customers intend to generate antibody product candidates for the treatment of cancer, inflammation, autoimmune diseases, transplant rejection, cardiovascular disease, growth factor modulation,
neurological diseases and infectious diseases. We expect that substantially all of our revenues for the foreseeable future will result from payments under these and other contracts. We have also
licensed technology from third parties for use in conjunction with our proprietary technology. The terms of our contractual arrangements vary, but can generally be categorized as follows:



11

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12

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As
of June 30, 2002, we had four proprietary antibody therapeutic product candidates that were in clinical trials, two of which were being co-developed with
collaborators, as follows:



13

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We
will expend significant capital to conduct clinical trials for our proprietary product candidates, including additional Phase I and II clinical trials we plan to initiate in 2002. We
believe that more extensive clinical data will enable us to enter into additional contractual arrangements related to those proprietary product candidates. We expect that this will substantially
increase our capital needs over the next few years and increase our operating losses. However, we believe that we will be able to receive more favorable terms from our contract parties if we have
completed significant development of these products.

In
addition to our proprietary antibody therapeutic product candidates in clinical trials, there are two customer-developed antibodies generated with XenoMouse technology in clinical
trials as follows:



Results of Operations

Three Months and Six Months Ended June 30, 2002 and 2001



Contract revenues totaled $2.5 million and $13.5 million, respectively, in the three and six months ended June 30, 2002, compared to
$8.4 million and $12.5 million, respectively, in the comparable 2001 periods. Because they depend to a large extent on the success or failure of research and development efforts
undertaken by our collaborators and licensees, our period-to-period contract revenues can fluctuate significantly and are inherently difficult to predict. In addition, as our
business model continues to evolve away from licensing to an increased focus on product development, our contract revenues generally will become less important to our success.

The
primary components of contract revenues for both periods were as follows:





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Interest and other income consist primarily of interest from cash, cash equivalents and marketable securities. Interest and other income decreased to
$5.1 million and $10.4 million, respectively, in the three and six months ended June 30, 2002, compared to $7.7 million and $18.0 million, respectively, in the same
periods in 2001. The decrease was due to lower interest rates and lower average cash, marketable securities and cash equivalent balances.



Research and development expenses increased to $38.9 million and $67.9 million, respectively, in the three and six months ended June 30, 2002
from $24.7 million and $40.7 million, respectively, in the same periods in 2001. Management separates research and development expenditures into amounts related to preclinical research
and development, amounts related to clinical development programs and amounts related to facilities as follows:





15

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16

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We
generally do not track our historical research and development costs by project; rather, we track such costs by the type of cost incurred, including costs in the categories discussed
above: preclinical research and development costs, clinical costs and facility costs. For this reason, we cannot accurately estimate with any degree of certainty our historical costs for any
particular research and development project.



Our identified intangible assets consist primarily of existing technology (including patents and certain royalty rights) that we acquired through the acquisitions
of Hesed Biomed Inc. in November 2001, Abgenix Biopharma Inc. (formerly known as ImmGenics Pharmaceuticals, Inc.) and IntraImmune Therapies, Inc. in
November 2000, and the acquisition of JT America's interest in Xenotech in December 1999. Amortization of intangible assets increased to $1.8 million and $3.6 million,
respectively, in the three and six months ended June 30, 2002, compared to $1.4 million and $2.8 million, respectively, in the same periods in 2001. The increase was due to the
amortization of the new technology acquired in our acquisition of Hesed Biomed. Beginning January 1, 2002, upon our adoption of Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets," we no longer amortize goodwill, but will perform impairment tests annually, or earlier if
indications of impairment exist. We have conducted an initial impairment test on our goodwill and concluded that no impairment charge was required. In the three and six months ended June 30,
2001, the amortization of goodwill was $628,000 and $1.3 million, respectively. All other intangible assets will continue to be amortized over their estimated useful lives.



General and administrative expenses include compensation, professional services, consulting and other expenses related to information systems, legal, finance and
human resources and an allocation of facility costs. General and administrative expenses increased to $7.2 million and $13.9 million, respectively, in the three and six months ended
June 30, 2002, compared to $4.0 million and $7.8 million, respectively, in the same periods in 2001. The primary reason for the increase in 2002 as compared to 2001, is the
increase in consulting and personnel expenses related to our information systems, including the implementation of a new enterprise resource planning system. Another significant reason for this
increase is the rise in legal costs to support the increased activities of Abgenix, including activities related to intellectual property, securities filings, licensing, financing activities and other
contractual matters. We expect personnel, consulting, professional services and

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other administrative costs to increase further as we continue to build our organization, but at a slower rate.



We purchased an aggregate amount of $80.0 million of common stock of CuraGen and ImmunoGen as strategic investments. Under SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity
Securities," the CuraGen and ImmunoGen investments are designated as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses
for available-for-sale securities generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of
available-for-sale securities is judged to be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the
write-down is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their
cost basis for more than six months, absent compelling evidence to the contrary. At March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost
basis for more than six months, at which time we deemed that an impairment of these investments had occurred. Additionally, at June 30, 2002, these same investments were trading below their
March 31, 2002 values, at which time we determined that a further impairment had occurred. Accordingly, we recorded impairment charges of $34.7 million and $30.4 million, in the
first and second quarters of 2002, respectively, which are recorded in our results of operations. The amount of the charge in the first quarter was based on the difference between the market price of
the securities as of March 31, 2002, and our original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of
June 30, 2002, and our cost basis as of March 31, 2002. As of June 30, 2002, the cost basis of these investments reflected the public trading prices on June 30, 2002, which
is recorded in long-term investments on the balance sheet. If we deem these investments further impaired at the end of any future period, we may incur an additional impairment charge on
these investments.

In
addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with the collaboration with that company. Because MDS Proteomics is a private
company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, we
estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of
$7.1 million in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined by our management and our
original cost basis. As of June 30, 2002, the cost basis of this investment reflected the new estimated value, which is recorded in long-term investments on the balance sheet. If we
deem the investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional impairment charge on this investment. We understand that MDS Proteomics is in the
process of undergoing a reorganization, which may result in a further decrease in the estimated valuation of our investment in MDS Proteomics. Depending on this ongoing reorganization of MDS
Proteomics and other relevant factors, we may deem our investment further impaired at the end of a subsequent period.



Interest expense consists of interest and amortization of issuance costs on our convertible debt, and interest on our equipment leaseline financing. Interest
expense increased to $1.8 million and $2.4 million, respectively, in the three and six months ended June 30, 2002, compared to zero and $0.3 million, respectively, in the
same periods ended June 30, 2001. The increase was primarily due to our issuance of $200.0 million of convertible debt in March 2002, which accrues interest at an annual

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rate of 3.5%. For each future quarterly period, we expect to accrue approximately $1.8 million of interest expense related to our convertible debt until the debt matures, until we redeem or
repurchase the debt or until all or part of the debt is converted into shares of our common stock. If a shelf registration statement for the notes representing the convertible debt and the shares into
which the notes are convertible is not declared effective by the Securities and Exchange Commission by August 30, 2002, additional interest will accrue at a rate of 0.5% per annum. The shelf
registration statement we filed in May 2002 has not yet been declared effective.

Liquidity and Capital Resources

At June 30, 2002, we had cash, cash equivalents and marketable securities of approximately $546.5 million. In March 2002, we received
approximately $194.0 million of net proceeds from our issuance of $200.0 million of convertible debt. We invest our cash equivalents and marketable securities primarily in highly liquid,
interest bearing, investment grade and government securities in order to preserve principal.

Cash Used in Operating Activities.Net cash used in operating activities was $55.5 million and $14.1 million in
the six months ended June 30, 2002 and 2001, respectively. The increase in cash used in operating activities in the six months ended June 30, 2002, compared to the same period in 2001
reflected primarily the following:



Cash Used in Investing Activities.Net cash used in investing activities was $43.3 million and $68.7 million in
the six months ended June 30, 2002 and 2001, respectively. Cash was provided by and used in investing activities as follows:



Cash Provided by Financing Activities.During the six months ended June 30, 2002, net cash provided by financing
activities was $195.6 million, consisting of $194.0 million net proceeds from our issuance of convertible subordinated notes, as described below, and $1.6 million proceeds from
the

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exercise of stock options and the issuance of stock under our employee stock purchase plan. During the six months ended June 30, 2001, net cash provided by financing activities was
$2.8 million, consisting of proceeds from the exercise of stock options and the issuance of stock under our employee stock purchase plan.

In
March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock
at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5% and we are obligated to pay interest on March 15 and
September 15 of each year, beginning on September 15, 2002. The notes will mature on March 15, 2007, and are redeemable at our option on or after March 20, 2005, or earlier
if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. If a shelf registration
statement for the notes and the shares into which they are convertible is not declared effective by the Securities and Exchange Commission by August 30, 2002, additional interest will accrue at
a rate of 0.5% per annum. The shelf registration statement we filed in May 2002 has not yet been declared effective. Proceeds from the sale of the notes, net of commissions payable to the initial
purchasers of the notes but before subtracting other offering expenses payable by us, were $194.0 million.

In
March 2000 and February 2001, we obtained stand-by letters of credit for $2.0 million and $3.0 million, respectively, from a commercial bank as
security for our obligations under two facility leases. These were increased in January 2002 to $2.5 and $3.2 million, respectively, in connection with amendments to our facility leases.
In September 2001, we obtained a stand-by letter of credit for 1.0 million Canadian dollars from a commercial bank as security for our obligations under a facility lease in
Canada. The stand-by letters of credit are secured by an investment account, in which we must maintain a $7.0 million balance. Additionally, in 1997 we leased $2.0 million of
our laboratory and office equipment from a financing company. The lease bore interest at approximately 12.5% to 13.0%, and matured in September 2001.

Financing Uncertainties Related to Our Business Plan.We plan to continue to make significant expenditures to establish our
own manufacturing facility and expand our research and development activities, including pre-clinical product development and clinical trials. We will also continue to look for new
technology suppliers as potential acquisitions or alliance collaborators. Over the next six months, we estimate that we will spend approximately $89.5 million on leasehold improvements and
equipment for our new manufacturing and research and development facilities. Additionally, during the same period we expect to spend up to approximately $12.0 million on new computer hardware
and software, including additions and enhancements to our new enterprise resource planning system. We also plan to spend significant amounts to develop, on a proprietary or co-developed
basis, INDs for up to two product candidates in 2002 and at least two per year beginning in 2003. We believe that the annual goals of our customers and collaborators for 2003 and beyond include one or
more INDs for additional product candidates based on our XenoMouse technology. In light of initiatives we have underway to increase significantly the number of drugs we have in development, we also
expect that our cash used in operating activities will be significantly greater in 2002 than in 2001.

We
currently intend to use our available cash on hand to finance these projects and business developments, but we might also pursue other financing alternatives, such as a bank line of
credit, funding by one ore more collaborators or a mortgage financing, that may become available to us. Whether we use cash on hand or choose to obtain financing will depend on, among other things,
the future success of our business, the prevailing interest rate environment and the condition of financial markets generally.

The
amounts of the expenditures that will be necessary to execute our business plan are subject to numerous uncertainties, which may adversely affect our liquidity and capital resources
to a significant

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extent. As of June 30, 2002, four of our proprietary product candidates, ABX-CBL, ABX-IL8, ABX-EGF and ABX-MA1, were in various stages of
clinical trials. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a
product candidate. We estimate that clinical trials of the type we generally conduct are typically completed over the following timelines:

Clinical Phase

Estimated
Completion PeriodPhase I

1 YearPhase II

1-2 YearsPhase III

2-4 Years


However,
the duration and the cost of clinical trials may vary significantly over the life of a project as a result of differences arising during the clinical trials, including, among
others, the following:



We
test our potential product candidates in numerous pre-clinical studies to identify disease indications for which they may be product candidates. We may conduct multiple
clinical trials to cover a variety of indications for each product candidate. As we obtain results from trials, we may elect to discontinue clinical trials for certain product candidates or for one or
more indications for a given product candidate in order to focus our resources on more promising product candidates or indications. For example, in January 2002 and May 2002, we
announced that clinical trials of our proprietary product candidate ABX-IL8 as a treatment for rheumatoid arthritis and psoriasis, respectively, did not support further clinical studies of
that product candidate. The failure of our clinical trials can also result in additional research and development expenses. For example, we recorded a charge of $6.7 million for the three
months ended June 30, 2002, related to our recent decision to wind down our clinical trials of IL-8.

An
important element of our business strategy is to pursue the research and development of a diverse range of product candidates for a variety of disease indications. This strategy is
designed to diversify
the risks associated with our research and development spending. As a result, we believe our future capital requirements and our future financial success are not substantially dependent on any one
product candidate. The decision to terminate or wind down our clinical programs for developing ABX-IL8 has reduced the diversity of our product portfolio. We believe that this effect is
temporary, in view of the number of potential product candidates we have in preclinical development. To the extent, however, that we are unable to maintain a diverse and broad range of product
candidates, our dependence on the success of one or a few product candidates would increase.

Our
proprietary product candidates also have not yet achieved FDA regulatory approval, which is required before we can market them as therapeutic products. In order to proceed to
subsequent clinical trial stages and to ultimately achieve regulatory approval, the FDA must conclude that our clinical data establish safety and efficacy. Historically, the results from preclinical
testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and biologics have shown promising results in clinical trials, but
subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals.

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Furthermore, our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our products.
In the event that third parties take over the clinical trial process for one of our product candidates, the estimated completion date would largely be under the control of that third party rather than
us. We cannot forecast with any degree of certainty which proprietary products or indications, if any, will be subject to future collaborative arrangements, in whole or in part, and how such
arrangements would affect our capital requirements.

As
a result of the uncertainties discussed above, among others, the duration and completion costs of our research and development projects are difficult to estimate and are subject to
considerable variation. Our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements, when appropriate, could significantly
increase our capital requirements and could adversely impact our liquidity. These uncertainties could force us to seek additional, external sources of financing from time to time in order to continue
with our business strategy. Our inability to raise additional capital, or to do so on terms reasonably acceptable to us, would jeopardize the future success of our business.

We
also may be required to make further substantial expenditures if unforeseen difficulties arise in other parts of our business. In particular, our future liquidity and capital
requirements also will depend on many factors other than our research and development activities, including:



We
believe that our current cash balances, cash equivalents, marketable securities, and the cash generated from our licensing and other contractual arrangements will be sufficient to
meet our operating and capital requirements for at least one year. However, because of the uncertainties in our business discussed above, among others, we cannot assure you that this will be the case.
In addition, we may choose to, or prevailing business conditions may require us to, obtain additional financing from time to time. We may choose to raise additional funds through public or private
financing, licensing and other contractual arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional
equity or equity-related financing may be dilutive to our stockholders, and debt financing, if available, may subject us to restrictive covenants. We may also choose to obtain funding through
collaborations, licensing and other contractual arrangements. Such agreements may require us to relinquish our rights to certain of our technologies, products or marketing territories. Our failure to
raise capital when needed would harm our business, financial condition and results of operations.

History of Net Losses.We have incurred net losses in each of the last five years of operation, including net losses of
$35.9 million in 1997, $16.8 million in 1998, $20.5 million in 1999, $8.8 million in

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2000, $60.9 million in 2001 and $136.2 million in the six months ended June 30, 2002. As of June 30, 2002, our accumulated deficit was $295.6 million. Our losses to
date have resulted principally from:



We
expect to incur additional losses for the foreseeable future as a result of increases in our research and development costs, including costs associated with conducting preclinical
development and clinical trials, charges related to purchases of technology or other assets, and costs associated with establishing our manufacturing facilities. We intend to invest significantly in
our products prior to entering into licensing agreements. This may increase our need for capital and will result in losses for at least several years. We expect that the amount of operating losses
will fluctuate significantly from quarter to quarter as a result of increases or decreases in our research and development efforts, the execution or termination of licensing and other contractual
arrangements, and the initiation, and success or failure, of clinical trials.

Net Operating Loss Carryforwards.As of December 31, 2001, we had federal net operating loss carryforwards of
approximately $189.0 million. Our net operating loss carryforwards exclude losses incurred prior to our formation in July 1996. Further, we have capitalized the amounts associated with
the 1997 settlement and cross-license that have been expensed for financial statement accounting purposes and we are amortizing those amounts over a period of approximately 15 years for tax
purposes. The net operating loss and credit carryforwards will expire in the years 2006 through 2021, if not utilized. Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net
operating losses and credits before utilization.

Critical Accounting Policies

The financial results that we report are impacted by the application of a several accounting policies that require us to make subjective and complex judgments. We
are required to estimate the effect of matters that are inherently uncertain. Changes in our estimates or judgments could materially impact our results of operations, financial condition and cash
flows in future years. We believe our most critical accounting policies include revenue recognition, accounting for our equity investments, and the capitalization of clinical trial supplies. Our
accounting practices are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 1 of "Notes to Consolidated
Financial Statements" in our Annual Report on Form 10-K for the year
ended December 31, 2001. The discussion below is an update to the disclosure in our Annual Report on Form 10-K relating to our method of accounting for our equity investments
and capitalization of clinical trial supplies.

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Accounting for Equity Investments.

We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics and we may elect to make additional similar investments
in the future. As of June 30, 2002, we had a cost basis of $12.8 million in CuraGen common stock, which reflected the public trading price on that date of $5.63 per share. We also had a
cost basis on June 30, 2002, of $2.1 million of ImmunoGen common stock, which reflected the public trading price on that date of $2.69. We typically do not attempt to reduce or eliminate
our market exposure on these types of investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated
as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses on available-for-sale securities
generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to
be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down is included in earnings as an impairment charge.
Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than six months, absent compelling evidence to the
contrary. At March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six months, at which time we deemed that an
impairment of these investments had occurred. Additionally, at June 30, 2002, these same investments were trading below their March 31, 2002 values, at which time we determined that a
further impairment had occurred. Accordingly, we recorded impairment charges of $34.7 million and $30.4 million, in the first and second quarters of 2002, respectively, which are
recorded in our results of operations. The amount of the charge in the first quarter was based on the difference between the market price of the securities as of March 31, 2002, and our
original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30, 2002, and our cost basis as of
March 31, 2002. As of June 30, 2002, the cost basis of these investments reflected the public trading prices on June 30, 2002, which is recorded in long-term
investments on the balance sheet. If we deem these investments further impaired at the end of any future period, we may incur an additional impairment charge on these investments. We purchased
$15 million of CuraGen in December 1999 at price of $17.90 per share and $50 million of CuraGen common stock in November 2000 at a price of $34.69 per share. We purchased
$15 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. The public trading prices of the shares of both companies have fluctuated significantly since we
purchased them and could continue to do so. If these shares continue to trade below their new cost bases in future periods, we may incur additional impairment charges relating to these investments.
The amounts of these charges, if any, will equal our unrealized loss on these securities as of the end of the relevant periods.

In
addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private
company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an
investment in a publicly traded company. As of June 30, 2002, we estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had
occurred. Accordingly, we recorded an impairment charge of $7.1 million on our investment in the second quarter of 2002. The amount of the charge in the second quarter was based on the
difference between the estimated value as determined by our management and our original cost basis. As of June 30, 2002, the cost basis of this investment reflected the new estimated value,
which is recorded in long-term investments on the balance sheet. If we deem our investment in MDS Proteomics further impaired at the end of any future period, we may incur an additional
impairment charge on this investment. We understand that MDS Proteomics is in the process of undergoing a reorganization, which may result in a further decrease in the estimated valuation of our
investment in MDS Proteomics. Depending on this ongoing reorganization and other relevant factors, we may deem our investment further impaired at the end of a subsequent period.

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Capitalization of Clinical Trial Supplies.

We pay fees to outside contractors for the manufacture of our antibody therapeutic product candidates. Such fees are capitalized as prepaid expense and are
expensed upon the use of the materials, primarily as they are used in clinical trials. We would immediately expense previously capitalized costs if the asset were not expected to have an alternative
future use, such as use in multiple independent trials. In the second quarter of 2002, as a result of our decision to wind down our clinical trials of IL-8, we recorded a charge of
$6.7 million relating to clinical trial supplies that we had previously capitalized. As of June 30, 2002, the balance of prepaid clinical trial supplies was $12.1 million. We may
incur additional expenses related to clinical supply writedowns depending on the outcome of ongoing clinical trials.

Contractual Obligations and Commercial Commitments

As of June 30, 2002, future minimum payments for all contractual obligations for years subsequent to December 31, 2001 were as follows:

|                        |                  | Total |   | 2002    |         | 2003-
2004* |        | 2005-
2006* |   | After 2006
|----------------------- | ---------------- | ----- | - | ------- | ------- | ----------- | ------ | ----------- | - | ----------
|
|Contractual Obligations |                  |       |   |         |         |             |        |             |   |           
|                        | Operating leases |       | $ | 165,856 |         | $           | 10,802 |             | $ | 25,761    
|                        | Convertible debt |       |   | 200,000 |         |             |       |             |   |          
|                        |                  | Total |   | $       | 365,856 |             | $      | 10,802      |   | $         

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In
March 2002, we issued $200.0 million principal amount of convertible subordinated notes in a private placement. The notes are convertible into shares of our common stock
at a conversion price of $27.58 per share subject to certain adjustments. The notes accrue interest at an annual rate of 3.5%, and we are obligated to pay interest on March 15 and
September 15 of each year, beginning on September 15, 2002. The notes will mature on March 15, 2007 and are redeemable at our option on or after March 20, 2005, or earlier
if the price of our common stock exceeds specified levels. In addition, the holders of the notes may require us to repurchase the notes if we undergo a change in control. Therefore, in
March 2007, or earlier if we undergo a change in control, we may use a significant portion of our cash balance to repay the $200.0 million principal amount of our convertible debt. If
our cash balance at any time is insufficient to meet our obligations under the notes, we would have to seek additional financing, if available, to support our obligations under the notes. In addition,
we expect to make interest payments on the notes of $5.8 million in 2002, $7.0 million per year for years of 2003 through 2006, and $1.2 million in 2007, assuming all the notes
remain outstanding until their maturity date. If a shelf registration statement for the notes and the shares into which they are convertible is not declared effective by the Securities and Exchange
Commission by August 30, 2002, additional interest will accrue at a rate of 0.5% per annum. The shelf registration statement we filed in May 2002 has not yet been declared effective.

Other
significant commercial commitments include the following:



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Additional Factors That Might Affect Future Results

Risks Related to our Finances

We are an early stage company without commercial therapeutic products, and we cannot assure you that we will develop sufficient revenues in the future to sustain our business.

You must evaluate us in light of the uncertainties and complexities present in an early stage biopharmaceutical company. Our product candidates are in early
stages of development. We will require significant additional investment in research and development, preclinical testing and clinical trials, and in regulatory and sales and marketing activities, to
commercialize current and future product candidates. Our product candidates, if successfully developed, may not generate sufficient or sustainable revenues to enable us to be profitable.

We have a history of losses and we expect to continue to incur losses for the foreseeable future.

We have incurred net losses in each of the last five years of operation, including net losses of $35.9 million in 1997, $16.8 million in 1998,
$20.5 million in 1999, $8.8 million in 2000, $60.9 million in 2001 and $136.2 million in the six months ended June 30, 2002. As of June 30, 2002, our
accumulated deficit was $295.6 million. Our losses to date have resulted principally from:



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We
expect to incur additional losses for the foreseeable future as a result of increases in our research and development costs, including costs associated with conducting preclinical
development and clinical trials, and charges related to purchases of technology or other assets. We intend to invest significantly in our products prior to entering into licensing agreements. This
will increase our need for capital and will result in losses for at least the next several years. We expect that the amount of operating losses will fluctuate significantly from quarter to quarter as
a result of increases or decreases in our research and development efforts, the execution or termination of licensing and other contractual arrangements, and the initiation, success or failure of
clinical trials.

We are currently unprofitable and may never be profitable, and our future revenues could fluctuate significantly.

Prior to June 1996, Cell Genesys owned our business and operated it as a separate business unit. Since that time, we have funded our research and
development activities primarily from private placements and public offerings of our securities and from revenues generated by our licensing and other contractual arrangements.

We
expect that substantially all of our revenues for the foreseeable future will result from payments under licensing and other contractual arrangements and from interest income. To
date, payments under licensing and other agreements have been in the form of option fees, reimbursement for research and development expenses, license fees and milestone payments. Payments under our
existing and any future customer agreements will be subject to significant fluctuation in both timing and amount. Our revenues may not be indicative of our future performance or of our ability to
continue to achieve such milestones. Our revenues and results of operations for any period may also not be comparable to the revenues or results of operations for any other period. We may not be able
to:



Our
failure to achieve any of the above goals would materially harm our business, financial condition and results of operations.

We may require additional financing, and an inability to raise the necessary capital or to do so on acceptable terms would threaten the continued success of our business.

We will continue to expend substantial resources for the expansion of research and development, including costs associated with conducting preclinical development
and clinical trials. In the six months ended June 30, 2002, we spent $67.9 million on research and development and in the years ended December 31, 2001, 2000 and 1999, we spent
$96.2 million, $50.1 million and $21.1 million, respectively, on research and development. Regulatory and business factors will require us to expend substantial funds in the
course of completing required additional development, preclinical testing and clinical trials of, and regulatory approvals for, product candidates. The amounts of the expenditures that will be
necessary to execute our business plan are subject to numerous uncertainties, which may

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adversely affect our liquidity and capital resources. Our future liquidity and capital requirements will depend on many factors, including:



We
believe that our current cash balances, cash equivalents, marketable securities, and the cash generated from our licensing and other contractual arrangements will be sufficient to
meet our operating and capital requirements for at least one year. However, because of the uncertainties in our business, including the uncertainties listed above, we cannot assure you that this will
be the case. In addition, we may choose to obtain additional financing from time to time. We may choose to raise additional funds through public or private financing, licensing and other agreements or
arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional equity or equity-related financing may be
dilutive to our stockholders, and debt financing, if available, may subject us to restrictive covenants. We may also choose to obtain funding through licensing and other contractual arrangements. Such
agreements may require us to relinquish our rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed would harm our business, financial
condition and results of operations.

Our strategic investments expose us to equity price risk and our investments in those companies may be deemed impaired, which would affect our results of operations.

We are exposed to equity price risk on our strategic investments in CuraGen, ImmunoGen and MDS Proteomics and we may elect to make additional similar investments
in the future. As of June 30, 2002, we had a cost basis of $12.8 million in CuraGen common stock, which reflected the public trading price on that date of $5.63 per share. We also had a
cost basis on June 30, 2002, of $2.1 million of ImmunoGen common stock, which reflected the public trading price on that date of $2.69. We typically do not attempt to reduce or eliminate
our market exposure on these types of investments. Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the CuraGen and ImmunoGen investments are designated
as available-for-sale and are reported at fair value on our balance sheet. Unrealized holding gains and losses on available-for-sale securities
generally are excluded from earnings and reported as a component of stockholders' equity. However, if a decline in the fair value of available-for-sale securities is judged to
be other than temporary, the cost basis of the security is written down to fair value as a new cost basis and the amount of the write-down

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is included in earnings as an impairment charge. Under our accounting policy, marketable equity securities are presumed to be impaired if their fair value is less than their cost basis for more than
six months, absent compelling evidence to the contrary. At March 31, 2002, our investments in CuraGen and ImmunoGen common stock had traded below their original cost basis for more than six
months, at which time we deemed that an impairment of these investments had occurred. Additionally, at June 30, 2002, these same investments were trading below their March 31, 2002
values, at which time we determined that a further impairment had occurred. Accordingly, we recorded impairment charges of $34.7 million and $30.4 million, in the first and second
quarters of 2002, respectively, which are recorded in our results of operations. The amount of the charge in the first quarter was based on the difference between the market price of the securities as
of March 31, 2002, and our original cost basis. The amount of the charge in the second quarter was based on the difference between the market price of these securities as of June 30,
2002, and our cost basis as of March 31, 2002. As of June 30, 2002, the cost basis of these investments reflected the public trading prices on June 30, 2002, which is recorded in
long-term investments on the Balance Sheet. If we deem these investments further impaired at the end of any future period, we may incur an additional impairment charge on these
investments. We purchased $15 million of CuraGen in December 1999 at price of $17.90 per share and $50 million of CuraGen common stock in November 2000 at a price of $34.69
per share. We purchased $15 million of ImmunoGen common stock in September 2000 at a price of $19.00 per share. The public trading prices of the shares of both companies have fluctuated
significantly since we purchased them and could continue to do so. If the public trading prices of these shares continue to trade below their new cost bases in future periods, we may incur additional
impairment charges relating to these investments. The amounts of these charges, if any, will equal our unrealized loss on these securities as of the end of the relevant periods.

In
addition, we invested $15.0 million in MDS Proteomics, a privately held company, in connection with our collaboration with that company. Because MDS Proteomics is a private
company and its securities are not publicly traded, the value of our investment is inherently more difficult to estimate than an investment in a publicly traded company. As of June 30, 2002, we
estimated that the value of our investment had declined to $7.9 million and that an impairment of our investment had occurred. Accordingly, we recorded an impairment charge of
$7.1 million on this investment in the second quarter of 2002. The amount of the charge in the second quarter was based on the difference between the estimated value as determined by our
management and our original cost basis. As of June 30, 2002, the
cost basis of this investment reflected the new estimated value, which is recorded in long-term investments on the balance sheet. If we deem our investment in MDS Proteomics further
impaired at the end of any future period, we may incur an additional impairment charge on this investment. We understand that MDS Proteomics is in the process of undergoing a reorganization, which may
result in a further decrease in the estimated valuation of our investment in MDS Proteomics. Depending on this ongoing reorganization and other relevant factors, we may deem our investment further
impaired at the end of a subsequent period.

Risks Related to the Development and Commercialization of our Products

Our XenoMouse and XenoMax technologies may not produce safe, efficacious or commercially viable products, which will be critical to our ability to generate revenues from our
products.

Our XenoMouse and XenoMax technologies are new approaches to developing antibodies as products for the treatment of diseases and medical disorders. We have not
commercialized any antibody therapeutic products based on our technologies. Moreover, we are not aware of any commercialized, fully human antibody therapeutic products that have been generated from
any technologies similar to ours. Our antibody therapeutic product candidates are still at an early stage of development. We have initiated clinical trials with respect to three proprietary fully
human antibody therapeutic product candidates, and our collaborators have initiated clinical trials with respect to two

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other fully human antibody therapeutic product candidates generated by XenoMouse technology. We cannot be certain that either XenoMouse technology or XenoMax technology will generate antibodies
against every antigen to which they are exposed in an efficient and timely manner, if at all. Furthermore, XenoMouse technology and XenoMax technology may not result in any meaningful benefits to our
current or potential customers or in product candidates that are safe and efficacious for patients. Our failure to generate antibody therapeutic product candidates that lead to the successful
commercialization of products would materially harm our business, financial condition and results of operations.

If we do not successfully develop our products, or if they do not achieve commercial success, our business will be materially harmed.

Our development of current and future product candidates, either alone or in conjunction with collaborators, is subject to the risks of failure inherent in the
development of new pharmaceutical products and products based on new technologies. These risks include:



Because
of these risks, our research and development efforts and those of our customers and collaborators may not result in any commercially viable products. Our failure to successfully
complete a significant portion of these development efforts, to obtain required regulatory approvals or to achieve commercial success with any approved products would materially harm our business,
financial condition and results of operations.

In
addition, our recent decision to terminate or wind down our clinical programs for developing ABX-IL8 has reduced the diversity of our product portfolio. We hope to be able
to make up for this loss of diversity through the number of potential new product candidates we have in preclinical development. However, to the extent that we are unable to maintain a broad and
diverse range of product candidates, our success would depend more heavily on one or a few product candidates.

Before we commercialize and sell any of our product candidates, we must conduct clinical trials, which are expensive and have uncertain outcomes.

Conducting
clinical trials is a lengthy, time-consuming and expensive process. Before obtaining regulatory approvals for the commercial sale of any products, we must
demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. We have incurred and will continue to incur substantial expense for,
and we have devoted and expect to continue to devote a significant amount of time to, preclinical testing and clinical trials.

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Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. A number of new drugs and
biologics have shown promising results in clinical trials, but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we may encounter regulatory delays or rejections as
a result of many factors, including changes in regulatory policy during the period of product development.

Four
of our proprietary product candidates, ABX-CBL, ABX-IL8, ABX-EGF and ABX-MA1, are in clinical trials. Patient follow-up
for these clinical trials has been limited because these trials have been ongoing for a relatively short period of time. To date, data obtained from these clinical trials have been insufficient to
demonstrate safety and efficacy under applicable Food and Drug Administration, or FDA, guidelines. As a result, these data will not support an application for regulatory approval without further
clinical trials. Clinical trials that we conduct or that third parties conduct on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for any of
our product candidates. We expect to commence new clinical trials from time to time in the course of our business as our product development work continues. However, regulatory authorities may not
permit us to undertake any additional clinical trials for our product candidates.

In
addition, we have ongoing research projects that may lead to product candidates, but we have not submitted INDs nor begun clinical trials for these projects. Our preclinical or
clinical development efforts may not be successfully completed, we may not file further INDs and clinical trials may not commence as planned.

Completion
of clinical trials may take several years or more. The length of time generally varies substantially according to the type, complexity, novelty and intended use of the product
candidate. However, we estimate that clinical trials of the type we generally conduct are completed over the following timelines:

Clinical Phase

Estimated
Completion PeriodPhase I

1 YearPhase II

1-2 YearsPhase III

2-4 Years


Many
factors may delay our commencement and rate of completion of clinical trials, including:



We
have limited experience in conducting and managing clinical trials. We rely on third parties, including our customers, to assist us in managing and monitoring clinical trials. Our
reliance on these third parties may result in delays in completing, or in failure to complete, these trials if the third parties fail to perform under our agreements with them.

Our
product candidates may fail to demonstrate safety or efficacy in clinical trials. For example, in January 2002 and May 2002, respectively, we announced that clinical
trials of our proprietary product candidate ABX-IL8 as a treatment for rheumatoid arthritis and psoriasis did not support further clinical studies of that product candidate. These and
other potential failures may delay the development of other product candidates. As a result of these failures, we may also be unable to obtain additional

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financing. In addition, failures in our clinical trials can lead to additional research and development charges. For example, our recent decision to wind down our clinical trials for
ABX-IL8 led us to record a charge of $6.7 million relating to clinical supplies that we had previously capitalized. Any delays in, or termination of, our clinical trials could
materially harm our business, financial condition and results of operations.

We currently rely on third-party manufacturers, and we may have difficulty conducting clinical trials of our product candidates if a manufacturer does not perform in accordance
with our expectations.

To
date we have relied on a single contract manufacturer, Lonza Biologics, to produce ABX-CBL, ABX-IL8 and ABX-EGF under good manufacturing practice
regulations, for use in our clinical trials. We may also rely on other contract manufacturers from time to time to produce our product candidates for use in our clinical trials. For example, Fred
Hutchinson Cancer Research Center produces ABX-MA1 for use in our clinical trials. While our Fremont manufacturing facility is expected to be operational by the end of 2002, thus creating
additional capacity, which we will control, we cannot assure you that this facility will open when expected. In November 2000, we entered into a manufacturing supply agreement with Lonza, under
which Lonza is making available exclusively to us, for a period of five years, a cell culture production suite, with associated purification capacity, within Lonza's facility. The agreement includes
an option to extend the initial five-year term. The dedicated cell culture production suite is operational and became available to us in the third quarter of 2001. Although we have gained
access through this agreement to production capacity and scheduling flexibility similar to owning the production capability, Lonza retains responsibility for, and control over, staffing and operating
the facility. In July 2001, we entered into an agreement granting us an option to negotiate an additional manufacturing supply agreement that would have provided us with additional capacity. In
July of 2002, after evaluation of our revised capacity needs, we notified Lonza that we have decided not to continue these negotiations.

Lonza
has a limited number of facilities in which it can produce our product candidates and has limited experience in manufacturing them in quantities sufficient for conducting clinical
trials or for commercialization. We currently rely on Lonza to produce our product candidates under good manufacturing practice regulations that meet acceptable standards for our clinical trials.

Third-party
manufacturers may encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified
personnel, compliance with FDA and other applicable regulations, production costs, and development of advanced manufacturing techniques and process controls. Our third-party manufacturers may not
perform as agreed or may not remain in the contract manufacturing business for the time required by us to successfully produce and market our product candidates. The failure of our third-party
manufacturers to deliver the required quantities of our product candidates for clinical use on a timely basis and at commercially reasonable prices, and our failure to find replacement manufacturers
or develop our own manufacturing capabilities, would materially harm our business, financial condition and results of operations.

Our own ability to manufacture is uncertain, which may make it more difficult for us to develop and sell our products.

We
are building our own manufacturing facility for the manufacture of product candidates for clinical trials and to support the potential early commercial launch of a limited number of
products, in each case, in compliance with FDA and European good manufacturing practices. In May 2000, we signed a long-term lease for a building to contain this manufacturing
facility. Construction has started and we expect this facility to be operational by the end of 2002. The costs of the facility, including design fees, permits, validation, leasehold improvements and
equipment, will approximate $140 million. Construction of this facility may take longer than expected, and the planned and actual construction costs of building and qualifying the facility for
regulatory compliance may be higher than expected. In

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addition, if the commercial launch of one or more of our product candidates proves successful, we will likely need to use one or more third-party facilities to produce these products in sufficient
quantities. The process of manufacturing antibody therapeutic products is complex. We have no experience in the clinical or commercial scale manufacturing of our existing product candidates, or any
other antibody therapeutic products. Also, we will need to manufacture such antibody therapeutic products in a facility and by a process that comply with FDA, European and other regulations. It may
take a substantial period of time to begin producing antibodies in compliance with those regulations. Our manufacturing operations will be subject to ongoing, periodic unannounced inspection by the
FDA and state agencies to ensure compliance with good manufacturing practices. Our inability to establish and maintain a manufacturing facility within our planned time and cost parameters could
materially harm the development and sales of our products and our financial performance.

We
also may encounter problems with the following:



We
continually evaluate our options for commercial production of our antibody therapeutic products, which include use of third-party manufacturers, establishing our own commercial scale
manufacturing facility or entering into a manufacturing joint venture relationship with a third party. We are aware of only a limited number of companies on a worldwide basis that operate
manufacturing facilities in which our product candidates can be manufactured under good manufacturing practice regulations, a requirement for all pharmaceutical products. It would take a substantial
period of time for a contract manufacturing facility that has not been producing antibodies to begin producing antibodies under good manufacturing practice regulations. We may not be able to contract
with any of these companies on acceptable terms, if at all.

In
addition, the FDA and other regulatory authorities will require us to register any manufacturing facilities in which our antibody therapeutic products are manufactured. The FDA and
other regulatory authorities will then subject the facilities to inspections confirming compliance with FDA good manufacturing practice or other regulations. Our failure or the failure of our
third-party manufacturers to maintain regulatory compliance would materially harm our business, financial condition and results of operations.

The successful growth of our business depends to a large extent on our ability to find third-party collaborators to develop and commercialize many of our product
candidates.

Our
strategy for the development and commercialization of antibody therapeutic products depends, in large part, upon the formation of collaboration agreements with third parties.
Potential third parties include pharmaceutical and biotechnology companies, technology companies, academic institutions and other entities. We must enter into these agreements to successfully develop
and commercialize product candidates. These agreements are necessary in order for us to:



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Our
ability to continue our current collaborations and to enter into additional third party collaborations is dependent in large part on our ability to successfully demonstrate that our
XenoMouse technology is an attractive method of developing fully human antibody therapeutic products. We have generated only a limited number of fully human antibody therapeutic product candidates
pursuant to our collaboration agreements and only five fully human antibody therapeutic product candidates generated with XenoMouse technology have entered clinical testing. We announced in
May 2002 that one of these product candidates has not met our expectations. In addition, our current expectations of the number of INDs to be filed by our collaborators is lower than our
previous estimates. Our failure to maintain our existing collaboration agreements or to enter into additional agreements could materially harm our business, financial condition and results of
operations.

Our
dependence on licensing, collaboration and other agreements with third parties subjects us to a number of risks. These agreements may not be on terms that prove favorable to us, and
we typically afford our collaborators significant discretion in electing whether to pursue any of the planned activities. Licensing and other contractual arrangements may require us to relinquish our
rights to certain of our technologies, products or marketing territories. We cannot control the amount or timing of resources our collaborators may devote to the product candidates, and collaborators
may not perform their obligations as expected. Additionally, business combinations or significant changes in a collaborator's business strategy may adversely affect a collaborator's willingness or
ability to complete its obligations under the arrangement. Even if we fulfill our obligations under an agreement, typically our collaborators can terminate the agreement at any time following proper
written notice. The termination or breach of agreements by our collaborators, or the failure of our collaborators to complete their obligations in a timely manner, could materially harm our business,
financial condition and results of operations. If we are not able to establish further collaboration agreements or any or all of our existing agreements are terminated, we may be required to seek new
collaborators or to undertake product development and commercialization at our own expense. Such an undertaking may:



Existing
or future collaborators may pursue alternative technologies, including those of our competitors. These types of transactions could have the effect of making a collaboration with
us less attractive to them for a number of reasons. For example, if an existing collaborator purchases a company that is one of our competitors, that company could be less willing to continue its
collaboration with us. In addition, a company that has a strategy of purchasing companies with attractive technologies might have less incentive to enter into a collaboration agreement with us.
Moreover, disputes may arise with respect to the ownership of rights to any technology or products developed with any current or future collaborator. Lengthy negotiations with potential new
collaborators or disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in
time-consuming and expensive litigation or arbitration. The decision by our collaborators to pursue alternative technologies or the failure of our collaborators to develop or commercialize
successfully any product candidate to which they have obtained rights from us could materially harm our business, financial condition and results of operations.

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We are subject to extensive government regulation, which will require us to spend significant amounts of money, and we may not be able to obtain regulatory approvals, which are
required for us to conduct clinical testing and commercialize our products.

Our
product candidates under development are subject to extensive and rigorous domestic government regulation. The FDA regulates, among other things, the development, testing,
manufacture, safety, efficacy, record-keeping, labeling, storage, approval, advertising, promotion, sale and distribution of biopharmaceutical products. If we market our products abroad, they will
also be subject to extensive regulation by foreign governments. Neither the FDA nor any other regulatory agency has approved any of our product candidates for sale in the United States or any foreign
market. The regulatory review and approval process, which includes preclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval
requires the submission of extensive preclinical and clinical data and supporting information to the FDA for each indication to establish the product candidate's safety and efficacy. The approval
process takes many years, requires the expenditure of substantial resources, involves post-marketing surveillance, and may involve ongoing requirements for post-marketing
studies. Regulatory requirements are subject to frequent change. Delays in obtaining regulatory approvals may:



Certain
material changes affecting an approved product such as manufacturing changes or additional labeling claims are subject to further FDA review and approval. The FDA may withdraw
any required approvals after we obtain them. We may not maintain compliance with other regulatory requirements. Further, if we fail to comply with applicable FDA and other regulatory requirements at
any stage during the regulatory process, we or our third-party manufacturers may be subject to sanctions, including:



In
many instances we expect to rely on our customers and co-developers to file INDs and generally direct the regulatory approval process for products derived from our
technologies. These customers and co-developers may not be able to conduct clinical testing or obtain necessary approvals from the FDA or other regulatory authorities for any product
candidates. If they fail to obtain required governmental approvals, we will experience delays in or be precluded from marketing or realizing the commercial

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benefits from the marketing of products derived from our technologies. In addition, our failure to obtain the required approvals would preclude the commercial use of our products. Any such delays and
limitations may materially harm our business, financial condition and results of operations.

We
and our third-party manufacturers also are required to comply with the applicable FDA current good manufacturing practice regulations. Good manufacturing practice regulations include
requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA and
the FDA must approve these facilities before we can use them in commercial manufacturing of our products. We or our third-party manufacturers may not be able to comply with the applicable good
manufacturing practice requirements and other FDA regulatory requirements. The failure of us or our third-party manufacturers to comply with these requirements would materially harm our business,
financial condition and results of operations.

If our products do not gain market acceptance among the medical community, our revenues would greatly decline.

Our
product candidates may not gain market acceptance among physicians, patients, third-party payors and the medical community. We may not achieve market acceptance even if clinical
trials demonstrate safety and efficacy, and the necessary regulatory and reimbursement approvals are obtained. The degree of market acceptance of any product candidates that we develop will depend on
a number of factors, including:



Physicians
will not recommend therapies using our products until such time as clinical data or other factors demonstrate the safety and efficacy of such procedures as compared to
conventional drug and other treatments. Even if we establish the clinical safety and efficacy of therapies using our antibody product candidates, physicians may elect not to recommend the therapies
for any number of other reasons, including whether the mode of administration of our antibody products is effective for certain indications. Antibody products, including our product candidates as they
would be used for certain disease indications, are typically administered by infusion or injection, which requires substantial cost and inconvenience to patients. Our product candidates, if
successfully developed, will compete with a number of drugs and therapies manufactured and marketed by major pharmaceutical and other biotechnology companies. Our products may also compete with new
products currently under development by others. Physicians, patients, third-party payors and the medical community may not accept or utilize any product candidates that we or our customers develop.
The failure of our products to achieve significant market acceptance would materially harm our business, financial condition and results of operations.

We do not have marketing and sales experience, which may require us to rely on others to market and sell our products and may make it more challenging for us to commercialize
our product candidates.

Although
we have been marketing our XenoMouse technology to potential customers and collaborators for several years, we do not have marketing, sales or distribution experience or
capability with respect to our therapeutic product candidates. We intend to enter into arrangements with third parties to market and sell most of our therapeutic product candidates when we
commercialize them,

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which may be as early as 2004. We may not be able to enter into these marketing and sales arrangements with others on acceptable terms, if at all. To the extent that we enter into marketing and sales
arrangements with other companies, our revenues, if any, will depend on the efforts of others. These efforts may not be successful. If we are unable to enter into third-party arrangements, we will
need to develop a marketing and sales force, which may need to be substantial in size, in order to achieve commercial success for any product candidate approved by the FDA. We may not successfully
develop marketing and sales capabilities or have sufficient resources to do so. If we do develop such capabilities, we will compete with other companies that have experienced and
well-funded marketing and sales operations. Our failure to enter into successful marketing arrangements with third parties and our inability to conduct such activities ourselves would
materially harm our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

Our ability to protect our intellectual property rights will be critically important to the success of our business, and we may not be able to protect these rights in the
United States or abroad.

Our
success depends in part on our ability to:



We
will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or
are effectively maintained as trade secrets. We attempt to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. However, the patent position of biopharmaceutical companies involves complex legal and factual questions, and, therefore, we cannot
predict with certainty whether our patent applications will be approved or any resulting patents will be enforced. In addition, third parties may challenge, invalidate or circumvent any of our
patents, once they are issued. Thus, any patents that we own or license from third parties may not provide any protection against competitors. Our pending patent applications, those we may file in the
future, or those we may license from third parties, may not result in patents being issued. Also, patent rights may not provide us with adequate proprietary protection or competitive advantages
against competitors with similar technologies. The laws of certain foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States.

In
addition to patents, we rely on trade secrets and proprietary know-how. We seek protection, in part, through confidentiality and proprietary information agreements. These
agreements may not provide meaningful protection for our technology or adequate remedies in the event of unauthorized use or disclosure of confidential and proprietary information, and, in addition,
the parties may breach such agreements. Also, our trade secrets may otherwise become known to, or be independently developed
by, our competitors. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed.

We may face challenges from third parties regarding the validity of our patents and proprietary rights, or from third parties asserting that we are infringing on their patents
or proprietary rights, which could result in litigation that would be costly to defend and could deprive us of valuable rights.

Parties
have conducted research for many years in the antibody and transgenic animal fields. The term "transgenic", when applied to an animal, such as a mouse, refers to an animal that
has

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chromosomes into which human genes have been incorporated. This research has resulted in a substantial number of issued patents and an even larger number of pending patent applications. The
publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries were made. Our commercial success depends
significantly on our ability to operate without infringing the patents and other proprietary rights of third parties. Our technologies may unintentionally infringe the patents or violate other
proprietary rights of third parties. Such infringement or violation may prevent us and our customers from pursuing product development or commercialization. Such a result could materially harm our
business, financial condition and results of operations.

In
March 1997, we entered into a cross-license and settlement agreement with GenPharm to avoid protracted litigation. Under the cross-license, we licensed on a
non-exclusive basis certain patents, patent applications, third-party licenses and inventions pertaining to the development and use of certain transgenic rodents, including mice, that
produce fully human antibodies that are integral to our products and business. Our business, financial condition and results of operations could be materially harmed if any of the parties breaches the
cross-license agreement.

GlaxoSmithKline,
plc, or Glaxo, has a family of patents relating to certain methods for generating monoclonal antibodies that Glaxo is asserting against Genentech, Inc. in
litigation that was commenced in 1999. On May 4, 2001, Genentech announced that a jury had determined that Genentech had not infringed Glaxo's patents and that all of the patent claims asserted
against Genentech are invalid. We understand that Glaxo has filed a notice of appeal with the Court of Appeals for the Federal Circuit. If any of the claims of these patents are finally determined in
the litigation to be valid, and if we were to use manufacturing processes covered by the patents to make our products, we may then need to obtain a license should one be available. Should a license be
denied or unavailable on commercially reasonable terms, we may have difficulties commercializing one or more of our products in any territories in which these claims were in force.

Genentech,
Johnson & Johnson, Glaxo and Transkaryotic Therapics, Inc. each own or control a U.S. patent that relates to recombinant cell lines or methods of generating
recombinant cell lines for the production of antibodies. If we were to use a production system covered by any of these patents, we may then need to obtain a license should one be available. Our
failure to obtain a license at all or on
commercially reasonable terms could impede commercialization of one or more of our products in any territories in which these patent claims were in force.

Genentech
owns a U.S. patent that issued in June 1998 relating to inhibiting the growth of tumor cells that involves an antibody that binds to an epidermal growth factor receptor,
or an anti-EGF receptor antibody, in combination with a cytotoxic factor, which is a substance having a toxic effect on cells. ImClone Systems, Inc. owns or is licensed under a U.S.
patent that issued in April 2001, relating to inhibiting the growth of tumor cells that involves an anti-EGF receptor antibody in combination with an anti-neoplastic, or
anti-tumor, agent. We do not believe based on our review that either the Genentech or ImClone patent would be successfully asserted against any planned commercial sales of
ABX-EGF. We believe that currently all of our activities relating to anti-EGF receptor monoclonal antibodies are within the exemption provided by the U.S. patent laws for uses
reasonably related to obtaining FDA approval of a drug. We do not expect the scope of our product development plans to change in the future prior to filing an application for a biologic license with
the FDA. If a court determines that the claims of either the Genentech patent or the ImClone patent cover our activities with ABX-EGF and are valid, such a decision may require us to
obtain a license to Genentech's or ImClone's patent, as the case may be, to label and sell ABX-EGF for certain combination therapies. Our failure to obtain a license, or to obtain a
license on commercially reasonable terms, could impede our commercialization of ABX-EGF in the United States.

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In
2000, the Japanese Patent Office granted a patent to Kirin Beer Kabushiki Kaisha, one of our competitors, relating to non-human transgenic mammals. Kirin has filed
corresponding patent applications in Europe and Australia. Kirin may also have filed a corresponding patent application in the United States. Our licensee, Japan Tobacco, has filed opposition
proceedings against the Kirin patent. We cannot predict the outcome of those opposition proceedings, which may take years to be resolved.

Extensive
litigation regarding patents and other intellectual property rights has been common in the biotechnology and pharmaceutical industries. The defense and prosecution of
intellectual property suits, United States Patent and Trademark Office interference proceedings, and related legal and administrative proceedings in the United States and internationally involve
complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to:



Our
involvement in any litigation, interference or other administrative proceedings could cause us to incur substantial expense and could significantly divert the efforts of our
technical and management personnel. An adverse determination may subject us to loss of our proprietary position or to significant liabilities, or require us to seek licenses that may not be available
from third parties. An adverse determination in a judicial or administrative proceeding, or a failure to obtain necessary licenses, may restrict or prevent us from manufacturing and selling our
products, if any. Costs associated with these arrangements may be substantial and may include ongoing royalties. Furthermore, we may not be able to obtain the necessary licenses on satisfactory terms,
if at all. These outcomes could materially harm our business, financial condition and results of operations.

Risks Related to Our Industry

We face intense competition and rapid technological change, and if we fail to develop products that keep pace with new technologies and that gain market acceptance, our product
candidates or technologies could become obsolete.

The
biotechnology and pharmaceutical industries are highly competitive and subject to significant and rapid technological change. We are aware of several pharmaceutical and biotechnology
companies that are actively engaged in research and development in areas related to antibody therapy. These companies have commenced clinical trials of antibody therapeutic product candidates or have
successfully commercialized antibody therapeutic products. Many of these companies are addressing the same diseases and disease indications as we or our customers are. Also, we compete with companies
that offer antibody generation services to companies that have antigens. These competitors have specific expertise or technology related to antibody development and introduce new or modified
technologies from time to time. These companies include GenPharm, a wholly owned subsidiary of Medarex, Inc., Medarex's collaborator, Kirin Brewing Co. Ltd.; Genmab A/S; Cambridge
Antibody Technology Group plc; Protein Design Labs, Inc.; MorphoSys AG; Xenerex Biosciences Inc., a subsidiary of Avanir Pharmaceuticals; and XLT Biopharmaceuticals Ltd.

Some
of our competitors have received regulatory approval of or are developing or testing product candidates that may compete directly with our product candidates. For example, SangStat,
Novartis AG, Pharmacia Corporation and Roche market organ transplant rejection products that may compete with ABX-CBL, which is in clinical trials. In addition, MedImmune, Inc. has
a potential antibody product candidate in clinical trials for graft versus host disease that may compete with ABX-CBL. We are also aware that ImClone, AstraZeneca, plc, Glaxo and a
collaboration of OSI Pharmaceuticals, Inc.,

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Genentech and Roche have potential antibody and small molecule product candidates in clinical development that may compete with ABX-EGF, which is also in clinical trials. Furthermore, we
are aware that AstraZeneca has received licensing approval in Japan for its experimental cancer drug Iressa, which may compete with ABX-EGF.

Many
of these companies and institutions, either alone or together with their customers, have substantially greater financial resources and larger research and development staffs than we
do. In addition, many of these competitors, either alone or together with their customers, have significantly greater experience than we do in:



Accordingly,
our competitors may succeed in obtaining patent protection, receiving FDA approval or commercializing products before we do. If we commence commercial product sales, we will
be competing against companies with greater marketing and manufacturing capabilities, areas in which we have limited or no experience.

We
also face, and will continue to face, competition from academic institutions, government agencies and research institutions. There are numerous competitors working on products to
treat each of the diseases for which we are seeking to develop therapeutic products. In addition, any product candidate that we successfully develop may compete with existing therapies that have long
histories of safe and effective use. Competition may also arise from:



Developments
by competitors may render our product candidates or technologies obsolete or non-competitive. We face and will continue to face intense competition from other
companies for agreements with pharmaceutical and biotechnology companies, for establishing relationships with academic and research institutions, and for licenses to proprietary technology. These
competitors, either alone or with their customers, may succeed in developing technologies or products that are more effective than ours.

We face uncertainty over reimbursement and healthcare reform, which, if determined adversely to us, could seriously hinder the market acceptance of our products.

In both domestic and foreign markets, sales of our product candidates will depend in part upon the availability of reimbursement from third-party payors, such as
government health administration authorities, managed care providers and private health insurers. Third-party payors are increasingly challenging the price and examining the cost effectiveness of
medical products and services. In addition, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. Adequate third-party reimbursement may not be available
to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development. In addition, domestic and foreign governments continue to propose and pass
legislation designed to reduce the cost of healthcare, which could further limit reimbursement for pharmaceuticals. The failure of the government and third-party payors to provide adequate coverage
and reimbursement rates for our product candidates could adversely affect the market acceptance of our products. The failure of our products to receive market acceptance would materially harm our
business, financial condition and results of operations.

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Other Risks Related to Our Company

We may experience difficulty in the integration of any future acquisition with the operations of our business.

We may from time to time seek to expand our business through corporate acquisitions. Our acquisition of companies and businesses and expansion of operations,
involve risks such as the following:



In
addition, our acquisition of companies and businesses and expansion of operations may result in dilutive issuances of equity securities, the incurrence of additional debt, large
one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense or other charges to expense.

The future growth and success of our business will depend on our ability to continue to attract and retain our employees and consultants.

For us to pursue product development, marketing and commercialization plans, we will need to hire additional qualified scientific personnel to perform research
and development. We will also need to hire personnel with expertise in clinical testing, government regulation, manufacturing, marketing and finance. Attracting and retaining qualified personnel will
be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition for such personnel among biotechnology, pharmaceutical and healthcare
companies, universities and non-profit research institutions. Our inability to attract and retain qualified personnel might materially harm our business, financial condition and results of
operations.

We have implemented a stockholder rights plan and are subject to other anti-takeover provisions, which could deter a party from effecting a takeover of us at a
premium to our then-current stock price.

In June 1999, our board of directors adopted a stockholder rights plan, which we amended and restated in November 1999 and May 2002. The
stockholder rights plan and certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire, control of us. This could limit the price that certain investors might be willing to pay in the future for our common
stock. Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws allow us to:



We
are subject to certain provisions of Delaware law which could also delay or make more difficult a merger, tender offer or proxy contest involving us. In particular, Section 203
of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in any business combination with any

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interested stockholder for a period of three years unless the transaction meets certain conditions. The stockholder rights plan, the possible issuance of preferred stock, the procedures required for
director nominations and stockholder proposals and Delaware law could have the effect of delaying, deferring or preventing a change in control of us, including, without limitation, discouraging a
proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions also could limit the price that investors might be willing to pay in the future for
shares of our common stock.

We face product liability risks and may not be able to obtain adequate insurance, and if we are held liable for an uninsured claim or a claim in excess of our insurance limits,
our business, financial condition and results of operations may be harmed.

The use of any of our product candidates in clinical trials, and the sale of any approved products, may expose us to liability claims resulting from such use or
sale of our products. Consumers, healthcare providers, pharmaceutical companies or others selling such products might make claims of this kind. We may experience financial losses in the future due to
product liability claims. We have obtained limited product liability insurance coverage for our clinical trials, under which the coverage limits are $5.0 million per occurrence and
$5.0 million in the aggregate. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for product candidates in development. We
may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. If third parties bring a successful product liability claim or series of
claims against us for uninsured liabilities or in excess of insured liabilities, our business, financial condition and results of operations may be materially harmed.

Our operations involve hazardous materials, and we could be held responsible for any damages caused by such materials.

Our research and manufacturing activities involve the controlled use of hazardous materials. In addition, although we maintain insurance for harm to employees and
to our facilities caused by hazardous materials, we do not insure against any other harm (including harm to the environment) caused by the use of hazardous materials on our premises. We cannot
eliminate the risk of accidental contamination or injury from these materials. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, which may exceed
our financial resources and may materially harm our business, financial condition and results of operations.

We do not intend to pay cash dividends on our common stock.

We intend to retain any future earnings to finance the growth and development of our business and we do not plan to pay cash dividends on our common stock in the
foreseeable future.

Our stock price is highly volatile, and you may not be able to sell your shares of our common stock at a price greater than or equal to the price you paid for them.

The market price and trading volume of our common stock are volatile, and we expect such volatility to continue for the foreseeable future. For example, during
the period between July 1, 2001 and June 30, 2002, our common stock closed as high as $44.10 per share and as low as $9.32 per share. This may impact your decision to buy or sell our
common stock. Factors affecting our stock price include:



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If we were deemed to be an investment company, we would become subject to provisions of the Investment Company Act that likely would have a material adverse impact on our
business.

A company is required to register as an investment company under the Investment Company Act of 1940, or the 1940 Act, if, among other things, and subject to
various exceptions:



A
major portion of our assets has been invested in investment grade interest-bearing securities. Such investments could in some circumstances require us to register as an investment
company under the 1940 Act. Registration under the 1940 Act, or a determination that we failed to register when required to do so, could have a material adverse impact on us. We believe that we are
and will remain exempt from the registration requirements, but absent interpretation by the courts or the SEC of the relevant exemption as applied to companies engaged in research and development,
this result cannot be assured. In addition, a change in our allocation of assets on account of 1940 Act concerns could reduce the rate of return on our liquid assets.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk.The objective of our investment activities is to preserve principal, while at the same time maximizing
yields without significantly increasing risk. To achieve this objective, we invest in highly liquid, investment grade and government debt securities. Our investments in debt securities are subject to
interest rate risk. To minimize the exposure due to an adverse shift in interest rates, we invest in short-term securities and our goal is to maintain an average maturity of approximately
one year. A hypothetical 1.0% per annum increase in interest rates would result in a decrease in the fair market value of our debt securities of approximately $7.0 million at June 30,
2002, and approximately $5.6 million at December 31, 2001.

Equity Price Risk.We are exposed to equity price risk on strategic investments, such as those we have made in CuraGen,
ImmunoGen and MDS Proteomics. We typically do not attempt to reduce or eliminate our market exposure on these securities. With respect to CuraGen and ImmunoGen, each of whose common stock is publicly
traded, the market price of these securities was approximately

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$14.9 million and $64.1 million as of June 30, 2002 and December 31, 2001, respectively. Accordingly, we recorded impairment charges of $34.7 million for the three
months ended March 31, 2002, and of $30.4 million for the three months ended June 30, 2002, related to our investments in CuraGen and ImmunoGen. The trading prices of shares of
CuraGen and ImmunoGen have fluctuated significantly since we purchased these securities. For example, for the three months ended June 30, 2002, the market prices of CuraGen and ImmunoGen common
stock declined by approximately 65% and 76%, respectively. Each additional 10% decrease in market value of these securities would result in a decrease in value of approximately $1.5 million
from the fair value of those investments at June 30, 2002. Additional price declines could cause us to record additional impairment charges in future periods.

An
adverse movement of equity market prices generally would also have an impact on the valuation of our non-publicly traded strategic equity securities, such as MDS
Proteomics. Such a movement and the related underlying economic conditions would negatively impact the prospects of any company we invest in, its ability to raise capital and the likelihood of our
being able to realize our investment through liquidity events such as a public offering, merger or private sale. For the three months ended June 30, 2002, we incurred a $7.1 million
charge related to a write-down of our investment in MDS Proteomics, and we may incur future write-downs of these securities. At June 30, 2002, our strategic investment in MDS
Proteomics had a carrying amount of $7.9 million.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

Not applicable.

ITEM 2. Changes in Securities and Use of Proceeds

Not applicable.

Recent Sales of Unregistered Securities

Not applicable.

ITEM 3. Defaults upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to Vote of Security Holders

At our Annual Meeting of Stockholders, held on June 4, 2002, one matter, the election of directors, was voted upon. The following is tabulation of votes
with respect to each nominee.

VotesNomineeFor

WithheldR. Scott Greer

60,995,462

118,459M. Kathleen Behrens

60,612,975

500,946Raju S. Kucherlapati

61,000,530

113,391Mark B. Logan

60,567,940

545,981Raymond M. Withy

61,001,037

112,884


ITEM 5. Other Information

Not applicable.

ITEM 6. Exhibits and Reports on Form 8-K



|Number |     | Description                                                                          
|------ | --- | -------------------------------------------------------------------------------------
|3.1    | (1) | Amended and Restated Certificate of Incorporation of Abgenix, as currently in effect.
|3.2    | (2) | Amended and Restated Bylaws of Abgenix, as currently in effect.                      

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We
are filing a Form 8-K on August 14, 2002, reporting under Item 9Regulation FD Disclosure, the written certifications which accompany this
Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

Dated:
August 14, 2002

| |  | ABGENIX, INC.(Registrant)                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------
| |  | /s/RAYMOND M. WITHYRaymond M. Withy, Ph.D. President and Chief Executive Officer
(Principal Executive Officer)
| |  | /s/KURT LEUTZINGERKurt Leutzinger Chief Financial Officer
(Principal Financial and Accounting Officer)        

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