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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
 
(MARK ONE)
 
     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
     [ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
               FOR THE PERIOD FROM ____________ TO ____________ .
 
                        COMMISSION FILE NUMBER: 0-19986
                            ------------------------
 
                               CELL GENESYS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                  DELAWARE                                      94-3061375
(STATE OR OTHER JURISDICTION OF INCORPORATION     (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
               OR ORGANIZATION)
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               342 LAKESIDE DRIVE, FOSTER CITY, CALIFORNIA 94404
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK $.001
                                   PAR VALUE
 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (650) 425-4400
 
     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 12 months (or 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 [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information incorporated
by reference in Part III of this Form 10-K or any amendment to this Form
10-K.  [X]
 
     As of March 15, 1999, the approximate market value of voting stock held by
nonaffiliates of the Registrant was $161,608,413. 2,582,703 shares of Common
Stock held by each officer, director and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
 
     As of March 15, 1999, the number of outstanding shares of the Registrant's
Common Stock was 30,997,389.
 
     Documents incorporated by reference: The information called by Part III of
this Form 10-K is incorporated by reference to the definitive proxy statement
for the annual meeting of stockholders of the company which will be filed no
later than 120 days after December 31, 1998.
 
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                               TABLE OF CONTENTS
 
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PART I
  Item 1.  Business.........................................    2
  Item 2.  Properties.......................................   13
  Item 3.  Legal Proceedings................................   14
  Item 4.  Submission of Matters to a Vote of Security
     Holders................................................   14
 
PART II
  Item 5.  Market for Registrant's Common Equity and Related
     Stockholder Matters....................................   15
  Item 6.  Selected Consolidated Financial Data.............   16
  Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..............   17
  Item 7a. Quantitative and Qualitative Disclosures about
     Market Risk............................................   29
  Item 8.  Consolidated Financial Statements and
     Supplementary Data.....................................   30
  Item 9.  Changes In and Disagreements with Accountants on
           Accounting and Financial Disclosure..............   49
 
PART III
  Item 10. Directors and Executive Officers of the
     Registrant.............................................   49
  Item 11. Executive Compensation...........................   49
  Item 12. Security Ownership of Certain Beneficial Owners
     and Management.........................................   49
  Item 13. Certain Relationships and Related Transactions...   49
 
PART IV
  Item 14. Exhibits, Financial Statements Schedules and
     Reports on Form 8-K....................................   49
 
SIGNATURES..................................................   53
 
POWER OF ATTORNEY...........................................   53
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                                     PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
     Statements made in this document other than statements of historical fact,
including statements about the Company's and its subsidiary's clinical trials,
product pipelines, corporate partnerships, licenses and intellectual property,
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are subject to a number of uncertainties that could cause actual results to
differ materially from the statements made, including risks associated with the
success of research and product development programs, patents, proprietary
technology and corporate partnerships. Reference is made to discussions about
risks associated with product development programs, intellectual property and
other risks which may affect the Company under "Risk Factors" below. The Company
does not undertake any obligation to update forward-looking statements.
 
     Since its inception in April 1988, Cell Genesys, Inc. ("Cell Genesys" or
"the Company") has focused its research and product development efforts on human
disease therapies which are based on innovative gene modification technologies.
The Company's strategic objective is to develop and commercialize in vivo and/or
ex vivo gene therapies to treat major, life-threatening diseases including
cancer and AIDS. Cell Genesys' clinical programs include GVAX(TM) cancer
vaccines in Phase I/II studies to treat specific types of cancer, and T cell
gene therapy for AIDS, which is undergoing Phase II testing. GVAX(TM) vaccines
for prostate cancer and for lung cancer are being developed through a worldwide
collaboration with the pharmaceutical division of Japan Tobacco Inc. ("JT").
AIDS gene therapy is being developed through a worldwide collaboration with
Hoechst Marion Roussel, Inc. ("Hoechst Marion Roussel"). In addition, Cell
Genesys has preclinical programs, which are evaluating potential gene therapies
for cancer, cardiovascular disorders, hemophilia and Parkinson's disease. The
Company also has assets outside of its core business which can be used to help
maintain financial strength while product candidates are under development.
These assets include Cell Genesys' minority ownership of Abgenix, Inc.
("Abgenix", Nasdaq-AMEX: ABGX), which is focused on the development and
commercialization of antibody therapies and a licensing program in gene
activation technology.
 
     During 1998, Cell Genesys continued to build its gene therapy business
through progress in both clinical and preclinical programs, by further
validating its technology through multiple scientific papers and patent
issuances, and by establishing the GVAX(TM) collaboration with JT. The Company
has prioritized its efforts, focusing on partnered clinical programs which offer
the greatest commercial potential and advancing preclinical programs to a point
where they can be partnered.
 
     Cell Genesys believes that gene therapies are likely to be developed on a
continuum, progressing from ex vivo (modification of cells outside the patient's
body for injection as therapy) to in vivo (modification of cells within the
patient's body to provide therapy). The Company's goal is to emphasize
"off-the-shelf" products that enable gene therapy to be provided in out-patient
settings. These potentially include both non-patient-specific therapies, which
could be vialed pharmaceuticals for direct administration, and patient-specific
gene therapy products, which could be packaged as "kits" for overnight cell
processing at clinical laboratories.
 
     Ex vivo gene therapies currently are being evaluated by Cell Genesys in
Phase I/II human clinical studies. These include studies of GVAX(TM) therapeutic
vaccines for specific types of cancer and studies of T cell AIDS gene therapy.
All of these gene therapies are designed to impart new disease-fighting
capabilities to the patient's immune system, in order to enhance an immune
response against diseased cells. During 1998, Phase I/II human trials evaluating
the GVAX(TM) vaccine for prostate cancer demonstrated antitumor effects as
measured by levels of prostate specific antigen (PSA), a cancer "marker." As a
result, the Company initiated additional GVAX(TM) clinical trials for prostate
cancer. Phase I/II trials for lung cancer and melanoma are continuing, and the
patients are now being evaluated. In Phase II trials of T cell gene therapy for
AIDS, data demonstrated safety in patients with persistent HIV in their
bloodstream as well as preliminary indications of potential antiviral activity.
 
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     In vivo gene therapies are at the preclinical stage of development at Cell
Genesys. Treatment strategies may target cells that typically cannot be removed
from the body for external processing and therefore are modified within the
body. With in vivo gene therapy, the treatment goals include stimulating
targeted cells to produce a protein or other substance needed to normalize key
biological processes, or otherwise inhibiting specific disease processes. In
1998, the Company's preclinical research focused on studies of gene therapy in
animal models for hemophilia and Parkinson's disease, and on gene therapy
strategies to overcome restenosis, a serious complication of angioplasty for
cardiovascular disease. For example, in hemophilia studies, a single injection
of gene therapy resulted in improved blood clotting and reduced number of
bleeding episodes in a dog hemophilia model. Similarly, in studies for
Parkinson's disease, a single injection of gene therapy essentially eliminated
the need for daily L-dopa injections in mice with a Parkinson's-like condition.
Cardiovascular gene therapy studies demonstrated the successful delivery of
genes to blood vessel lining cells.
 
     Cell Genesys ended 1998 with approximately $53 million in cash and
short-term investments. The Company has maintained its financial position by
relying on funding from various corporate collaborations and licensing
agreements, as well as through strategic management of its resources. Sources of
funding in 1998 included the signing of the GVAX(TM) collaboration with JT, a
sale of Abgenix common stock representing part of the Company's ownership
position, and payments received through its gene activation licensing program.
 
     The Company's plan is to continue to finance its operations when possible
through corporate collaborations with established pharmaceutical and
biotechnology companies in order to develop its technologies as broadly as
possible, to fund product development and to accelerate the commercialization of
certain product opportunities. Such alliances are intended to provide financial
resources, research, development and manufacturing capabilities, and marketing
infrastructure to aid in the commercialization of potential disease therapies.
Cell Genesys also evaluates on an ongoing basis opportunities to in-license or
acquire genes and technologies that complement its portfolio. There can be no
assurance that Cell Genesys will be able to enter into additional collaborative
relationships or obtain new genes and technologies on acceptable terms, if at
all, or that if such actions occur, they will be successful. Failure to enter
new corporate relationships or expand Cell Genesys' product and technological
base may limit Cell Genesys' success unless alternative financing arrangements
are available.
 
BACKGROUND
 
     For many years the pharmaceutical industry has focused on developing
chemical compounds as pharmaceutical drugs and disease therapies. These
traditional pharmaceutical products are most often synthesized in the laboratory
or derived from substances found in nature, and they include antibiotics,
antineoplastics, analgesics and a variety of other compounds. The therapeutic
value of such agents generally depends on their ability to stimulate or inhibit
physiological processes related to disease, to interfere directly with infection
or cancer, or to correct various chemical imbalances. In certain cases,
traditional pharmaceutical products may not be able to achieve these purposes,
due to a variety of reasons including unwanted side effects, delivery of
insufficient amounts of drug to the disease site, or treatment of symptoms
rather than the underlying cause of illness. Although the biotechnology industry
has made significant advances with respect to the development of therapeutic
products based on proteins or monoclonal antibodies, such products are not
always successful in treating certain complex diseases. Examples include types
of cancer, AIDS, cardiovascular diseases, neurologic conditions and a variety of
genetic diseases and disorders. Cell Genesys believes that an important approach
to the treatment of these and other diseases may involve the genetic
modification of cells, ex vivo or in vivo, to potentially provide new, enhanced
or expanded functions in the form of "gene therapy."
 
GENE THERAPY
 
     A critical component of gene therapy are genes, or segments of DNA, which
typically are contained in the nucleus of cells. Genes provide the chemical
instructions that direct cells to produce proteins. The production process is
known as gene "expression," and the resulting proteins determine the nature and
function of cells and tissues in all living organisms.
 
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     A worldwide effort has been under way for several years to discover and
study genes and their functions. Findings by academic institutions, government
organizations and various corporations are providing an increased understanding
of the relationship between specific genes and human disease. It is now well
known that genes are implicated in the cause of many diseases, including not
only inherited conditions involving a defective or missing gene, but also a wide
range of diseases arising from inappropriate biological activity, such as the
over- or under-expression of a normal gene as a result of environmental factors.
Certain genes also may provide therapeutic benefits by stimulating the
production of proteins that can overcome various disease processes.
 
     The field known as gene therapy is based on the principle that naturally
occurring or genetically modified genes can be introduced into target cells to
bring about a therapeutic effect. Depending upon the choice of genetic material
delivered, gene therapy may be used to enhance normal cell activities or enable
cells to perform new roles. In addition, certain forms of gene therapy may
involve "gene correction," which introduces normal genes into relevant cells of
patients with genetically inherited diseases, or may involve "vaccination,"
which uses genetic material or modified cells to stimulate the patient's immune
response. Cell Genesys' lead gene therapy programs, which currently are
undergoing human clinical testing, are designed to expand the capabilities of
immune cells to target and more effectively fight disease.
 
     Another key component of gene therapy is the methodology used to introduce
therapeutic genes into cells. Whether ex vivo or in vivo, the insertion of genes
into cells is typically accomplished using reagents known as vectors. The role
of vectors is to deliver the gene to the target cell, in order to allow the
production of a specific protein. Depending upon the type of gene and its
delivery site in the cell, the expressed protein may remain within the cell for
intracellular effect, travel to the cell membrane to exert a cell-surface
effect, or be secreted into the bloodstream to provide a systemic effect.
 
     Different types of vectors are needed for multiple gene therapy products,
and the appropriateness of a specific vector is based on the disease indication,
safety considerations, production efficiencies, disease site and other factors.
Certain viruses, because of their natural ability to insert genes into cells,
have proven to be particularly efficient vectors and can be genetically modified
to eliminate inherent disease-causing properties. Engineered viruses may
potentially have selective capabilities for targeting the delivery of genes into
specific cell types and specific regions within the cells. To date, Cell Genesys
has focused its gene delivery efforts primarily on the development and use of
viral vector systems, including adenoviral, adeno-associated viral, lentiviral
and retroviral vectors.
 
PRODUCT DEVELOPMENT
 
     Cell Genesys' strategic objective is to develop and commercialize ex vivo
and in vivo gene therapies to treat major, life-threatening diseases and
disorders. Toward this end, Cell Genesys is genetically modifying selected cell
types, using patient-specific or more broadly applicable treatment approaches,
to impart disease-fighting capabilities that are not possible with conventional
therapeutic agents.
 
Clinical Programs
 
     OVERVIEW OF GVAX(TM) CANCER VACCINE PROGRAM. GVAX(TM) cancer vaccine is a
treatment vaccine, not a preventative, designed to stimulate the patient's
overall immune system to effectively fight cancer. This program, was obtained by
Cell Genesys as part of its acquisition of Somatix Therapy Corporation in 1997.
The GVAX(TM) cancer vaccine is composed of tumor cells which are genetically
modified to secrete an immune-stimulating protein, granulocyte-macrophage colony
stimulating factor (GM-CSF), and then are lethally irradiated for safety.
Administration of the resulting product involves injecting the genetically
modified, irradiated cells into the patient. The goal is to stimulate an
anti-tumor immune response that targets and destroys tumor cells which persist
or recur following surgery, radiation therapy and other forms of cancer
treatment. Cell Genesys is currently testing two configurations of its
second-generation GVAX(TM) cancer vaccine in human clinical studies, a
non-patient-specific format in prostate cancer and a patient-specific format in
lung cancer and melanoma. Phase I results from an earlier, first-generation
GVAX(TM) vaccine substantiated the potential of the patient-specific treatment
approach. Among patients with advanced
 
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metastatic melanoma, 11 of 16 patients in whom biopsies were possible
demonstrated potent antitumor immunity. The evidence included dense infiltration
of immune cells into metastatic tumors, detection of antitumor T cells and
antibodies specific to melanoma, and destruction of tumor blood vessels.
 
     GVAX(TM) VACCINE FOR PROSTATE CANCER. This product candidate is comprised
of an "allogeneic" (non-patient specific) vaccine which employs prostate cancer
cell lines that have been genetically modified with GM-CSF and irradiated for
safety. The Company's plan is to develop and manufacture this potential product
as an "off-the-shelf" pharmaceutical for use after surgery or radiation therapy
for the primary cancer. In ongoing Phase I/II studies, prostate cancer patients
who have rising PSA levels indicative of recurrent disease are receiving the
prostate cancer GVAX(TM) vaccine by intradermal injection. The objective of
these initial trials is to conduct a preliminary evaluation of the safety and
activity of the product. Interim results of the initial Phase I/II trial,
conducted at Johns Hopkins Medical Institutions in 21 patients, were reported in
late 1998. These results indicated that the treatment was safe and well
tolerated and that it resulted in antitumor effects as measured by blood levels
of PSA. Disease stabilization and a decrease in rising PSA levels were observed
in 11 of 15 (73 percent) patients then evaluable at three months following the
vaccine treatment. Two patients experienced a greater than 50 percent decrease
in PSA levels, in one case continuing after eight months. The Company
anticipates that further results from this initial trial will be reported during
1999. Based on the data from this initial trial, Cell Genesys has initiated an
expanded Phase I/II trial of prostate cancer GVAX(TM) to optimize the dose and
treatment regimen and is planning an additional study in men who have failed
hormone treatment for prostate cancer. Both of these studies will include
approximately 40 patients and will be conducted at Johns Hopkins Medical
Institutions (Baltimore, MD), University of California, San Francisco, and PRN
Research, Inc. (Dallas, TX).
 
     GVAX(TM) VACCINES FOR LUNG CANCER AND MELANOMA. This product candidate is
comprised of an "autologous" (patient-specific) vaccine which employs cancer
cells obtained from individual patients. After surgical removal of a patient's
tumor, the vaccine is prepared by genetically modifying the cells to secrete
GM-CSF and irradiating them for safety. The production process involves an
adenoviral gene delivery system that allows overnight preparation of the vaccine
at the hospital. The vaccine is injected into the patient with the intent of
stimulating an immune response against the patient's own tumor cells. This form
of GVAX(TM) could potentially be commercialized by Cell Genesys as a gene
therapy "kit" for use by hospitals to produce vaccines on a patient-by-patient
basis. Phase I/II clinical trials are in progress for lung cancer and melanoma
at Dana-Farber Partners Cancer Care, Harvard Medical School (Boston, MA).
Approximately 25 lung cancer patients and 25 melanoma patients are participating
in the clinical trials. The company anticipates that results from these trials
will be reported during 1999.
 
     Cell Genesys' GVAX(TM) cancer vaccines are novel therapies which must
undergo rigorous human testing regulated by the FDA. There is no assurance that
either configuration of GVAX(TM) will be proven safe or efficacious, or if
approved, that either configuration can be successfully commercialized. Although
preliminary results reported to date from Cell Genesys' Phase I/II clinical
testing of GVAX(TM) vaccine for prostate cancer are encouraging, and the therapy
appears to be both safe and well tolerated by patients, there can be no
assurance that this therapy will be tolerated over an extended period of time or
that the clinical efficacy of this therapy will be demonstrated. There also can
be no assurance that Phase I/II studies of GVAX(TM) vaccines for the treatment
of lung cancer or melanoma will demonstrate clinical efficacy. Any conclusion as
to whether the Company's GVAX(TM) cancer vaccines can potentially play a role in
the treatment of prostate cancer, lung cancer or melanoma will be based on both
the results of ongoing Phase I/II clinical trials as well as future Phase II and
Phase III studies.
 
     T CELL GENE THERAPY FOR HIV INFECTION. Human immunodeficiency virus ("HIV")
is the virus which infects the human immune system and causes AIDS. A number of
antiviral drugs have been approved by the U.S. Food and Drug Administration
("FDA") to inhibit replication of HIV in infected individuals and thereby slow
the spread of infection throughout the immune system. However, none of these
antiviral drugs is able to kill HIV-infected cells and eliminate persistent
sites of infection with the virus. Furthermore, AIDS patients undergoing
long-term therapy may become drug-resistant, and extensive evidence now shows
that the virus reappears when drug resistance occurs, or within a short period
following the discontinuation of antiviral therapy.
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     Cell Genesys' T cell gene therapy for HIV infection involves genetically
modifying the patient's own immune T cells to impart the ability to recognize
and destroy HIV-infected cells potentially eliminating reservoirs of virus that
persist despite antiviral drugs. Specifically, killer T cells (CD8 cells) and
helper T cells (CD4 cells) are collected from the patient's blood via a standard
blood bank procedure (apheresis) and are genetically modified with the CD4-zeta
gene, which encodes a novel cell surface receptor that targets a viral protein
present on HIV-infected cells. The genetically modified T cells are then
expanded in number and infused into the patient periodically in an outpatient
clinical setting, with the goal of reducing the number of HIV-infected cells.
Cell Genesys has conducted Phase II clinical studies of T cell gene therapy for
HIV infection in combination with antiviral drugs. These studies are being
conducted at multiple clinical sites including the University of California at
San Francisco, Massachusetts General Hospital, University of California at Los
Angeles, the AIDS Community Research Consortium, and ViRx, Inc. Cell Genesys'
initial Phase II trial evaluated patients who were receiving antiretroviral drug
therapy but still had detectable HIV in their blood. Clinical data reported for
this initial trial showed no treatment-related safety problems and successfully
demonstrated persistence of the genetically modified T cells in the circulatory
system for at least 100 days following cell infusion. Preliminary evidence of
potential antiviral activity included a trend toward decreasing levels of HIV in
gastrointestinal lymph tissue, a primary reservoir for HIV-infected cells, in
four of five patients tested. A second multi-center Phase II trial of the
Company's AIDS gene therapy is being conducted in approximately 40 patients who
have no detectable virus in their blood while receiving antiretroviral drugs.
Results from this trial are expected to be available during 1999.
 
     Cell Genesys' AIDS gene therapy is a novel therapy which must undergo
rigorous human testing regulated by the FDA. There is no assurance that the
therapy will be proven safe or efficacious, or if approved, that the therapy can
be successfully commercialized. Although there have been no treatment-related
side effects to date, there can be no assurance that this therapy will be
tolerated by the patient over an extended period of time or that the clinical
efficacy of this therapy will be demonstrated. Any conclusion as to whether the
Company's gene therapy can potentially play a role in the treatment of AIDS will
be based on the results of ongoing Phase II clinical trials as well as future
Phase III trials.
 
     T CELL GENE THERAPY FOR CANCER. Cell Genesys has also conducted research
and development of T cell gene therapy for the treatment of specific types of
cancer. During 1998, the Company completed Phase I/II testing of T cell gene
therapy for colon cancer. The patient-specific treatment involved genetically
modifying the patient's own T cells with a proprietary therapeutic gene,
CC49-zeta, which targets TAG-72, a protein present on many types of cancer
cells. Data from both an intravenous and intrahepatic infusion study of T cell
gene therapy, in patients with advanced colon cancer with liver metastases,
indicated that the treatment could be safely administered in an outpatient
setting and that the genetically modified T cells persisted and trafficked to
the liver. No antitumor activity was observed in these studies. Cell Genesys
currently plans to establish collaborative arrangements before proceeding with
additional studies of T cell cancer gene therapy.
 
Preclinical Programs
 
     During 1998, Cell Genesys conducted preclinical studies in three in vivo
gene therapy programs including hemophilia, Parkinson's disease and
cardiovascular disorders. Findings to date have been encouraging, and the
Company is seeking corporate partners to support the next stages of product
development.
 
     HEMOPHILIA GENE THERAPY. Cell Genesys scientists and academic collaborators
have evaluated gene therapy using an adeno-associated viral (AAV) vector to
deliver the factor IX gene into the liver of both small and large animals with
hemophilia. Factor IX is deficient in one type of hemophilia referred to as
hemophilia B. Liver cells are the primary site for production of blood clotting
proteins. With successful gene therapy, liver cells may be modified to provide a
missing blood clotting protein. In the preclinical studies of hemophilia gene
therapy, a single gene therapy injection led to stable production of the factor
IX protein for the duration of study: seventeen months in mice and eight months
in dogs. In the treated dogs, the time required to form blood clots was reduced,
and there was a greater than 90 percent reduction in bleeding episodes in the
large animals. No immune response against the gene therapy was observed.
 
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     PARKINSON'S DISEASE GENE THERAPY. Cell Genesys scientists and academic
collaborators have also evaluated AAV-based gene therapy in Parkinson's disease,
a neurodegenerative condition affecting brain cells responsible for movement and
speech. Currently, the drug, L-dopa is commonly prescribed as a treatment for
Parkinson's disease. In a study in mice exhibiting certain Parkinson's symptoms,
an AAV gene delivery system was used to deliver the genes required for the
production of L-dopa to specific regions of the brain where L-dopa production
could be detected throughout the one-year observation period. Additionally,
after a single gene therapy injection, treated mice could survive during the
study without daily L-dopa treatments.
 
     CARDIOVASCULAR GENE THERAPY. Cell Genesys' cardiovascular gene therapy
program is focused on the development of gene therapy to prevent or treat
restenosis, a complication of thrombolysis and angioplasty, a surgical procedure
employed to open blood vessel blockages and restore blood flow in patients with
cardiovascular disease. Restenosis occurs when blood vessel lining cells migrate
to and proliferate at such treatment sites thereby constricting blood flow. Cell
Genesys believes that gene therapy represents a potential approach to treating
or preventing restenosis by delivering genes to blood vessel lining cells that
can inhibit or slow the proliferation of the blood vessel cells associated with
restenosis. Medical procedures are currently available to achieve the
site-specific delivery of these genes to appropriate sites in blood vessels.
Cell Genesys scientists and academic collaborators have demonstrated that
adenoviral gene delivery systems can be used to deliver genes to blood vessel
lining cells in studies in rabbits and that certain genes can reduce the
proliferation of cells that contribute to restenosis.
 
PROPRIETARY GENE THERAPY TECHNOLOGIES
 
     Successful gene therapy -- ex vivo or in vivo -- depends on an effective
combination of therapeutic genes and vectors, the gene delivery technologies
used to transfer genes into cells. Cell Genesys' proprietary gene delivery
technologies include adenoviral, adeno-associated viral (AAV), lentiviral and
retroviral vectors. This broad portfolio of vectors enhances the number of gene
therapy applications that the Company and its collaborators can pursue.
 
     The selection of a specific vector is based on the disease indication,
safety considerations, production efficiencies, disease site and other factors.
Adenoviral vectors deliver larger genes into dividing or nondividing cells, and
they are currently being used ex vivo in human clinical studies of GVAX(TM)
vaccine for lung cancer and melanoma. Adenoviral vectors are also being used in
vivo in preclinical studies to deliver genes to cardiovascular cells.
Adeno-associated viral (AAV) vectors deliver smaller genes to certain
nondividing cells, including muscle, liver, nerve and blood vessel cells.
Effective in vivo gene delivery using the AAV vector has been achieved in the
Company's hemophilia and Parkinson's disease preclinical programs. Lentiviral
vectors deliver larger genes to dividing and nondividing cells, including nerve,
liver, muscle and bone marrow stem cells. Company scientists have recently
described that the improved third-generation lentiviral vectors, a potential
candidate for human clinical studies, which employ a new safety mechanism which
can prevent the vector from functioning should it recombine with infectious
virus already present in the individual receiving the gene therapy treatment.
Finally, retroviral vectors are suitable for delivering genes ex vivo to
dividing cells such as immune system T cells and are currently being employed in
the Company's clinical programs for T cell AIDS gene therapy.
 
     Cell Genesys believes that its broad portfolio of vectors position the
company as an attractive partner for biotechnology and pharmaceutical companies
as well as academic institutions which have proprietary genes with potential in
gene therapy. Cell Genesys expects to enter collaborations with such companies
or institutions to license genes for product development. One example of this
strategy is the worldwide license and research collaboration which Cell Genesys
signed in 1998 with Mitotix, Inc. under which Cell Genesys has exclusive rights
to use cell cycle inhibitor genes for the development of gene therapy products
for cardiovascular disease and other indications.
 
GOVERNMENT REGULATIONS
 
     FDA REGULATION. The activities required before a pharmaceutical agent may
be marketed in the United States begin with preclinical testing. Preclinical
tests include laboratory evaluation of potential products and
 
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animal studies to assess the potential safety and efficacy of the product and
its formulations. The results of these studies and other information must be
submitted to the FDA as part of an investigational new drug application, which
must be reviewed and approved by the FDA before proposed clinical testing can
begin. Clinical trials involve the administration of the investigational new
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with Good
Clinical Practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the
investigational new drug application. Further, each clinical study must be
conducted under the auspices of an independent institutional review board at the
institution at which the study will be conducted. The institutional review board
will consider, among other things, ethical factors and the safety of human
subjects. In addition, certain protocols involving the use of genetically
modified human cells must also be reviewed by the Recombinant Advisory Committee
of the National Institutes of Health.
 
     Typically, clinical testing involves a three-phase process. In Phase I,
clinical trials are conducted with a small number of subjects to determine the
early safety profile and pharmacology of the new therapy. In Phase II, clinical
trials are conducted with groups of patients afflicted with a specific disease
in order to determine preliminary efficacy, optimal dosages and expanded
evidence of safety. In Phase III, large scale, multicenter, comparative clinical
trials are conducted with patients afflicted with a target disease in order to
provide enough data for the statistical proof of efficacy and safety required by
the FDA and others. In the case of products for life-threatening diseases, the
initial human testing is generally done with diseased patients rather than with
healthy volunteers. Since these patients are already afflicted with the target
disease, it is possible that such studies may provide results traditionally
obtained in Phase II trials. These trials are frequently referred to as Phase
I/II trials. Although the preliminary Phase I/II clinical results of Cell
Genesys' GVAX(TM) cancer vaccine and AIDS gene therapy have shown no significant
treatment-related safety problems to date, there can be no assurance that such
therapy or product will be tolerated at higher doses or that the clinical
efficacy of such therapy or product will be demonstrated.
 
     The results of the preclinical and clinical testing, together with
chemistry and manufacturing information, are submitted to the FDA in the form of
a new drug application for a pharmaceutical product, and in the form of a
product license application for a biological product, for approval to commence
commercial sales. In responding to a new drug application or a product license
application, the FDA may grant marketing approvals, request additional
information or further research, or deny the application if it determines that
the application does not satisfy its regulatory approval criteria. Approvals may
not be granted on a timely basis, if at all, or if granted may not cover all the
clinical indications for which Cell Genesys is seeking approval or may contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
 
     OTHER GOVERNMENT REGULATION. In addition to laws and regulations enforced
by the FDA, Cell Genesys is also subject to regulation under the Occupational
Safety and Health Act, the Environmental Protection Act, the Toxic Substances
Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local laws and regulations as Cell Genesys
research and development involves the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds.
 
     Cell Genesys' manufacturing facility for production of clinical quantities
of its products was licensed in 1994 by the California Department of Health
Services. The California Department of Health Services may inspect the facility
annually. Manufacture of clinical quantities of Cell Genesys' products does not
require an FDA license, although the FDA may at any time inspect the facility.
The continued operation of this facility requires compliance with FDA standards
for this type of manufacturing. A separate license from the FDA is required for
commercial manufacturing of any products. During 1995, Cell Genesys completed
construction of a clinical scale manufacturing facility. This facility has been
used to process cells for Cell Genesys' clinical testing of its T cell gene
therapy and additionally is being used to manufacture clinical product for the
company's Phase I/II clinical trials of GVAX(TM) cancer vaccine. Cell Genesys
will consider contract manufacturing for commercial scale requirements in the
future to the extent possible, or expansion of its own facilities if necessary.
 
                                        8
<PAGE>   10
 
CELL GENESYS ASSETS OUTSIDE OF ITS CORE BUSINESS IN GENE THERAPY
 
     MINORITY-OWNED ABGENIX, INC. ("ABGENIX") SUBSIDIARY. Abgenix is developing
antibody therapies for transplantation-associated medical conditions,
inflammation, autoimmune disorders and cancer. Abgenix's core technology
includes strains of transgenic mice capable of generating fully human
antibodies. Cell Genesys formed Abgenix as a separate business subsidiary in
June 1996, contributing $14 million in cash, research, development and
manufacturing technology as well as patents and other intellectual property
specific to the antibody therapy programs. Abgenix completed its public offering
(Nasdaq-AMEX: ABGX) in July 1998. Following the initial public offering, Cell
Genesys' ownership of Abgenix dropped below 50 percent. In a private placement
during November 1998, Cell Genesys sold approximately 1.1 million shares of
Abgenix common stock, thereby reducing its Abgenix ownership to approximately 30
percent. In March, 1999, Abgenix completed the sale of 3 million shares of
common stock in a follow-on offering reducing Cell Genesys' ownership of Abgenix
to approximately 22 percent. The Company may decide to sell additional shares of
Abgenix common stock over time, when appropriate to provide additional funding
for Cell Genesys' gene therapy business.
 
     GENE ACTIVATION TECHNOLOGY. Cell Genesys has developed a novel and
proprietary method for protein production referred to as "gene activation." Gene
activation involves the insertion of genetic regulatory elements at specific
sites in cell chromosomes in proximity to a human gene responsible for the
production ("expression") of a therapeutic protein. Subsequently, the
gene-activated protein could be produced in a cell-based production system. Gene
activation may be applied to therapeutic proteins such as erythropoietin (EPO)
and potentially other proteins and may offer certain advantages. Gene activation
licensing agreements have provided more than $21 million in revenues to Cell
Genesys as of February 1999. Most recently, Cell Genesys executed a license
agreement with Hoechst Marion Roussel in February 1997 for gene-activated EPO
and a second undisclosed protein. The agreement provides for up to $26 million
in milestone payments and fees, in addition to any royalties on future sales of
these two potential gene-activated protein products. As of February 1999, Cell
Genesys had received over $13 million under this license agreement, including a
milestone payment for the 1998 initiation of a Phase III clinical trial for
gene-activated EPO, which Hoechst Marion Roussel is developing in collaboration
with Transkaryotic Therapies, Inc., and a milestone payment for the 1998
granting of a European patent to Cell Genesys for gene activation technology.
 
CORPORATE COLLABORATIONS
 
     PHARMACEUTICAL DIVISION OF JAPAN TOBACCO. In December 1998, Cell Genesys
announced the signing of a worldwide collaboration with the pharmaceutical
division of Japan Tobacco Inc. ("JT") for selected product candidates from the
Company's GVAX(TM) cancer vaccine program. Initially the collaboration will
focus on two targets: prostate cancer and lung cancer. Under the terms of the
agreement, the two parties will share equally in the product development costs
and future profits on a worldwide basis. Cell Genesys will have marketing rights
in North America; JT will have marketing rights in Japan, Taiwan and Korea; and
the two companies will share equally in marketing rights in Europe and the rest
of the world. The agreement provides for committed payments to Cell Genesys of
$12.7 million due at signature and a first anniversary payment of $2.5 million.
Based primarily on the research and development progress with the two GVAX(TM)
products, Cell Genesys could receive up to $27.5 million in research and
development funding in the first three years, and approximately $80 million in
milestone payments if JT continues in the collaboration through the regulatory
approvals of the two products. Additionally, the agreement provides for loans of
up to $30 million to Cell Genesys for Phase III development costs if JT
continues in the collaboration into Phase III trials. The parties have also
agreed to support an ongoing clinical trial of GVAX(TM) for kidney cancer in
Japan which is the first clinical trial of cancer gene therapy in Japan. If the
parties agree to proceed with the development of this third GVAX(TM) product,
Cell Genesys will be eligible to receive additional funding in the form of
research and development reimbursements and other payments to be agreed upon at
a later date. Of the above payments to be received by Cell Genesys,
approximately $45 million thereof are expected during the first two years of the
agreement. None of the payments involve an additional equity investment in Cell
Genesys by JT, which currently owns approximately 3 percent of the Company. This
is the second collaboration agreement between
 
                                        9
<PAGE>   11
 
Cell Genesys and JT. The first collaboration, signed in 1991, funded the
successful development of the fully human monoclonal antibody technology
employed by Abgenix.
 
     HOECHST MARION ROUSSEL. In 1995, Cell Genesys signed a worldwide agreement
with Hoechst Marion Roussel for the development and commercialization of Cell
Genesys' AIDS gene therapy program. Under the agreement, Cell Genesys is leading
product development in North America and would provide worldwide manufacturing
services. Hoechst Marion Roussel has worldwide marketing rights to AIDS gene
therapy. In North America, Cell Genesys will participate in profit sharing and
has retained a co-promotion option. Elsewhere in the world, Cell Genesys will
receive royalties. Cell Genesys has retained worldwide rights for any cancer
gene therapy. In addition to AIDS gene therapy, Hoechst Marion Roussel also has
preferential rights for up to two additional T cell gene therapy product
candidates that, if exercised, would result in additional payments to Cell
Genesys. The collaboration also provides for consolidation of intellectual
property related to Cell Genesys' gene therapy technology through a
cross-licensing agreement among Cell Genesys, Hoechst Marion Roussel and its
licensor in this field, Massachusetts General Hospital. Through December 1998,
Cell Genesys has received approximately $63.6 million under its agreement with
Hoechst Marion Roussel including a $20 million equity investment in Cell
Genesys' common stock representing approximately 6 percent of the outstanding
Cell Genesys common stock as of December 31, 1998. There can be no assurance
that Cell Genesys will receive any further progress-dependent funding from
Hoechst Marion Roussel pursuant to this arrangement, or that Hoechst Marion
Roussel will exercise its warrant to purchase additional shares of Cell Genesys'
common stock.
 
     OTHER COLLABORATIONS. Cell Genesys entered into two agreements in 1998
relating to its cardiovascular technology. The first was a worldwide license and
research collaboration with Mitotix, Inc. under which Cell Genesys has exclusive
rights to use certain cell cycle inhibitor genes for the development of gene
therapy products to treat cardiovascular disease and other indications. The
agreement also covers a research collaboration in which Mitotix scientists are
conducting research to enhance cell cycle inhibitors for Cell Genesys'
development of these products. Additionally, Cell Genesys signed a research
collaboration agreement with Collateral Therapeutics, Inc. Under this agreement,
Collateral is evaluating Cell Genesys' second-generation recombinant adenoviral
vectors in preclinical studies of cardiovascular gene therapy.
 
GENE THERAPY PATENTS AND TRADE SECRETS
 
     The patent positions of pharmaceutical and biotechnology firms, including
Cell Genesys, are generally uncertain and involve complex legal and factual
questions. Cell Genesys currently has approximately 150 issued or granted
patents and more than 300 pending applications. While Cell Genesys is currently
prosecuting its patent applications, it cannot be certain whether any given
application will result in the issuance of a patent or, if any patent is issued,
whether it will provide significant proprietary protection or will be
invalidated. Because patent applications in the United States are confidential
until patents are issued and publication of discoveries in the scientific or
patent literature tends to lag behind actual discoveries by several months, Cell
Genesys cannot be certain that it was the first creator of inventions covered by
pending patent applications or that it was the first to file patent applications
for such inventions.
 
     The commercial success of the Company will also depend in part on not
infringing the patents or proprietary rights of others and not breaching
licenses granted to the Company. The Company may be required to obtain licenses
to third party technology or genes necessary to conduct its business. Any
failure by the Company to license at reasonable cost any technology or genes
required to commercialize its technologies or products may have a material
adverse effect on the Company's business, results of operations, financial
condition or cash flow.
 
     Litigation, which could result in substantial cost to the Company, may also
be necessary to enforce any patents issued to the Company or to determine the
scope and validity of other parties' proprietary rights. To determine the
priority of inventions, interference proceedings are frequently declared by the
U.S. Patent Office that could result in substantial costs to the Company and may
result in an adverse decision as to the priority of the Company's inventions.
Cell Genesys is currently involved in interference and/or opposition proceedings
with regard to: (i) gene activation technology, (ii) ex vivo gene therapy, and
(iii) chimeric receptor
 
                                       10
<PAGE>   12
 
technology employed in the company's T cell gene therapy program. The outcome of
these proceedings cannot be predicted, but are not expected to have a material
adverse effect on the Company's intellectual property position or its business.
The Company may be involved in other interference and/or opposition proceedings
in the future. The Company believes there will continue to be significant
litigation in the industry regarding patent and other intellectual property
rights.
 
     The Company also relies on unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position. No assurance can be given that others will
not independently develop substantially equivalent proprietary information and
techniques, or otherwise gain access to the Company's trade secrets or disclose
such technology, or that the Company can meaningfully protect its rights to its
unpatented trade secrets.
 
     Cell Genesys requires its employees and consultants to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. These agreements provide that all confidential
information developed by or made known to an individual during the course of the
employment or consulting relationship generally must be kept confidential. In
the case of employees, the agreements provide that all inventions conceived by
the individual, while employed by the Company, relating to the Company's
business are the Company's exclusive property. These agreements may not provide
meaningful protection for the Company's trade secrets in the event of
unauthorized use or disclosure of such information.
 
HUMAN RESOURCES
 
     As of December 31, 1998, Cell Genesys employed 118 persons, of whom 18 hold
Ph.D. degrees and 3 hold M.D. degrees. Approximately 89 employees are engaged in
research and development, and 29 support business development, intellectual
property, finance and other administrative functions. Cell Genesys' senior
management and directors have had prior product development experience in the
biotechnology and pharmaceutical industries.
 
     Cell Genesys' success will depend in large part upon its ability to attract
and retain employees. Cell Genesys faces competition in this regard from other
companies, research and academic institutions, government entities and other
organizations. Cell Genesys believes that it maintains good relations with its
employees.
 
EXECUTIVE OFFICERS
 
     The executive officers of Cell Genesys and their ages as of December 31,
1998 are as follows:
 
<TABLE>
<CAPTION>
                NAME                   AGE                  POSITION WITH CELL GENESYS
                ----                   ---                  --------------------------
<S>                                    <C>   <C>
Stephen A. Sherwin, M.D. ............  50    Chairman of the Board, President and Chief Executive
                                             Officer
Matthew J. Pfeffer...................  41    Chief Financial Officer
Dale G. Ando M.D. ...................  45    Vice President -- Clinical Research and Regulatory
                                             Affairs
David F. Broad, Ph.D. ...............  45    Vice President -- Development and Manufacturing
Mitchell H. Finer, Ph.D. ............  40    Vice President -- Research
Bruce A. Hironaka....................  44    Vice President -- Corporate Development
Christine McKinley...................  45    Vice President -- Human Resources
</TABLE>
 
     Dr. Sherwin has served as the president and chief executive officer and a
director of Cell Genesys since March 1990. In March 1994, Dr. Sherwin was
elected to the additional position of chairman of the board of directors of Cell
Genesys. From 1983 to 1990, Dr. Sherwin held various positions at Genentech,
Inc., a biotechnology company, most recently as vice president of clinical
research. Prior to 1983, Dr. Sherwin held various positions on the staff of the
National Cancer Institute. Dr. Sherwin also currently serves as an associate
clinical professor of medicine at the University of California, San Francisco, a
position he has held since 1986. Dr. Sherwin currently serves as chairman of the
board of Abgenix, Inc. and is also a director of the California Healthcare
Institute, a non-profit institution. Dr. Sherwin holds a B.A. in biology from
Yale University and an M.D. from Harvard Medical School.
                                       11
<PAGE>   13
 
     Mr. Pfeffer joined Cell Genesys in June 1996 as director of finance and was
appointed chief financial officer in September 1998. From 1989 to 1996, Mr.
Pfeffer held a variety of positions at Diasonics Ultrasound, Inc., most recently
as corporate controller. From 1987 to 1989, he was in the finance department at
ComputerLand Corporation. From 1981 to 1987, Mr. Pfeffer was in the audit and
consulting groups at Price Waterhouse, where he obtained his CPA certificate.
Mr. Pfeffer graduated with a B.S. degree in business administration from the
University of California, Berkeley.
 
     Dr. Ando, vice president, clinical research and regulatory affairs, joined
Cell Genesys in July 1997. Dr. Ando brings over nine years of clinical
development and research experience to Cell Genesys, including three years at
Cetus Corporation and six years at Chiron Corporation. Most recently he has
served as director of clinical gene therapy for Chiron Technologies at Chiron.
His experience includes clinical development of biological therapeutics and gene
therapy for both cancer and HIV infection. Dr. Ando began his career as a
faculty member at UCLA medical school in the division of rheumatology. He
received his M.D. and Internal Medicine training at the University of Michigan
and a B.S. in Chemistry from Stanford University.
 
     Dr. Broad joined Cell Genesys in 1993 and is currently vice president of
development and manufacturing. His prior experience in biological product
development includes more than six years at Celltech Limited, where he
specialized in cell-based manufacturing systems for therapeutic proteins and
antibodies. Dr. Broad also served as a senior development scientist at Beecham
Pharmaceuticals. He received his B.S. and Ph.D. in microbiology from the
University of London and served as a postdoctoral research fellow in the
Microbiology Section of the School of Pharmacy, University of London.
 
     Dr. Finer, vice president, research of Cell Genesys, joined Cell Genesys in
1990, serving in a variety of scientific positions. He has provided scientific
leadership to both the ex vivo and in vivo gene therapy programs at Cell
Genesys. Prior to joining Cell Genesys, Dr. Finer was an American Cancer Society
postdoctoral fellow at the Whitehead Institute for Biomedical Research. He
received his B.A. in biochemistry, microbiology and immunology from the
University of California, Berkeley and his Ph.D. in biochemistry and molecular
biology from Harvard University. He served as a postdoctoral fellow at the
Whitehead Institute of the Massachusetts Institute of Technology.
 
     Mr. Hironaka, vice president, corporate development, joined Cell Genesys in
1994. From 1992 to 1994, Mr. Hironaka was with Aviron, a biotechnology company
focusing on viral vaccines, most recently as vice president responsible for
business development, finance, human resource and operations. Previously, he was
a consultant with McKinsey & Company, a leading international management
consulting firm. Mr. Hironaka received an A.B. in economics from the University
of California, Berkeley and holds an M.B.A. and J.D. from Stanford University.
 
     Ms. McKinley, vice president, human resources joined Cell Genesys in l994.
From 1986 to 1994, she was responsible for human resources at Nellcor Puritan
Bennett, Inc. Previously, Ms. McKinley also worked at Genentech, Inc. for seven
years in various human resource positions. She received a B.A. in psychology
from the University of California, Santa Barbara.
 
                                       12
<PAGE>   14
 
SCIENTIFIC ADVISORY BOARD
 
     Cell Genesys has created a prominent scientific advisory board that
includes several leaders in the gene therapy field. The board consists of the
following individuals:
 
<TABLE>
<CAPTION>
                   NAME                                         SCIENTIFIC POSITION
                   ----                                         -------------------
<S>                                         <C>
Fred H. Gage, Ph.D. ......................  Professor of Neuroscience at The Salk Institute for
                                            Biological Studies
Ronald N. Germain, M.D., Ph.D. ...........  Deputy Chief of Laboratory of Immunology
                                            Chief, Lymphocyte Biology Section
                                            National Institutes of Health
                                            National Institute of Allergy and Infectious Diseases
Jordan U. Gutterman, M.D. ................  Chairman, Clinical Immunology and Biological Therapy M.D.
                                            Anderson Cancer Center
Philip A. Hieter, Ph.D. ..................  Professor of Medical Genetics
                                            University of British Columbia
                                            Center for Molecular Medicine & Therapeutics
Raju S. Kucherlapati, Ph.D. ..............  Kramer Professor
                                            Chairman of the Department of Molecular Genetics
                                            Albert Einstein College of Medicine
Richard C. Mulligan, Ph.D. ...............  Investigator, Howard Hughes Medical Institute Children's
                                            Hospital;
                                            Mallinckrodt Professor of Genetics
                                            Harvard Medical School
John T. Potts, Jr., M.D. .................  Director of Research
                                            Massachusetts General Hospital; Physician-in-Chief Emeritus
                                            Jackson Distinguished Professor of Clinical Medicine
                                            Harvard Medical School
Thomas E. Shenk, Ph.D. ...................  Elkins Professor
                                            Chairman of the Department of Molecular Biology
                                            Investigator, Howard Hughes Medical Institute
                                            Professor, Princeton University
Inder M. Verma, Ph.D. ....................  Professor of Molecular Biology and Virology
                                            The Salk Institute
Arthur Weiss, M.D., Ph.D. ................  Chief, Rheumatology Division
                                            Ephraim P. Engleman Distinguished Professor of Rheumatology
                                            Investigator, Howard Hughes Medical Institute
                                            University of California, San Francisco
</TABLE>
 
ITEM 2. PROPERTIES
 
     Cell Genesys occupies administrative offices and research laboratories
covering approximately 80,000 square feet of space in a research and development
office park located in Foster City, California. Cell Genesys' lease of these
facilities expires in 2002, with an option to renew the lease for an additional
four-year term. Cell Genesys' laboratories are equipped for biochemical and
tissue culture research and development. Additionally, Cell Genesys has
constructed a facility licensed for Good Manufacturing Practices ("GMP")
manufacturing of clinical quantities of Cell Genesys' products.
 
     In addition, Cell Genesys leases certain other facilities, including
facilities assumed as part of its acquisition of Somatix Therapy Corporation in
1997. These facilities are not currently occupied by Cell
 
                                       13
<PAGE>   15
 
Genesys, but are largely sublet to other companies under sub-leasing
arrangements. Cell Genesys also retains approximately 25,000 square feet of GMP
manufacturing space in Alameda, Calif. available for manufacturing of future
products. The Company believes its facilities are in good repair and are
adequate for its current needs.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Not applicable.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not applicable.
 
                                       14
<PAGE>   16
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The Cell Genesys common stock is traded in the over-the-counter market and
is quoted on The Nasdaq-AMEX National Market under the symbol "CEGE." The
following table sets forth, for the periods indicated, the high and low bid
prices per share of Cell Genesys common stock as reported by The Nasdaq-AMEX
National Market. Cell Genesys did not pay any cash dividends with respect to the
Cell Genesys common stock during any of the periods indicated below.
 
<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    -----
<S>                                                           <C>       <C>
Calendar Year 1997
  First Quarter.............................................  $ 9.44    $6.13
  Second Quarter............................................  $ 6.25    $4.50
  Third Quarter.............................................  $ 7.88    $4.94
  Fourth Quarter............................................  $11.50    $7.19
Calendar Year 1998
  First Quarter.............................................  $ 8.63    $6.19
  Second Quarter............................................  $ 9.00    $6.50
  Third Quarter.............................................  $ 8.94    $3.00
  Fourth Quarter............................................  $ 6.00    $2.69
Calendar Year 1999
  First Quarter (through 3/15/99)...........................  $ 7.06    $5.69
</TABLE>
 
     As of March 15, 1999, there were approximately 11,556 holders of record of
the Company's common stock. On March 15, 1999 the last reported sales price on
the Nasdaq-AMEX National Market for the common stock was $5.69. The market for
the Company's common stock is highly volatile.
 
                                       15
<PAGE>   17
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                  ------------------------------------------------------
                                                    1998        1997        1996       1995       1994
                                                  ---------   ---------   --------   --------   --------
                                                          (in thousands, except per share data)
<S>                                               <C>         <C>         <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue under collaborative
  agreements -- principally from related
  parties.......................................  $  24,146   $  23,806   $ 22,505   $ 13,822   $  9,416
Operating expenses:
  Research and development......................     37,932      36,830     27,587     25,879     21,540
  General and administrative....................      8,204      10,659      7,469      5,670      5,316
  Charge for purchased in-process technology....         --      72,270         --         --         --
  Restructuring charge related to acquisition...         --       6,576         --         --         --
  Charge for cross-license and settlement
    (includes $11,250 equity in losses of
    Xenotech joint venture associated with
    cross-license and settlement)...............         --      22,500         --         --         --
                                                  ---------   ---------   --------   --------   --------
         Total operating expenses...............     46,136     148,835     35,056     31,549     26,856
                                                  ---------   ---------   --------   --------   --------
Operating loss..................................    (21,990)   (125,029)   (12,551)   (17,727)   (17,440)
Equity in loss of Abgenix.......................     (2,917)         --         --         --         --
Gain on sale of stock of Abgenix................      7,020          --         --         --         --
Interest income, net............................      1,567       1,500      3,277      2,739      2,896
                                                  ---------   ---------   --------   --------   --------
Loss before minority interest...................    (16,320)  $(123,529)  $ (9,274)  $(14,988)  $(14,544)
Loss attributed to minority interest............      4,192          --         --         --         --
                                                  ---------   ---------   --------   --------   --------
Net loss........................................    (12,128)  $(123,529)  $ (9,274)  $(14,988)  $(14,544)
Deemed dividend to preferred stockholders.......      1,088          --         --         --         --
                                                  ---------   ---------   --------   --------   --------
Net loss attributed to common stock.............  $ (13,216)  $(123,529)  $ (9,274)  $(14,988)  $(14,544)
                                                  =========   =========   ========   ========   ========
Basic and diluted net loss per common share.....  $   (0.46)  $   (5.33)  $  (0.57)  $  (1.07)  $  (1.07)
                                                  =========   =========   ========   ========   ========
Basic and diluted weighted average common shares
  outstanding...................................     28,607      23,172     16,373     14,025     13,630
                                                  =========   =========   ========   ========   ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                  ------------------------------------------------------
                                                    1998        1997        1996       1995       1994
                                                  ---------   ---------   --------   --------   --------
                                                                      (in thousands)
<S>                                               <C>         <C>         <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
  investments...................................  $  52,874   $  88,816   $ 85,584   $ 81,929   $ 70,772
Working capital.................................     44,031      51,804     64,137     76,098     67,923
Total assets....................................     65,799     106,887     99,809     94,120     82,162
Total current liabilities.......................      9,964      39,955     22,612      7,007      4,707
Long-term obligations...........................      4,860      11,082      6,133      7,720      5,126
Redeemable convertible preferred stock..........     12,083      19,817         --         --         --
Accumulated deficit.............................   (175,456)   (179,563)   (56,270)   (46,459)   (32,405)
Stockholders' equity............................     38,892      18,641     71,064     79,393     72,329
</TABLE>
 
                                       16
<PAGE>   18
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     Statements made in this Item other than statements of historical fact,
including statements about the Company's and its subsidiary's clinical trials,
product pipelines, corporate partnerships, licenses and intellectual property,
are forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
and are subject to a number of uncertainties that could cause actual results to
differ materially from the statements made, including risks associated with the
success of research and product development programs, patents, proprietary
technology and corporate partnerships. Reference is made to discussions about
risks associated with product development programs, intellectual property and
other risks which may affect the Company under "Risk Factors" below. The Company
does not undertake any obligation to update forward-looking statements.
 
OUTLOOK
 
     Since its inception in April 1988, Cell Genesys, Inc. has focused its
research and product development efforts on human disease therapies which are
based on innovative gene modification technologies. The Company's strategic
objective is to develop and commercialize in vivo and/or ex vivo gene therapies
to treat major, life-threatening diseases including cancer and AIDS. Cell
Genesys' clinical programs include GVAX(TM) cancer vaccines in Phase I/II
studies to treat specific types of cancer, and T cell gene therapy for AIDS,
which is undergoing Phase II testing. GVAX(TM) vaccines for prostate cancer and
for lung cancer are being developed through a worldwide collaboration with the
pharmaceutical division of Japan Tobacco. AIDS gene therapy is being developed
through a worldwide collaboration with Hoechst Marion Roussel, Inc. In addition,
Cell Genesys has preclinical programs, which are evaluating potential gene
therapies for cancer, cardiovascular disorders, hemophilia and Parkinson's
disease. The Company also has assets outside of its core business which can be
used to help maintain financial strength while product candidates are under
development. These assets include Cell Genesys' minority ownership of Abgenix,
which is focused on the development and commercialization of antibody therapies
and a licensing program in gene activation technology.
 
     The Company acquired Somatix Therapy Corporation ("Somatix") during 1997
and completed the integration of Somatix and Cell Genesys during 1997 and 1998,
having prioritized the most promising programs and having significantly reduced
overall expenses of the combined businesses. At the end of the third quarter of
1998, encouraging data from Cell Genesys' clinical trials prompted the Company
to implement further restructuring to focus its resources on the advancement of
its clinical-stage programs and to reduce operating expenses by approximately 30
percent, or $10 million per year. The restructuring was accomplished through a
combination of reallocation of resources on more advanced clinical-stage
programs, elimination of certain fixed costs and an approximate 20 percent
reduction in the number of regular employees. Prior to this reduction, Cell
Genesys employed approximately 140 individuals. The Company's plan is to advance
preclinical-stage programs to a point where they can then be supported primarily
through corporate partnerships.
 
     Cell Genesys believes that gene therapies are likely to be developed on a
continuum, progressing from ex vivo (modification of cells outside the patient's
body for injection as therapy) to in vivo (modification of cells within the
patient's body to provide therapy). The Company's goal is to emphasize
"off-the-shelf" products that enable gene therapy to be provided in out-patient
settings. These potentially include both non-patient-specific therapies, which
could be vialed pharmaceuticals for direct administration, and patient-specific
gene therapy products, which could be packaged as "kits" for overnight cell
processing at clinical laboratories.
 
     Ex vivo gene therapies currently are being evaluated by Cell Genesys in
Phase I/II human clinical studies. These include studies of GVAX(TM) therapeutic
vaccines for specific types of cancer and studies of T cell AIDS gene therapy.
All of these gene therapies are designed to impart new disease-fighting
capabilities to the patient's immune system, in order to enhance an immune
response against diseased cells. During 1998, Phase I/II human trials evaluating
the GVAX(TM) vaccine for prostate cancer demonstrated antitumor effects as
measured by levels of prostate specific antigen (PSA), a cancer "marker." As a
result, the Company initiated additional GVAX(TM) clinical trials for prostate
cancer. Phase I/II trials for lung cancer and
 
                                       17
<PAGE>   19
 
melanoma are continuing, and the patients are now being evaluated. In Phase II
trials of T cell gene therapy for AIDS, data demonstrated safety in patients
with persistent HIV in their bloodstream as well as preliminary indications of
potential antiviral activity.
 
     In vivo gene therapies are at the preclinical stage of development at Cell
Genesys. Treatment strategies may target cells that typically cannot be removed
from the body for external processing and therefore are modified within the
body. With in vivo gene therapy, the treatment goals include stimulating
targeted cells to produce a protein or other substance needed to normalize key
biological processes, or otherwise inhibiting specific disease processes. In
1998, the Company's preclinical research focused on studies of gene therapy in
animal models for hemophilia and Parkinson's disease, and on gene therapy
strategies to overcome restenosis, a serious complication of angioplasty for
cardiovascular disease. For example, in hemophilia studies, a single injection
of gene therapy resulted in improved blood clotting and reduced number of
bleeding episodes in a dog hemophilia model. Similarly, in studies for
Parkinson's disease, a single injection of gene therapy essentially eliminated
the need for daily L-dopa injections in mice with a Parkinson's-like condition.
Cardiovascular gene therapy studies demonstrated the successful delivery of
genes to blood vessel lining cells.
 
     Abgenix, which is focused on the development and commercialization of
antibody therapies, was initially formed as a wholly owned subsidiary of Cell
Genesys in mid-1996. In July 1998, Abgenix completed an initial public offering
(IPO). Cell Genesys' financial results for 1998 include the results of Abgenix
only during the first half of the year, prior to Abgenix's IPO. After this IPO,
Cell Genesys' ownership of Abgenix dropped below 50 percent, with the result
that Abgenix is no longer consolidated into the individual financial statement
lines but is shown instead as equity in the losses of an unconsolidated
subsidiary. Following the Company's sale of part of its ownership of Abgenix
common stock in the fourth quarter, Cell Genesys ended 1998 with approximately
30 percent ownership in Abgenix. Abgenix is developing antibody therapies for
transplantation-associated medical conditions, inflammation, autoimmune
disorders and cancer. Abgenix's core technology includes strains of transgenic
mice capable of generating fully human antibodies. Cell Genesys formed Abgenix
as a separate business subsidiary in June 1996, contributing $14 million in
cash, research, development and manufacturing technology as well as patents and
other intellectual property specific to the antibody therapy programs. Abgenix
completed its public offering (Nasdaq-AMEX: ABGX) in July 1998. Following the
initial public offering, Cell Genesys' ownership of Abgenix dropped below 50
percent. In a private placement during November 1998, Cell Genesys sold
approximately 1.1 million shares of Abgenix common stock, thereby reducing its
Abgenix ownership to approximately 30 percent. In March, 1999, Abgenix completed
the sale of 3 million shares of common stock in a follow-on offering reducing
Cell Genesys' ownership of Abgenix to approximately 22 percent. The Company may
decide to sell additional shares of Abgenix common stock over time, when
appropriate to provide additional funding for Cell Genesys' gene therapy
business.
 
     Cell Genesys' net cash usage for 1999 in its current operations is not
expected to exceed approximately $10 million, and the Company intends to manage
toward this net cash expenditure target through funding received from various
corporate collaborations and licensing agreements, as well as through strategic
management of its resources and, potentially the sale of some portion of its
remaining Abgenix shares. When possible, the company intends to continue to
finance its operations through corporate collaborations with established
pharmaceutical and biotechnology companies in order to develop its technologies
as broadly as possible, to fund product development and to accelerate the
commercialization of certain product opportunities. The Company may from time to
time evaluate opportunities to acquire or in-license other potential products
and technologies. Expenses associated with in-licensing such products may
constitute unbudgeted expenses.
 
RESULTS OF OPERATIONS
 
     Revenue increased to $24.1 million in 1998 from $23.8 million and $22.5
million in 1997 and 1996, respectively. The collaboration with Japan Tobacco
Inc. entered into in December 1998 for Cell Genesys GVAX(TM) programs provided
revenue of $12 million during 1998. Under the terms of the agreement, the
Company could receive up to $27.5 million in research and development
expenditures during the first three years and could receive up to $80 million in
milestone payments. The collaboration with Hoechst Marion
                                       18
<PAGE>   20
 
Roussel, Inc. which was entered into in 1995 continued to fund Cell Genesys'
AIDS gene therapy program. Revenue under this agreement decreased to $6.4
million in 1998 from $14.4 million in 1997 and $15.3 million in 1996, and will
continue to decrease in 1999 due to the completion of the majority of research
and development activities planned to date. The partners are currently
evaluating the results of these activities, including ongoing clinical trials.
Further research and development activities and funding will be determined upon
completion of this review. In February 1997, Cell Genesys entered into an
agreement to license the Company's gene activation technology to Hoechst Marion
Roussel for erythropoietin (EPO) and a second undisclosed protein. The agreement
provides for milestone payments and annual maintenance fees, in addition to
royalties on future sales of these two potential gene-activated protein
products. The Company recognized revenue of $4.1 million in 1998 and $5.1
million in 1997 pursuant to the agreement. Other revenues in 1996 through 1998
resulted primarily from the Company's joint venture ("Xenotech") with JT
Immunotech in its human monoclonal antibody program during such time that
Abgenix's results were included as a consolidated subsidiary (see Note 3 to the
Consolidated Financial Statements).
 
     Research and development expenses increased to $37.9 million during 1998
from $36.8 million and $27.6 million in 1997 and 1996, respectively. The
increase reflects the costs of expanded clinical development activities for the
Company's cancer gene therapy and AIDS gene therapy programs. The increase also
reflects the costs of additional research targets following the acquisition of
Somatix in 1997. Research and development expenses have generally represented
approximately 80% of the Company's total operating expenses, excluding the
effect of non-recurring charges in 1997 for a cross-license and settlement with
GenPharm International ("GenPharm") to which the Company as well as Abgenix,
Japan Tobacco and Xenotech were parties, as well as the acquisition of Somatix
and related restructuring. The Company expects that its research and development
expenditures will continue to increase to support additional product development
activities, particularly in the field of cancer, for which a number of the
Company's GVAX(TM) cancer vaccine trials commenced in 1998. The rate of increase
depends on a number of factors including primarily progress in the clinical
trials.
 
     General and administrative expenses were $8.2 million during 1998 compared
to $10.7 million and $7.5 million in 1997 and 1996, respectively. The decrease
this year reflects the Company's continuing efforts to control administrative
expenditures as well as the exclusion of Abgenix costs following its IPO. The
Company implemented a corporate restructuring plan in September 1998 to reduce
its operating expenses by 30 percent and focus more resources on its clinical
stage programs.
 
     Interest income was $3.7 million in 1998 compared to $4.0 million and $4.4
million in 1997 and 1996, respectively. The decrease was due to lower average
cash balances during these years. Interest expense decreased to $2.2 million in
1998 from $2.5 million in 1997 and increased from $1.2 million in 1996. The
increase in 1997 and subsequent decline in 1998 was due to interest accrued on
the note payable to GenPharm commencing January 1997 which was paid in September
1998.
 
     Cell Genesys' net loss was $12.1 million in 1998, compared to $123.5
million in 1997 and $9.3 million in 1996. This was primarily due to $78.9
million in non-recurring charges for the acquisition of Somatix and related
costs and $22.5 million in non-recurring charges related to the cross-license
and settlement agreement in 1997. The Company's accounting for costs associated
with its purchase of Somatix is currently under review by the Securities and
Exchange Commission ("SEC"). The SEC has recently been critical of many
companies' accounting for acquisition related costs, including those associated
with in-process technology. While the Company believes its accounting for such
costs to be correct, as a result of this review it may be subject to potential
revision. Net losses, excluding non-recurring charges, are expected to continue
and may increase in future years as operating expenses rise, particularly as the
Company incurs expenses related to manufacturing and late stage human testing of
its potential products.
 
     At December 31, 1998, Cell Genesys had federal net operating loss
carryforwards of approximately $119 million. The company also had federal
research and development tax credit carryforwards of approximately $2.4 million
as of December 31, 1998. The net operating loss and credit carryforwards will
expire in the years of 1999 through 2018, if not utilized.
 
                                       19
<PAGE>   21
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cell Genesys has financed its operations primarily through the sale of
equity securities, funding under collaborative arrangements and equipment
financing. From inception through February 28, 1999, the Company received $172.8
million in net proceeds from equity financings, $118.4 million under
collaborative agreements and utilized $27.3 million of property and equipment
financings.
 
     At December 31, 1998, Cell Genesys' cash, cash equivalents and short-term
investments totaled $52.9 million, compared to $88.8 million at December 31,
1997. This decrease was due primarily to cash used in operating activities of
$15.3 million, payment of $15.0 million for the GenPharm convertible note and
payment of long term financing obligations. At December 31, 1997 cash and cash
equivalents included $15.3 million held by Abgenix, which at December 31, 1998
is not consolidated in the Company's cash and cash equivalents.
 
     Cell Genesys anticipates that consolidated net cash usage will not exceed
$10 million in 1999. The Company expects its cash requirements to increase
significantly in the future. The Company's capital requirements can depend on
numerous factors, including: the progress of the Company's research and
development programs; preclinical and clinical trials; clinical and commercial
scale manufacturing requirements; the attraction and maintenance of
collaborative partners; the acquisition of new products or technologies; and the
cost of litigation, patent interference proceedings or other legal proceedings
or their resolution.
 
     Cell Genesys believes that its available cash, cash equivalents and
short-term investments at December 31, 1998, together with payments to be
received under the Company's existing collaborative arrangements, license
agreements and financing facilities will be sufficient to meet the Company's
operating expenses and capital requirements at least through 2000. Thereafter,
the Company may require substantial additional funds. Due to these requirements,
the Company regularly considers financing alternatives, including sale of equity
securities held in Abgenix and the private or public sale of equity by Cell
Genesys. Any sale of Cell Genesys' equity securities may be dilutive to existing
stockholders.
 
RISK FACTORS
 
     Need for Substantial Additional Funds. We will need substantial additional
funds to do existing and planned preclinical and clinical trials to continue
research and development activities, and to establish manufacturing and
marketing capabilities for any products we may develop. We expect that our
existing capital resources, together with payments to be received under existing
collaborative agreements and amounts available under existing equipment
financing facilities, will enable us to maintain our operations at least through
2000. Beyond 2000, we may need to raise substantial additional capital to fund
our operations.
 
     Our future capital requirements will depend on, and could increase as a
result of, many factors such as:
 
     - continued scientific progress of research and development programs
 
     - magnitude of such programs
 
     - progress of preclinical and clinical testing
 
     - time and costs involved in obtaining regulatory approvals
 
     - costs involved in preparing, filing, prosecuting, maintaining, enforcing
       and defending patent claims
 
     - competing technological and market developments
 
     - changes in collaborative relationships with Hoechst Marion Roussel, Japan
       Tobacco and others
 
     - terms of any additional collaborative arrangements into which we may
       enter
 
     - our ability to establish research, development and commercialization
       arrangements pertaining to products other than those covered by existing
       collaborative arrangements
 
     - cost of establishing manufacturing facilities
 
     - cost of commercialization activities
 
                                       20
<PAGE>   22
 
     - demand for our products, if and when approved
 
     - potential redemption obligations in connection with conversion of the
       Series B convertible preferred stock. See "Notes to Consolidated
       Financial Statements" Note 9, "-- Shares Eligible for Future Sale,
       Dilution" and ". . . Potential Redemption Obligations."
 
     We expect to raise additional funds through additional equity or debt
financings, collaborative relationships, or otherwise. Because of our long-term
capital requirements, we may seek to access the public or private equity markets
whenever conditions are favorable, even if we do not have an immediate need for
additional capital at that time. There can be no assurance that any such
additional funding will be available to us, or, if available, that it will be on
acceptable terms. If we raise additional funds by issuing equity securities,
stockholders will incur immediate dilution. There is no assurance that
opportunities for in-licensing technologies or for third party collaborations
will continue to be available to us on acceptable terms. If adequate funds are
not available, we may be required to delay, reduce the scope of, or eliminate
one or more of our research, development and clinical activities or we may need
to seek funds through arrangements with collaborative partners or others that
require us to relinquish rights to certain of our technologies, product
candidates or products that we would otherwise seek to develop or commercialize
ourselves. Either of these events could have a material adverse effect on our
business, results of operations, financial condition or cash flow.
 
     Early Stage of Development; No Developed or Approved Products. All of our
potential gene therapy products are in research and development. We have not
sold any products or generated any revenues from the sale of products. We do not
expect to generate any such revenues for at least the next several years. Our
products currently under development will require significant additional
research and development efforts, including extensive preclinical and clinical
testing and regulatory approval, prior to commercial use. There can be no
assurance that our research and development efforts will be successful or that
any of our future products will ultimately be commercially successful. Even if
developed, our products may not receive regulatory approval or be successfully
introduced and marketed at prices that would permit us to operate profitably.
 
     Operating Loss and Accumulated Deficit. We have incurred net losses since
our inception. At December 31, 1998, our accumulated deficit was approximately
$175.6 million. We incurred net losses of $12.1 million for the year ended
December 31, 1998. Such losses have resulted principally from expenses of
research and development programs and to a lesser extent, from general and
administrative expenses. In 1997, we incurred losses of $123.5 million,
including $78.9 million related to the acquisition of Somatix and $22.5 million
related to the cross license and settlement agreement with GenPharm. During the
first six months of 1998 while Abgenix was a consolidated subsidiary, we
attributed Abgenix losses totaling $4.2 million to the minority stockholders.
Under the equity method of accounting, we recorded $2.9 million loss in equity
of Abgenix during the six months ended December 31, 1998. We expect to incur
substantial losses for at least the next several years due primarily to the
expansion of research and development programs, including preclinical studies,
clinical trials and manufacturing. We expect that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial. There can be
no assurance that we will successfully develop, commercialize, manufacture or
market any products. We cannot guarantee that we will ever achieve or sustain
product revenues or profitability.
 
     Technological Uncertainty. Gene therapy is a new technology. Existing
preclinical and clinical data on the safety and efficacy of gene therapy are
limited. Data relating to our specific gene therapy approaches are also limited.
Our GVAX(TM) cancer vaccine and AIDS gene therapy are currently being tested in
Phase I/II and Phase II human clinical trials, respectively, to determine their
safety and efficacy. None of our other products or therapies under development
are in human clinical trials. The results of preclinical studies do not predict
safety or efficacy in humans. Possible side effects of gene therapy may be
serious and potentially life-threatening. There can be no assurance that
unacceptable side effects will not be discovered during preclinical and clinical
testing of our potential products or thereafter. There are many reasons that
potential products that appear promising at an early stage of research or
development do not result in commercialization. Although we are testing proposed
products or therapies in human clinical trials, there can be no assurance that
we will be permitted to undertake human clinical trials for any of our other
products. Also, the results of such testing
 
                                       21
<PAGE>   23
 
might not demonstrate safety or efficacy. Even if clinical trials are
successful, there is no assurance that we will obtain regulatory approval for
any indication, that an approved product can be produced in commercial
quantities at reasonable cost or that such a product will be successfully
marketed.
 
     Patents and Trade Secrets. The patent positions of pharmaceutical and
biotechnology firms, including Cell Genesys, are generally uncertain and involve
complex legal and factual questions. Cell Genesys currently has approximately
150 issued or granted patents and more than 300 pending applications. Although
we are prosecuting patent applications, we cannot be certain whether any given
application will result in the issuance of a patent or, if any patent is issued,
whether it will provide significant proprietary protection or will be
invalidated. Also, patent applications in the United States are confidential
until patents are issued. Publication of discoveries in scientific or patent
literature tends to lag behind actual discoveries by several months.
Accordingly, we cannot be certain that we were the first creator of inventions
covered by pending patent applications or that we were the first to file patent
applications for such inventions.
 
     Our commercial success will also depend in part on not infringing the
patents or proprietary rights of others and not breaching licenses granted to
us. We will be required to obtain licenses to certain third party technology and
genes necessary to conduct our business. Any failure to license at reasonable
cost any technology or genes required to commercialize our technologies or
products may have a material adverse effect on our business, results of
operations, financial condition or cash flow.
 
     Litigation, which could result in substantial cost to us, may also be
necessary to enforce any patents issued to us, or to determine the scope and
validity of other parties' proprietary rights. To determine the priority of
inventions, the United States Patent Office frequently declares interference
proceedings. In Europe, other patents can be revoked through opposition
proceedings. Such proceedings could result in an adverse decision as to the
priority of our inventions.
 
     We are currently involved in three separate interference and/or opposition
proceedings with regard to:
 
     (i) gene activation technology
 
     (ii) ex vivo gene therapy
 
     (iii) chimeric receptor technology
 
     While we believe our position in each proceeding is strong, the outcome of
each proceeding cannot be predicted. An adverse result could have a material
adverse effect on our intellectual property position in these areas. We may be
involved in other interference and/or opposition proceedings in the future. We
believe that there will continue to be significant litigation in the industry
regarding patent and other intellectual property rights.
 
     We also rely on unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. No assurance can be given that others will not
independently develop similar or better proprietary information and techniques
and disclose it. Also, there can be no assurance that others will not gain
access to our trade secrets, or that we can meaningfully protect our rights to
our unpatented trade secrets.
 
     We require our employees and consultants to execute a confidentiality
agreement upon the commencement of an employment or consulting relationship with
us. These agreements provide that all confidential information developed by or
made known to an individual during the course of the employment or consulting
relationship generally must be kept confidential. In the case of employees, the
agreements provide that all inventions conceived by the individual while
employed by us, relating to our business are our exclusive property. These
agreements may not provide meaningful protection for our trade secrets in the
event of unauthorized use or disclosure of such information.
 
     Competition. Competition in the field of gene therapy from other
biotechnology and pharmaceutical companies and from research and academic
institutions is intense and expected to increase. There are numerous competitors
working on products to treat each of the diseases for which we are seeking to
develop therapeutic products. Some competitors are pursuing a product
development strategy competitive with ours,
 
                                       22
<PAGE>   24
 
particularly with respect to our cancer vaccine program. Certain of these
competitive products are in substantially more advanced stages of product
development and clinical trials. Our competitors may develop technologies and
products that are more effective than ours, or that would render our technology
and products less competitive or obsolete. Many of these competitors have
substantially greater financial resources and larger research and development
staffs than we do. In addition, many of these competitors may have significantly
greater experience than we do in developing products, in undertaking preclinical
testing and human clinical trials of new pharmaceutical products, in obtaining
United States Food and Drug Administration (the "FDA") and other regulatory
approvals of products, and in manufacturing and marketing such products.
Accordingly, our competitors may obtain patent protection, or FDA approval and
may commercialize products more rapidly than we do. There can be no assurance
that we will be able to obtain certain biological materials necessary to support
our research, development or manufacturing of any of our planned therapies. If
we are permitted to commence commercial sales of products, we will also be
competing with respect to marketing capabilities and manufacturing efficiency,
areas in which we have limited or no experience. We expect to build additional
clinical scale and commercial scale manufacturing facilities and/or employ
contract facilities to commercialize our products. We also expect to secure
funding for these and other product development activities through our partners
and future potential partners. We also compete with universities and other
research institutions in the development of products, technologies and
processes. In many instances, we compete with other commercial entities in
acquiring products or technology from universities.
 
     We expect that competition among products approved for sale will be based,
among other things, on:
 
     - product efficacy
 
     - safety
 
     - reliability
 
     - availability
 
     - price
 
     - patent position
 
     - sales, marketing and distribution capabilities
 
     Our competitive positions also depend upon our ability to attract and
retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient funding for the often
substantial period between product conception and commercial sales.
 
     The continuing efforts of governmental and third-party payers to contain or
reduce the costs of health care through various means may affect the revenues
and profitability of biotechnology and pharmaceutical companies like ours. In
the United States there have been, and we expect there to continue to be, a
number of federal and state proposals to control health care costs. We cannot
predict the effect health care reforms may have on our business. It is possible
that such reforms will have a material adverse effect on our business, results
of operations, financial condition or cash flow. In the United States and
elsewhere, sales of therapeutic products depend in part on the availability of
reimbursements to consumer from third party payers, such as government and
private insurance plans. If we succeed in bringing one or more products to the
market, our products might not be considered cost effective. In such event,
third party payers might not reimburse the consumer sufficiently to allow us to
sell our products on a competitive basis.
 
     Volatility Of Stock Price. The market prices for securities of
biopharmaceutical and biotechnology companies (including Cell Genesys) have
historically been highly volatile. The market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The following factors may affect our stock
price:
 
     - fluctuations in our financial results
 
     - announcements of technological innovations or new therapeutic products by
       us or our competitors
 
                                       23
<PAGE>   25
 
     - announcements of changes in governmental regulation
 
     - announcements of regulatory approvals or disapprovals of our or our
       competitors' products
 
     - developments in patent or other proprietary rights
 
     - public concern as to the safety of products developed by us or other
       biotechnology and pharmaceutical companies
 
     - general market conditions
 
     Government Regulation. Regulation by governmental authorities in the United
States and foreign countries is a significant factor in the manufacture and
marketing of our proposed products and our research and development activities.
All of our products will require regulatory approval by governmental agencies
prior to commercialization. In particular, human therapeutic products must
undergo rigorous preclinical and clinical testing and other premarket approval
procedures by the FDA and similar authorities in foreign countries. Since
certain of our potential products involve the application of new technologies,
regulatory approvals may take longer than for products produced using more
conventional methods. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such products. The lengthy process of
seeking these approvals, and the subsequent compliance with applicable federal
statutes and regulations, requires the expenditure of substantial resources. Any
failure by us or our collaborators or licensees to obtain, or any delay in
obtaining regulatory approvals could adversely affect the marketing of our
products and our ability to receive product or royalty revenue.
 
     In responding to a new drug application, or a product license application,
the FDA may grant marketing approvals, request additional information or further
research, or deny the application if it determines that the application does not
satisfy its regulatory approval criteria. Approvals may not be granted on a
timely basis, if at all, or if granted may not cover all the clinical
indications for which we are seeking approval. Also, an approval might contain
significant limitations in the form of warnings, precautions or
contraindications with respect to conditions of use.
 
     In addition to laws and regulations enforced by the FDA, we are also
subject to regulation under:
 
     - Occupational Safety and Health Act
 
     - Environmental Protection Act
 
     - Toxic Substances Control Act
 
     - Resource Conservation and Recovery Act
 
     - Other present and potential future federal, state or local laws and
       regulations
 
     Our research and development involves the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although we
believe our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, we could be held liable for any
damages that result and any such liability could exceed our resources.
 
     Our manufacturing facilities are subject to licensing requirements of the
California Department of Health Services. While not subject to license by the
FDA, such facilities are subject to inspection by the FDA as well as by the
California Department of Health Services. A separate license from the FDA is
required for commercial manufacture of any product. Failure to maintain such
licenses or to meet the inspection criteria of the FDA and the California
Department of Health Services would disrupt our manufacturing processes and have
a material adverse effect on our business, results of operations, financial
condition and cash flow.
 
     For marketing outside the United States, we are subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs and devices. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary greatly from country
to country. Failure to
 
                                       24
<PAGE>   26
 
comply with such regulatory requirements or obtain such approvals could impair
our ability to develop these markets and have a material adverse effect on our
business, results of operations, financial condition or cash flow.
 
     Commercialization; Lack of Marketing Experience. We expect to rely on sales
and marketing expertise of potential corporate partners for our initial
products. We do not have any experience in sales, marketing or distribution of
biopharmaceutical products. The decision to market future products directly or
through corporate partners will be based on a number of factors including;
 
     - market size and concentration
 
     - size and expertise of the partner's sales force in a particular market
 
     - the Company's overall strategic objectives
 
     We are currently engaged in various stages of discussions with potential
partners. There can be no assurance that we will be able to establish new
relationships, if at all, on acceptable terms and conditions.
 
     Product Liabilities and Insurance. Clinical trials or marketing of any of
our potential products may expose us to liability claims resulting from the use
of such products. These claims might be made directly by consumers, health care
providers or by others selling such products. We currently maintain product
liability insurance with respect to each of our clinical trials. There can be no
assurance that we will be able to maintain such insurance or that sufficient
coverage can be acquired at a reasonable cost. An inability to maintain
insurance at acceptable cost, or at all, could prevent or inhibit the clinical
testing or commercialization of our products. A product liability claim or
recall could have a material adverse effect on our business, results of
operations, financial condition and cash flow.
 
     Hazardous Materials; Environmental Matters. Our research and development
activities involve the controlled use of hazardous materials, chemicals, viruses
and various radioactive compounds. We are subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by such laws and regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these materials.
In the event of such an accident, we could be held liable for any damages that
result, and any such liability could exceed our resources. We may be required to
incur significant costs to comply with environmental laws and regulations in the
future. Our business may be materially adversely affected by current or future
environmental laws or regulations.
 
     Reimbursement. In both domestic and foreign markets, sales of our potential
products will depend in part upon coverage and reimbursement from third-party
payers, including:
 
     - government agencies
 
     - private health care insurers and other health care payers such as health
       maintenance organizations
 
     - self-insured employee plans
 
     - Blue Cross/Blue Shield and similar plans
 
     There is considerable pressure to reduce the cost of biotechnology and
pharmaceutical products. In particular, reimbursement from government agencies
and insurers and large health organizations may become more restricted in the
future. Our potential products represent a new mode of therapy and, while the
cost-benefit ratio of the products may be favorable, we expect that the costs
associated with our products will be substantial. There can be no assurance that
our proposed products, if successfully developed, will be considered
cost-effective by third-party payers. There can be no assurance that insurance
coverage will be provided by such third-party payers at all or without
substantial delay. Even if such coverage is provided, the approved reimbursement
might not provide sufficient funds to enable us to become profitable.
 
     Uncertainty Of Pharmaceutical Pricing and Related Matters. The continuing
efforts of governmental and third-party payers to contain or reduce the costs of
healthcare through various means, may have a material
                                       25
<PAGE>   27
 
adverse affect on the future revenues and profitability of biotechnology
companies. For example, in certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to government control. In the United
States, there have been, and we expect that there will continue to be, a number
of federal and state proposals to implement similar government control. While we
cannot predict whether the government will adopt any such legislative or
regulatory proposals, the announcement or adoption of such proposals could have
a material adverse effect on our business, results of operations, financial
condition and cash flow.
 
     Dependence Upon Key Personnel and Collaborative Relationships. We rely and
will continue to rely on our key management and scientific staff. The loss of
key personnel or the failure to recruit necessary additional qualified personnel
could have a material adverse effect on our business, results of operations,
financial condition or cash flow. There is intense competition from other
companies, research and academic institutions and other organizations for
qualified personnel in the areas of our activities. There is no assurance that
we will be able to continue to attract and retain the qualified personnel
necessary for the development of our business. We will need to continue to
recruit experts in the areas of clinical testing, manufacturing, marketing and
distribution and develop additional expertise in our existing personnel. If we
do not succeed in recruiting such personnel or developing such expertise, our
business could suffer significantly.
 
     We have clinical trial agreements with a number of public and private
medical institutions relating to the conduct of human clinical trials for our
GVAX(TM) cancer vaccine program and T cell gene therapy program. These
agreements include:
 
     - National Institutes of Allergy and Infectious Diseases
 
     - University of California, San Francisco
 
     - San Francisco General Hospital
 
     - University of Colorado Health Sciences Center
 
     - Massachusetts General Hospital
 
     - University of California, Los Angeles
 
     - ViRx, Inc.
 
     - Aids Community Research Consortium
 
     - Dana Farber Partners Cancer Care
 
     - The Johns Hopkins Medical Institutions
 
     - PRN Research Inc.
 
     - Stanford University
 
     - University of Tokyo, IMSUT
 
     The early termination of certain of these clinical trial agreements would
hinder the progress of our clinical trials including Phase II trials of T cell
gene therapy for HIV infection and Phase I/II trials of GVAX(TM) cancer vaccine
for prostate cancer, lung cancer and melanoma. If certain of these relationships
are terminated, the clinical trials might not be completed and the results might
not be evaluated.
 
     We rely on the continued availability of outside scientific collaborators
performing research. These relationships generally may be terminated at any time
by the collaborator, typically by giving 30 days' notice. These scientific
collaborators are not our employees. As a result, we have limited control over
their activities and can expect that only limited amounts of their time will be
dedicated to our activities. Our agreements with these collaborators, as well as
those with our scientific consultants, provide that any rights we obtain as a
result of their research efforts will be subject to the rights of the research
institutions in such work. In addition, some of these collaborators have
consulting or other advisory arrangements with other entities that may
potentially conflict with their obligations to us. For these reasons, there can
be no assurance that inventions or processes discovered by our scientific
collaborators or consultants will become our property.
 
                                       26
<PAGE>   28
 
     Shares Eligible For Future Sale; Dilution. Substantially all the
outstanding shares of Cell Genesys common stock are eligible for sale in the
public market. The following factors, as well as others such as those identified
above under "Volatility of Stock Price," could cause a decline in the market
price of our common stock:
 
     - severe fluctuations in price and volume in the stock market in general
       which are unrelated to our operating performance
 
     - issuance of common stock upon conversion of the Series B preferred stock
 
     - issuance of common stock upon exercise of the warrants issued to Hoechst
       Marion Roussel, Inc. and others -- see Notes to the Consolidated
       Financial Statements (the "Warrants").
 
     - future sales of such common stock or other shares of common stock by
       existing stockholders
 
     - the perception that such issuances or sales could occur
 
     Conversion of the Series B preferred stock or exercise of the warrants
would result in issuance of additional shares of common stock, diluting existing
investors. The number of shares of common stock issued, and therefore the amount
of dilution of existing investors, would increase as a result of either (i) an
event triggering the antidilution rights of any outstanding shares of Series B
preferred stock, or (ii) a decline in the market price of the Company's common
stock immediately prior to conversion of the Series B preferred stock.
 
     The holders of the Series B preferred stock may choose at any time to
convert their shares into common stock. In such event, the number of shares of
common stock issued would be based on a conversion price of $11.02 per share or,
if lower, the average of certain specified trading prices during the 10 trading
days preceding such date of conversion (the "Floating Conversion Price"). The
market price of the common stock has recently traded below $11.02 per share and
consequently the conversion rate of the Series B preferred stock is currently
based on the market price. The greater in decline in the market price, the
greater the number of shares issuable upon conversion of the Series B preferred
stock.
 
     Potential Redemption Obligation. If the holders of the Series B preferred
stock decide to convert their shares, we would not be required to issue more
than 5,624,000 shares of common stock (which is 19.99% of the outstanding shares
of common stock on November 14, 1997, or the "Share Limit"), unless we first
obtained stockholder approval. If we did not obtain stockholder approval or an
exemption from the requirement for stockholder approval from the Nasdaq-AMEX
(the "Nasdaq-AMEX exemption") we would not be required to issue shares of common
stock in excess of the Share Limit pursuant to requests for conversion of the
Series B preferred stock. However, in such event, the holders of the Series B
preferred stock could require us to redeem certain shares of Series B preferred
stock, and the amount of these redemption obligations could become material if
the common stock price declined below approximately $3.70 per share. Since the
common stock traded at prices below $3.70 per share during certain periods in
1998 and we have not obtained stockholder approval or the Nasdaq-AMEX exemption,
we could become subject to a material redemption obligation if the number of
shares of common stock issuable upon conversion of the Series B preferred stock
exceeds the Share Limit. The amount of the redemption obligation will increase
as the common stock price decreases because we are limited in the number of
shares we can issue upon conversion. Consequently, volatility in the price of
the common stock could magnify the amount of any redemption obligation.
 
IMPACT OF THE YEAR 2000
 
     The Company has undertaken various initiatives to ensure that its
information technology (IT) and non-IT systems are Year 2000 compliant. Based on
its assessment efforts to date, the Company has not identified any systems
currently in use which require replacement as a result of its Year 2000
initiatives. The Company currently anticipates that its Year 2000
identification, assessment, remediation activities (including repairing or
replacing identified systems), testing and contingency planning efforts, which
began in late 1997, will be complete by the end of the fourth quarter of 1999.
 
                                       27
<PAGE>   29
 
     Year 2000 costs incurred to date have not been material and total costs to
modify systems for Year 2000 compliance are not expected to become material.
Such costs do not include normal system upgrades and replacements and the actual
financial impact could exceed this estimate.
 
     The following summarizes the progress the Company has made to date on each
phase of its Year 2000 project plan:
 
<TABLE>
<CAPTION>
                         PHASE                           TIMEFRAME FOR COMPLETION    PERCENT COMPLETE
                         -----                           ------------------------    ----------------
<S>                                                      <C>                         <C>
Initial identification assessment, and contingency
  planning.............................................        Q2 -- 1999                  75%
Remediation............................................        Q3 -- 1999                  25%
Testing................................................        Q4 -- 1999                  10%
</TABLE>
 
     In addition to risks associated with the Company's own computer systems and
equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third parties that provide information, goods
and services to the Company. These include financial institutions, suppliers,
vendors, research partners, governmental entities and customers. The Company has
begun surveying all of its major vendors, collaborative partners and other third
party interests to determine whether their systems are Year 2000 compliant. We
cannot guarantee that all of the Company's key suppliers, partners and others
will achieve Year 2000 compliance in a timely manner. The failure of the
Company's vendors and partners to successfully address the Year 2000 issue could
have a material adverse effect on the Company's ability to fully address its
Year 2000 issue. Such failures could materially affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty of
the Year 2000 readiness of third parties, the Company is unable to determine at
this time whether all consequences of Year 2000 failures will have a material
impact on the Company's results of operations, liquidity and financial
condition.
 
     The costs of the Company's Year 2000 project plan, the dates on which the
Company believes it will complete each phase of its Year 2000 project plan and
the process for contingency planning are best estimates, which are derived from
assumptions regarding future events, including the continued availability of
certain resources, third party remediation plans and other factors. There can be
no assurance that these estimates and plans will prove to be accurate, and
actual results could differ materially from those currently anticipated.
 
                                       28
<PAGE>   30
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     In the normal course of business, the financial position of the Company is
routinely subject to a variety of risks including market risk associated with
interest rate movements. The Company regularly assesses these risks and has
established policies and business practices to protect against and other
exposures. As a result, the Company does not anticipate material potential
losses in these areas.
 
     The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For investment
securities and debt obligations, the table presents principal cash flows and
related weighted-average interest rates by expected maturity dates.
Additionally, the Company has assumed its available for sale securities,
comprised of corporate notes and commercial paper, are similar enough to
aggregate those securities for presentation purposes. The average interest rate
was calculated using the weighted average fixed rates under all contracts with
Wells Fargo Bank, Transamerica Business Credit Corporation, FINOVA Credit
Corporation and Silicon Valley Bank.
 
                           INTEREST RATE SENSITIVITY
                     PRINCIPAL AMOUNT BY EXPECTED MATURITY
                             AVERAGE INTEREST RATE
 
<TABLE>
<CAPTION>
                                                                            THERE-              FAIR VALUE
       (IN THOUSANDS)           1999      2000      2001     2002    2003   AFTER     TOTAL    DEC. 31, 1988
       --------------          -------   -------   ------   ------   ----   ------   -------   -------------
<S>                            <C>       <C>       <C>      <C>      <C>    <C>      <C>       <C>
Cash and cash equivalents
  Fixed Rate Securities......  $11,846        --       --       --     --    --      $11,846      $11,846
  Average Interest Rate......     5.27%       --       --       --     --    --         5.27%
Short-term Investments
  Fixed Rate Securities......  $14,223        --       --       --     --    --      $14,223      $14,294
  Average Interest Rate......     5.09%       --       --       --     --    --         5.09%
Long-term Investments
  Fixed Rate Securities......       --   $24,451       --       --     --    --      $24,451      $24,494
  Average Interest Rate......       --      5.15%      --       --     --    --         5.15%
Total Investments
  Securities.................  $26,069   $24,451       --       --     --    --      $50,520      $50,633
  Average Interest Rate......     5.18%     5.15%      --       --     --    --         5.16%
Long-term Debt, including
  Current Portion............  $ 4,447   $ 2,813   $1,837   $  511   $313            $ 9,920      $ 9,920
  Average Interest Rate......    11.47%    11.07%   10.56%   10.69%  9.66%   --        10.69%
</TABLE>
 
                                       29
<PAGE>   31
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Cell Genesys, Inc.
 
     We have audited the accompanying consolidated balance sheets of Cell
Genesys, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cell Genesys,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
 
                                                               ERNST & YOUNG LLP
 
Palo Alto, California
January 29, 1999
 
                                       30
<PAGE>   32
 
                               CELL GENESYS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                              ----------------------------
                                                                  1998            1997
                                                              ------------    ------------
                                                              (IN THOUSANDS, EXCEPT SHARE
                                                                  AND PER SHARE DATA)
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................   $  14,086       $  10,631
  Short-term investments....................................      38,788          78,185
  Prepaid expenses and other current assets.................       1,121           2,943
                                                               ---------       ---------
       Total current assets.................................      53,995          91,759
Property and equipment, net.................................       6,079          13,815
Deposits and other assets...................................         645           1,313
Investment in Abgenix.......................................       5,080              --
                                                               ---------       ---------
                                                               $  65,799       $ 106,887
                                                               =========       =========
 
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $   1,103       $   2,090
  Accrued compensation and benefits.........................       1,288             892
  Deferred revenue..........................................         703           5,993
  Accrued legal expenses....................................         651           1,137
  Accrued acquisition and related costs.....................         932           1,648
  Other accrued liabilities.................................       1,721           4,286
  Current portion of property and equipment financing.......       3,566           5,159
  Contribution payable......................................          --           3,750
  Convertible note payable..................................          --          15,000
                                                               ---------       ---------
       Total current liabilities............................       9,964          39,955
Non-current portion of property and equipment financing.....       4,860          11,082
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value:
  5,000,000 shares authorized; 1,156 and 2,000 shares issued
  and outstanding in 1998 and 1997, respectively............      12,083          19,817
Minority interest in the equity of subsidiary...............          --          17,392
Stockholders' equity:
  Common stock, $.001 par value: 80,000,000 shares
     authorized; 30,866,610 and 28,168,459 shares issued and
     outstanding in 1998 and 1997, respectively.............          31              28
  Additional paid-in capital................................     230,557         199,495
  Deferred compensation of subsidiary.......................          --          (1,319)
  Accumulated other comprehensive income....................         113             118
  Accumulated deficit.......................................    (191,809)       (179,681)
                                                               ---------       ---------
       Total stockholders' equity...........................      38,892          18,641
                                                               ---------       ---------
                                                               $  65,799       $ 106,887
                                                               =========       =========
</TABLE>
 
                            See accompanying notes.
                                       31
<PAGE>   33
 
                               CELL GENESYS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                             --------------------------------------
                                                                1998          1997          1996
                                                             ----------    -----------    ---------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                          <C>           <C>            <C>
Revenue under collaborative agreements -- principally from
  related parties (net of equity in losses of the Xenotech
  joint venture of $310, $897 and $3,866)..................   $ 24,146      $  23,806      $22,505
Operating expenses:
  Research and development.................................     37,932         36,830       27,587
  General and administrative...............................      8,204         10,659        7,469
  Charge for purchased in-process technology...............         --         72,270           --
  Restructuring charge related to acquisition..............         --          6,576           --
  Charge for cross-license and settlement (includes $11,250
     equity in losses of Xenotech joint venture associated
     with cross-license and settlement)....................         --         22,500           --
                                                              --------      ---------      -------
       Total operating expenses............................     46,136        148,835       35,056
Equity in loss of Abgenix..................................     (2,917)            --           --
Gain on sale of stock of Abgenix...........................      7,020             --           --
Interest income............................................      3,725          3,953        4,446
Interest expense...........................................     (2,158)        (2,453)      (1,169)
                                                              --------      ---------      -------
Loss before minority interest in Abgenix...................    (16,320)      (123,529)      (9,274)
Loss attributed to minority interest in Abgenix............      4,192             --           --
                                                              --------      ---------      -------
Net loss...................................................    (12,128)      (123,529)      (9,274)
Deemed dividend to preferred stockholders..................      1,088             --           --
Net loss attributed to common stockholders.................   $(13,216)     $(123,529)     $(9,274)
                                                              ========      =========      =======
Net loss per common share..................................   $  (0.46)     $   (5.33)     $ (0.57)
                                                              ========      =========      =======
Shares used in computing net loss per common share.........     28,607         23,172       16,373
                                                              ========      =========      =======
</TABLE>
 
                            See accompanying notes.
                                       32
<PAGE>   34
 
                               CELL GENESYS, INC.
 
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                              ACCUMULATED
                                                 ADDITIONAL                      OTHER                         TOTAL
                                        COMMON    PAID-IN       DEFERRED     COMPREHENSIVE   ACCUMULATED   STOCKHOLDERS'
                                        STOCK     CAPITAL     COMPENSATION      INCOME         DEFICIT        EQUITY
                                        ------   ----------   ------------   -------------   -----------   -------------
                                                               (IN THOUSANDS, EXCEPT SHARE DATA)
<S>                                     <C>      <C>          <C>            <C>             <C>           <C>
Balances at December 31, 1995.........   $16      $125,836      $    --          $ 419        $ (46,878)     $  79,393
                                                                                                             ---------
  Net loss............................    --            --           --             --           (9,274)        (9,274)
                                                                                                             ---------
  Change in net unrealized holding
    loss on available for sale
    securities........................    --            --           --           (537)              --           (537)
                                                                                                             ---------
  Comprehensive income................    --            --           --             --               --         (9,811)
                                                                                                             ---------
  Issuance of 555,522 shares of common
    stock upon exercise of stock
    options and pursuant to the 1992
    Employee Stock Purchase Plan......    --         1,482           --             --               --          1,482
                                         ---      --------      -------          -----        ---------      ---------
Balances at December 31, 1996.........    16       127,318           --           (118)         (56,152)        71,064
                                                                                                             ---------
  Net loss............................    --            --           --             --         (123,529)      (123,529)
  Change in net unrealized holding
    loss on available for sale
    securities........................    --            --           --            236               --            236
                                                                                                             ---------
  Comprehensive income................    --            --           --             --               --       (123,293)
                                                                                                             ---------
  Issuance of 11,089,706 shares of
    common stock to Somatix
    stockholders......................    11        67,913           --             --               --         67,924
  Issuance of 564,060 shares of common
    stock upon exercise of stock
    options and pursuant to the 1992
    Employee Stock Purchase Plan......     1         2,561           --             --               --          2,562
  Deferred compensation related to the
    issuance of certain stock options
    of subsidiary.....................    --         1,703       (1,703)            --               --             --
  Amortization of deferred
    compensation recognized by
    subsidiary........................    --            --          384             --               --            384
                                         ---      --------      -------          -----        ---------      ---------
Balances at December 31, 1997.........    28       199,495       (1,319)           118         (179,681)        18,641
                                                                                                             ---------
  Net loss............................    --            --           --             --          (12,128)       (12,128)
  Change in net unrealized holding
    loss on available for sale
    securities........................    --            --           --             (5)              --             (5)
                                                                                                             ---------
  Comprehensive income................    --            --           --             --               --        (12,133)
                                                                                                             ---------
  Adjustment to carrying amount of
    Abgenix investment as a
    result of IPO.....................    --        22,209        1,319             --               --         23,528
  Issuance of 245,856 shares of common
    stock upon exercise of stock
    options and pursuant to the 1992
    Employee Stock Purchase Plan......     1         1,089           --             --               --          1,090
  Issuance of 66,512 shares of common
    stock upon exercise of warrants...    --            33           --             --               --             33
  Conversion of 844 shares of Series B
    redeemable preferred into
    2,385,783 shares of common
    stock.............................     2         8,360           --             --               --          8,362
  Deemed Dividend to preferred
    stockholders......................    --          (629)          --             --               --           (629)
                                         ---      --------      -------          -----        ---------      ---------
Balances at December 31, 1998.........   $31      $230,557      $    --          $ 113        $(191,809)     $  38,892
                                         ===      ========      =======          =====        =========      =========
</TABLE>
 
                            See accompanying notes.
                                       33
<PAGE>   35
 
                               CELL GENESYS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1998        1997         1996
                                                            --------    ---------    --------
                                                                     (IN THOUSANDS)
<S>                                                         <C>         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss................................................  $(12,128)   $(123,529)   $ (9,274)
  Adjustments to reconcile net loss to net cash used by
     operating activities:
     Depreciation and amortization........................     4,549        5,433       3,718
     Amortization of deferred compensation of
       subsidiary.........................................       528          384          --
     Minority interest in net loss........................    (4,192)          --          --
     Equity in losses of Xenotech joint venture...........       118          897       3,866
     Equity in losses of Abgenix..........................     2,917           --          --
     Gain on sale of shares of Abgenix....................    (7,020)          --          --
     Charge for purchased in-process technology...........        --       72,270          --
     Restructuring charges................................        --        4,021          --
     Charge for cross-license and settlement..............        --       22,500          --
  Changes, excluding effect of acquisition, to:
     Prepaid expenses and other assets....................     1,239       (1,369)       (250)
     Accounts payable.....................................       (55)      (1,280)      1,312
     Accrued compensation and benefits....................       704       (1,520)        249
     Deferred revenue from related parties................    (5,290)      (6,170)     10,060
     Accrued legal expenses...............................       592         (446)      1,654
     Accrued acquisition and related costs................      (716)      (3,203)         --
     Other accrued liabilities............................    (3,597)      (2,551)       (204)
                                                            --------    ---------    --------
       Net cash provided by (used in) operating
          activities......................................   (22,351)     (34,563)     11,131
                                                            --------    ---------    --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of short-term investments.....................   (40,071)     (79,282)    (62,946)
  Maturities of short-term investments....................    14,831        9,607      24,752
  Sales of short-term investments.........................    57,614       56,375      46,747
  Purchase of subsidiary, net of cash acquired............        --        2,842          --
  Contributions to Xenotech joint venture.................        (8)      (4,647)     (3,205)
  Capital expenditures....................................      (703)      (2,460)     (2,726)
  Cash effect of applying equity method of accounting to
     the investment in Abgenix............................      (642)          --          --
  Net proceeds from sale of Abgenix shares................     9,008           --          --
                                                            --------    ---------    --------
       Net cash provided by (used in) investing
          activities......................................    40,029      (17,565)      2,622
                                                            --------    ---------    --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of convertible preferred stock...        --       19,817          --
  Proceeds from minority investment in subsidiary.........     3,944       17,392          --
  Proceeds from issuances of common stock.................     1,121        2,563       1,482
  Proceeds from property and equipment financing..........        --        5,735          --
  Payment of convertible note.............................   (15,000)          --        (750)
  Payments under equipment financing obligations..........    (4,288)      (3,683)     (1,740)
                                                            --------    ---------    --------
       Net cash provided by (used in) financing
          activities......................................   (14,223)      41,824      (1,008)
                                                            --------    ---------    --------
Net increase (decrease) in cash and cash equivalents......     3,455      (10,304)     12,745
Cash and cash equivalents at beginning of year............    10,631       20,935       8,190
                                                            --------    ---------    --------
Cash and cash equivalents at end of year..................  $ 14,086    $  10,631    $ 20,935
                                                            ========    =========    ========
</TABLE>
 
                             See accompanying notes
                                       34
<PAGE>   36
 
                               CELL GENESYS, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization and basis of presentation
 
     Cell Genesys, Inc. ("Cell Genesys"), a Delaware corporation, is focused on
the development and commercialization of gene therapies to treat major,
life-threatening diseases, including cancer and AIDS. Abgenix, Inc., ("Abgenix")
a partially owned subsidiary of Cell Genesys, is focused on the development and
commercialization of human monoclonal antibodies for pharmaceutical
applications, including inflammation, autoimmune disorders, and cancer. On July
2, 1998 Abgenix completed its initial public offering and Cell Genesys'
ownership position fell below 50 percent. Consequently, while Abgenix had
previously been fully consolidated, it has been accounted for under the equity
method of accounting from July 2, 1998 forward (see Note 2 -- Investment in
Abgenix). In May 1997, the Company acquired Somatix Therapy Corporation,
("Somatix"). The accompanying consolidated financial statements include the
accounts of Cell Genesys, including Abgenix on a consolidated basis prior to
July 2, 1998, and Somatix from May 30, 1997, the date of acquisition, (together
the "Company" or "Cell Genesys"). Intercompany accounts and transactions have
been eliminated in consolidation.
 
Revenue recognition
 
     Revenue under collaborative agreements, including that from related
parties, is recorded when earned as defined under the terms of the respective
collaborative agreements. Nonrefundable signing or licensing fees that are not
dependent on future performance under collaborative agreements are recognized as
revenue when received. Payments for research and development performed by the
Company under contractual arrangements are recognized as revenue ratably over
the period in which the related work is performed. Revenue from the achievement
of milestone events is recognized when the funding party agrees that the
scientific or clinical results stipulated in the agreement have been achieved.
Deferred revenue arises principally due to timing of cash payments received
under research and development contracts. Revenues from Abgenix' joint venture
("Xenotech") with JT Immunotech have been recognized net of the Company's
related payments to Xenotech through July 2, 1998, as described above.
 
Research and development
 
     Research and development expenses, including direct and allocated expenses,
consist of independent research and development costs and costs associated with
sponsored research and development. Research and development payments made by
Abgenix to Xenotech have been eliminated against related revenues from Xenotech.
 
Depreciation and amortization
 
     Cell Genesys records property and equipment at cost and depreciates it
using the straight-line method over the estimated useful lives of the assets,
generally five years. Furniture and equipment leased under capital leases is
amortized over the shorter of the useful lives or the lease term. Amortization
of leased assets is included in depreciation and amortization expense and is
combined with accumulated depreciation and amortization of the Company's owned
assets. Intangible assets are amortized using the straight-line method over the
estimated useful lives of the assets, generally three years.
 
Cash, cash equivalents and short-term investments
 
     Cell Genesys places its cash, cash equivalents and short-term investments
with high credit quality U.S. and foreign financial institutions, government and
corporate issuers and limits the amount of credit exposure to any one issuer.
The Company considers all highly liquid investments with insignificant interest
 
                                       35
<PAGE>   37
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
rate risk with a maturity of less than three months when purchased to be cash
equivalents. All investments are denominated in U. S. dollars.
 
     The Company's debt securities are classified as available-for-sale and
carried at fair value. The cost of securities sold is based on the specific
identification method. Realized gains and losses and declines in value, judged
to be other than temporary, on available for sale securities are included in
interest income. Unrealized holding gains and losses on securities classified as
available-for-sale are recorded in accumulated other comprehensive income. The
Company determines the appropriate classification of debt securities at the time
of purchase and re-evaluates such designation as of each balance sheet date.
 
Net loss per share
 
     In December 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") and
restated all prior periods. Under the provisions of SFAS 128, basic earnings per
share is calculated based on the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share also give
effect to the dilutive effect of stock options, warrants and convertible
preferred stock (calculated based on the treasury stock method). The Company
does not present diluted earnings per share as the effect of potentially
dilutive shares from stock options, warrants and preferred stock, is
antidilutive.
 
Use of estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
 
Comprehensive Income
 
     As of January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive income (loss) is
comprised of net income (loss) and other comprehensive income (loss). The
measurement and presentation of net income (loss) does not change. Other
comprehensive income (loss) includes certain changes to stockholders' equity of
the Company that are excluded from net income (loss). Specifically, SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income (loss). Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130.
 
Recent Accounting Pronouncements
 
     Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131. "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 superseded SFAS 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS 131 establishes standards
for the way that public business enterprises report selected information about
operating segments in annual and interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company operates solely in one
segment, the development and commercialization of gene therapies to treat major,
life threatening diseases. The adoption of SFAS 131 had no impact on the
Company's results of operations, financial position or disclosure of segment
information.
 
     In March 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132. "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 does not change the
recognition of measurement of pension of postretirement
                                       36
<PAGE>   38
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
benefit plans, but revises and standardizes disclosure requirement for pensions
and other postretirement benefits. The adoption of SFAS 132 has no impact on the
Company's results of operations or financial condition.
 
     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133. "Accounting for Derivative Financial
Instruments and for Hedging Activities" ("SFAS 133") which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for years beginning
after June 15, 1999 and is not anticipated to have an impact on the Company's
results of operations or financial condition when adopted.
 
Statement of cash flows
 
     Supplemental disclosure to the Consolidated Statements of Cash Flows is as
follows for the years ended December 31 (in thousands):
 
<TABLE>
<CAPTION>
                                                    1998      1997      1996
                                                   ------    ------    ------
<S>                                                <C>       <C>       <C>
Cash paid for interest...........................  $2,159    $2,224    $1,169
</TABLE>
 
     Supplemental disclosure regarding noncash investing and financing
activities is as follows for the years ended December 31 (in thousands):
 
<TABLE>
<CAPTION>
                                                   1998      1997       1996
                                                  ------    -------    ------
<S>                                               <C>       <C>        <C>
Furniture and equipment acquired under
  financing.....................................  $1,268    $ 3,652    $1,319
Deferred compensation related to grant of stock
  options by subsidiary.........................  $  298    $ 1,703    $   --
Shares issued to Somatix stockholders...........  $   --    $67,924    $   --
</TABLE>
 
 2. INVESTMENT IN ABGENIX AND MINORITY INTEREST
 
     Since 1996, the Company has maintained an investment in Abgenix, Inc
("Abgenix"). In December 1997 and January 1998, Abgenix completed private
placements of securities reducing Cell Genesys' percentage ownership from
approximately 100% to approximately 54%.
 
     On July 2, 1998, Abgenix completed an initial public offering ("IPO")
resulting in gross proceeds of $23 million, reducing Cell Genesys' percentage
ownership to approximately 40%. Prior to the IPO, Abgenix was a consolidated
subsidiary and its financial results were presented accordingly. From July 2,
1998 forward, the Company's investment in Abgenix is accounted for under the
equity method of accounting as a result of the reduced ownership position. The
difference between the cost of the investment (the carrying value of the net
assets less the minority interest immediately prior to the IPO) and the amount
of the underlying equity in net assets of Abgenix immediately following the IPO
was accounted for in accordance with APB Opinion No. 18 "The Equity Method of
Accounting for Investment in Common Stock" and Staff Accounting Bulletin No. 51.
Accordingly, the Company recognized $6.0 million as a contribution to
Stockholders' Equity upon completion of the IPO.
 
                                       37
<PAGE>   39
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     On November 20, 1998, the Company completed the sale of 1.1 million shares
of Abgenix common stock for approximately $9.5 million in gross proceeds. This
further reduced the Company's ownership percentage in Abgenix to approximately
30 percent. At December 31, 1998, the carrying amount of the Company's
investment in Abgenix was $5 million. Summarized information for Abgenix is as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED
                                                       DECEMBER 31, 1998
                                                       -----------------
<S>                                                    <C>
Revenue..............................................      $  3,842
Operating loss.......................................       (17,258)
Net loss.............................................       (16,827)
</TABLE>
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31, 1998
                                                       -----------------
<S>                                                    <C>
Current assets.......................................       $15,871
Non-current assets...................................         9,234
Current liabilities..................................         6,213
Non-current liabilities..............................         3,979
</TABLE>
 
     Minority interest in Abgenix at December 31, 1997 represents the minority
stockholders' investment in Abgenix. During the period of 1998 prior to its IPO
while Abgenix was a consolidated subsidiary, losses of Abgenix totaling $4.2
million were attributed to the minority stockholders.
 
 3. BUSINESS COMBINATION AND RELATED RESTRUCTURING
 
     On May 30, 1997, Cell Genesys acquired Somatix Therapy Corporation. Under
the terms of the merger agreement, Somatix became a subsidiary of Cell Genesys
in a tax-free reorganization and stock-for-stock merger. Somatix stockholders
received 0.385 shares of Cell Genesys stock for each share of Somatix stock. A
total of 11,089,706 shares were issued to Somatix stockholders. The acquisition
was accounted for under the purchase method of accounting. The purchase price of
approximately $70.9 million, comprised of $67.9 million of common stock and $3.0
million of transaction costs, was allocated to the acquired assets and assumed
liabilities based upon their estimated fair value. The fair value of the net
assets acquired, including in-process technology, was determined by management
based on a forecast of future results management believes are likely to occur.
However, no assurance can be given that deviations from these projections will
not occur. The purchase price was allocated as follows:
 
<TABLE>
<CAPTION>
                                                         (IN THOUSANDS)
<S>                                                      <C>
Purchased in-process technology........................     $72,270
Purchased intangibles..................................         500
Liabilities assumed in excess of assets acquired.......      (1,870)
                                                            -------
                                                            $70,900
                                                            =======
</TABLE>
 
     The amount allocated to purchased in-process technology was charged to
operations in 1997. The purchased intangible, assembled workforce, is being
amortized over the period of three years using the straight-line method.
Accumulated amortization of purchased intangibles at December 31, 1998 was
$264,000. The operations of Somatix are included in the Company's consolidated
operating results from May 31, 1997 forward.
 
                                       38
<PAGE>   40
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     In addition, Cell Genesys recognized $6.6 million in 1997 for restructuring
and integration expenses related to the acquisition. The current status of the
accrued restructuring charges is summarized below:
 
<TABLE>
<CAPTION>
                                      AMOUNT OF TOTAL    AMOUNT UTILIZED     AMOUNT UTILIZED     AMOUNT TO BE
                                       RESTRUCTURING         THROUGH             THROUGH         UTILIZED IN
                                          CHARGE        DECEMBER 31, 1997   DECEMBER 31, 1998   FUTURE PERIODS
                                      ---------------   -----------------   -----------------   --------------
                                                         (IN THOUSANDS)      (IN THOUSANDS)
<S>                                   <C>               <C>                 <C>                 <C>
Employee-related costs..............      $2,880             $(2,730)             $(150)             $ --
Facility shut-down..................       1,991                (918)              (312)              761
Duplicate equipment.................         537                (537)                --                --
Other...............................       1,170                (745)              (251)              174
                                          ------             -------              -----              ----
                                          $6,578             $(4,930)             $(713)             $935
                                          ======             =======              =====              ====
</TABLE>
 
PRO FORMA FINANCIAL INFORMATION
 
     The following unaudited pro forma information presents the results of
operations of the Company and Somatix for the years ended December 31, 1996 and
1997 as if the acquisition had been consummated as of the beginning of the
periods presented. This pro forma information does not purport to be indicative
of what would have occurred had the acquisitions been made as of those dates or
of results which may occur in the future. The pro forma information does not
include the charge for purchased in-process technology of $72.3 million or other
transaction-related restructuring costs totaling $6.6 million which were
recognized as expense during 1997, relating to the acquisition of Somatix.
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                         ----------------------
                                                           1997         1998
                                                         ---------    ---------
                                                             (IN THOUSANDS,
                                                         EXCEPT PER SHARE DATA)
                                                              (UNAUDITED)
<S>                                                      <C>          <C>
Total revenues.........................................  $ 23,806     $ 22,505
Net loss...............................................   (53,239)     (31,169)
Net loss per share.....................................     (1.92)       (1.14)
</TABLE>
 
 4. COLLABORATIVE AND LICENSE AGREEMENTS
 
Collaborative agreement with Japan Tobacco Inc.
 
     On December 18, 1998, Cell Genesys entered into a worldwide collaboration
agreement with the pharmaceutical division of Japan Tobacco Inc. ("JT") related
to the Company's GVAX(TM) cancer vaccine program. The Company received an
initial payment under the agreement of $12.7 million in December 1998 of which
$12.0 million was recognized as revenue in 1998, including an initial
nonrefundable payment of $10 million. Research and development expenses incurred
in 1998 in connection with this agreement were $4.0 million. Under the terms of
this agreement, the Company could receive up to $27.5 million in research and
development funding in the first three years, and approximately $80 million in
milestone payments if JT continues in the collaboration through the regulatory
approvals of the two products. As part of the agreement, JT agreed to advance
the Company up to $30 million in the form of a loan to assist in the funding of
Phase III trials, if needed. None of the payments involve an additional equity
investment in Cell Genesys by JT, which currently owns approximately 3 percent
of the company.
 
Collaborative agreement with Hoechst Marion Roussel
 
     In 1995, Cell Genesys entered into a collaboration agreement with Hoechst
Marion Roussel, Inc. ("Hoechst Marion Roussel") for the worldwide development
and commercialization of the Company's AIDS gene therapy program. The agreement
provides for funding based on research and development progress.
 
                                       39
<PAGE>   41
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Under the agreement with Hoechst Marion Roussel, Cell Genesys conducts
research, will lead product development in North America and will provide
worldwide manufacturing services. Hoechst Marion Roussel has worldwide marketing
rights for AIDS products developed in this program and Cell Genesys retains a
co-promotion option in North America. Cell Genesys receives payments for
research and development and milestone payments and will receive a transfer
price for manufacturing services and profit sharing. The Company recognized
revenue of $6.4 million, $14.4 million and $15.3 million in fiscal 1998, 1997
and 1996, respectively, pursuant to the agreement. Research and development
expenses incurred under collaborative agreements with Hoechst Marion Roussel
were $8.8 million, $13.7 million, and $12.7 million in 1998, 1997 and 1996
respectively.
 
Gene Activation Technology Licenses
 
     In 1997, the Company entered into an agreement to license the Company's
gene activation technology to Hoechst Marion Roussel for gene-activated
erythropoietin (EPO) and a second undisclosed protein. The agreement provides
for milestone payments and fees, in addition to royalties on future sales of
these two potential gene-activated protein products. The Company recognized
revenue of $4.1 and $5.1 million in 1998 and 1997, respectively, pursuant to the
agreement.
 
     In 1994, the Company entered into a license agreement for gene-activated
follicle-stimulating hormone ("FSH") for infertility with Organon, a business
unit of Akzo Nobel Pharma Group. In November 1996, the Company renegotiated the
license agreement. The Company recognized revenue of $2.5 million in fiscal 1997
and $2.5 million in fiscal 1996 pursuant to the agreement.
 
Joint venture with JT Immunotech
 
     In 1991, the Company and JT Immunotech, a medical subsidiary of Japan
Tobacco Inc. ("Japan Tobacco"), formed Xenotech, LP, ("Xenotech"), an
equally-owned joint venture, to develop genetically modified strains of mice
which can produce human monoclonal antibodies and to commercialize products
generated from these mice. In June 1996, Cell Genesys transferred its
partnership interest in the joint venture to its then subsidiary, Abgenix, as
part of the initial formation of Abgenix. Xenotech funds this research which is
now conducted by Abgenix on behalf of the joint venture. The Company recognized
revenue of $499,000, $1.3 million and $4.7 million in 1998, 1997 and 1996,
respectively, net of its own payments to the joint venture. Related research and
development expenses incurred were $152,000, $2.9 million, and $8.9 million for
the same periods, respectively. The Company (Abgenix, subsequent to its IPO) has
funded 50% of all Xenotech expenses.
 
     Abgenix accounts for its investment in Xenotech under the equity method;
50% of Xenotech's losses (after adjustment for certain timing differences) are
offset against revenue, as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                    YEARS ENDED DECEMBER 31,
                                                   --------------------------
                                                   1998      1997       1996
                                                   ----    --------    ------
<S>                                                <C>     <C>         <C>
Abgenix' share of Xenotech net loss..............  $310    $ 12,347    $3,306
Losses associated with cross-license and
  settlement.....................................    --     (11,250)       --
Difference due to timing and change in deferred
  revenue........................................    --        (200)      560
                                                   ----    --------    ------
Equity in losses of Xenotech.....................  $310    $    897    $3,866
                                                   ====    ========    ======
</TABLE>
 
                                       40
<PAGE>   42
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Summarized information for Xenotech at June 30, 1998 (just prior to
Abgenix's IPO), and December 31, 1997 and 1996, and for the six months ended
June 30, 1998 and the years ended at December 31, 1997, and 1996 as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                 1998       1997       1996
                                                ------    --------    -------
<S>                                             <C>       <C>         <C>
Total assets..................................  $8,240..  $  7,569    $   492
Total liabilities.............................   8,052       7,556         59
Total revenues................................     310         272      1,912
Total expenses (principally research and
  development)................................    (935)    (24,964)    (8,547)
Net loss......................................    (625)    (24,680)    (6,614)
</TABLE>
 
 5. CHARGE FOR CROSS-LICENSE AND SETTLEMENT
 
     In February 1994, the Company filed a complaint against GenPharm
International, Inc. ("GenPharm") alleging that GenPharm and its agents
misappropriated Cell Genesys' proprietary technology used to develop strains of
mice which produce human antibodies and that GenPharm unlawfully filed patent
applications covering this technology. One aspect of the technology at issue
related to a method for inactivating a mouse's antibody genes. On January 7,
1997, GenPharm received a patent (the "'669 patent") which includes claims
related to transgenic mice whose antibody genes have been inactivated. On that
same date, GenPharm filed suit alleging that the Company's subsidiary, Abgenix,
was infringing the '669 patent. In light of these developments, the Company
dismissed without prejudice its state court action against GenPharm in January
1997. In February 1996, GenPharm filed an antitrust suit against the Company
alleging that Cell Genesys violated the Federal antitrust laws when it filed the
state court action against GenPharm in February 1994. GenPharm sought treble
damages, attorneys' fees and costs for suit. The Court granted Cell Genesys'
motion to dismiss this lawsuit and entered a judgment of dismissal without
prejudice in December 1996. In January 1997, GenPharm filed an appeal of this
judgment.
 
     On March 27, 1997, the Company announced that, along with Abgenix, Xenotech
and Japan Tobacco, it had signed a comprehensive patent cross-license and
settlement agreement with GenPharm that resolved all related litigation and
claims between the parties. The cross-license agreement includes a worldwide
royalty free cross-license to all issued and related patent applications
pertaining to the generation of fully human monoclonal antibody technologies in
genetically modified strains of mice. The Company also obtained a license to
certain technology in the field of gene therapy held by GenPharm. As
consideration for the cross-license and settlement agreement, Cell Genesys
issued a note for $15 million bearing interest at a rate of 7% per annum, which
came due and was paid on September 30, 1998. Total interest paid for the note
was $805,000 and $787,500 in 1998 and 1997, respectively. Of this note, $3.75
million was contributed to, then paid by Xenotech. The entire amount of the note
was recognized as expense by Abgenix in the first quarter of 1997. In addition,
Japan Tobacco also made a cash payment to GenPharm. During 1997, two milestones
contemplated under the cross license and settlement agreement related to the
issuance of specified patents of $7.5 million each were met. Xenotech recognized
an expense of $15 million, $7.5 million of which was paid in cash in the fourth
quarter of 1997 and the remainder was paid in the fourth quarter of 1998. During
1997, Abgenix recognized an expense of $7.5 million for its contribution due to
Xenotech for its share of the patent milestones which was paid in two equal
installments in 1997 and 1998. No additional milestone payments will accrue
under this agreement.
 
                                       41
<PAGE>   43
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following is a summary of the Company's available-for-sale securities
at December 31, 1998 and 1997, respectively (in thousands):
 
<TABLE>
<CAPTION>
                                                         GROSS         GROSS
                                          AMORTIZED    UNREALIZED    UNREALIZED    ESTIMATED
                                            COST         GAINS         LOSSES      FAIR VALUE
                  1998                    ---------    ----------    ----------    ----------
<S>                                       <C>          <C>           <C>           <C>
U.S. Government and its Agencies........   $16,327        $ 51          $--         $16,378
Corporate Notes.........................    17,293          27           --          17,321
Commercial Paper........................    16,900          35           --          16,934
                                           -------        ----          ---         -------
                                           $50,520        $113          $--         $50,633
                                           =======        ====          ===         =======
Classified as:
  Cash equivalents......................   $11,846        $ --          $--         $11,845
  Short-term investments................    38,674         113           --          38,788
                                           -------        ----          ---         -------
                                           $50,520        $113          $--         $50,633
                                           =======        ====          ===         =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                         GROSS         GROSS
                                          AMORTIZED    UNREALIZED    UNREALIZED    ESTIMATED
                                            COST         GAINS         LOSSES      FAIR VALUE
                  1997                    ---------    ----------    ----------    ----------
<S>                                       <C>          <C>           <C>           <C>
U.S. Government and its Agencies........   $33,897        $ 62          $--         $33,959
Corporate Notes.........................    26,123          10           --          26,133
Commercial Paper........................    24,866          46           --          24,912
                                           -------        ----          ---         -------
Short-term investments..................   $84,886        $118          $--         $85,004
                                           =======        ====          ===         =======
</TABLE>
 
     Gross realized gains and losses for 1998 were immaterial and gross realized
gains recorded on sales of available-for-sale securities were approximately
$154,000 for the year ended December 31,1997.
 
     The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1998, by contractual maturity, are shown below (in
thousands):
 
<TABLE>
<CAPTION>
                                                         AMORTIZED    ESTIMATED
                                                           COST       FAIR VALUE
                                                         ---------    ----------
<S>                                                      <C>          <C>
Due in one year or less................................   $26,069      $26,140
Due in one to two years................................    24,451       24,493
                                                          -------      -------
                                                          $50,520      $50,633
                                                          =======      =======
</TABLE>
 
 7. PROPERTY AND EQUIPMENT
 
     Property and equipment consists of the following at December 31 (in
thousands):
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Furniture and equipment under equipment financing...........  $ 12,141    $ 13,236
Machinery and equipment.....................................     4,574       4,733
Leasehold improvements under financing......................     5,129       9,173
Leasehold improvements......................................     3,929       4,188
Construction in progress....................................       165          32
                                                              --------    --------
                                                                25,938      31,362
Accumulated depreciation and amortization...................   (19,859)    (17,547)
                                                              --------    --------
                                                              $  6,079    $ 13,815
                                                              ========    ========
</TABLE>
 
                                       42
<PAGE>   44
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The Company recognized depreciation and amortization expense of $4,567,000,
$5,281,000 and $3,709,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
 
 8. DEBT OBLIGATIONS
 
Property and equipment financing
 
     As of December 31, 1998 the Company has $17.3 million of property and
equipment financed through long-term obligations. These obligations bear
interest ranging from 10 to 14 percent, have up to 5 year terms and contain
various buy-out provisions at term expiration. These obligations are secured by
certain fixed assets at the Company and by certain deposits. Under these
obligations, the Company is required to meet various financial covenants with
which it was in compliance at December 31, 1998. $2.8 million is available under
these leaselines for future financings.
 
     Future minimum principal payments under property and equipment financing as
of December 31, 1998 were (in thousands):
 
<TABLE>
<S>                                                   <C>
Years ending December 31:
  1999..............................................  $4,447
  2000..............................................   2,813
  2001..............................................   1,837
  2002..............................................     511
  2003 and beyond...................................     313
                                                      ------
                                                      $9,920
                                                      ======
</TABLE>
 
     The Company leases its facilities and certain equipment under noncancelable
operating leases. The leases expire at various dates through 2007 and some
contain options for renewal. Rent expense under operating leases was $2.7
million in 1998, $2.2 million in 1997 and $1.8 million in 1996. Included in
accrued liabilities was $935,000 at December 31, 1998 for future lease payments,
net of expected sublease income, related to the closed Alameda facility assumed
through the Somatix acquisition.
 
     Future minimum payments under noncancelable operating and capital leases,
excluding the Alameda facility, at December 31, 1998 were (in thousands):
 
<TABLE>
<CAPTION>
                                                              OPERATING LEASES   CAPITAL LEASES
                                                              ----------------   --------------
<S>                                                           <C>                <C>
Years ending December 31:
  1999......................................................       $1,593           $ 4,447
  2000......................................................        1,705             2,813
  2001......................................................        1,721             1,837
  2002......................................................          150               511
  2003......................................................            0               313
                                                                   ------           -------
  Total minimum lease payment...............................       $5,169           $ 9,920
Less: Amount representing interest..........................                         (1,494)
                                                                                    -------
Present value of future lease payments                                              $ 8,426
Current portion.............................................                          3,566
                                                                                    -------
Non current portion.........................................                        $ 4,860
                                                                                    =======
</TABLE>
 
 9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
     On November 14, 1997, the Company completed a private placement of 2,000
shares of Series B redeemable convertible preferred stock, ("preferred stock"),
for aggregate proceeds of $20 million. The Company, subject to certain
conditions, may exercise a put option to sell up to an additional $10 million of
                                       43
<PAGE>   45
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
preferred stock and investors, subject to certain conditions, may exercise a
call option to purchase up to an additional $10 million of preferred stock. Each
of the preferred shares is convertible, at the option of the holder, into shares
of common stock of the Company based upon a conversion price of $11.02 per share
or, if lower, 100% of the average of specified trading prices during the ten
trading days preceding a conversion. Any shares not converted prior to November
2002 are automatically converted into shares of the Company's common stock. The
convertible preferred stock bears a dividend of 5%, payable in kind upon
conversion. If the Company enters into a "major transaction" or effects a
"triggering event" as defined in the private placement agreement, the stock may
be redeemed at the option of the holders. Examples of such transactions or
events would include a change in control of the Company or delisting of
company's stock. The preferred stock is non-voting. At December 31, 1998, 844
shares of Series B preferred stock had been converted into common stock and
1,156 shares remained outstanding.
 
10. STOCKHOLDERS' EQUITY
 
Accounting for Stock Issued to Employees
 
     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
 
Incentive Stock Plans
 
     The Company's 1989 Incentive Stock Plan and the 1998 Incentive Stock Plan
("the Plans") provide for the issuance of common stock and granting of options
for common stock to employees, officers, directors and consultants of the
Company. The Company grants shares of common stock for issuance under the Plans
at no less than the fair market value of the stock (85% of fair market value for
non-qualified options). Options granted under the Plans have a maximum term of
ten years and generally vest over four years at the rate of 25% one year from
the grant date and 1/48 monthly thereafter.
 
     Effective November 6, 1998, Cell Genesys offered employees holding
outstanding options the opportunity to exchange each option share for one option
share priced at $4.125 (the fair market value on that date). The new options are
not eligible for exercise prior to May 6, 1999, after which vesting continues in
accordance with the previous options' vesting schedule. All other terms remained
unchanged. As a result of the offer, 1,765,835 options were exchanged which are
included in the table below.
 
                                       44
<PAGE>   46
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     The following table summarizes information about the plan:
 
<TABLE>
<CAPTION>
                                                                          OUTSTANDING STOCK OPTIONS
                                                                         ---------------------------
                                                                                        WEIGHTED-
                                                             SHARES      NUMBER OF       AVERAGE
                                                            AVAILABLE     SHARES      EXERCISE PRICE
                                                            ---------    ---------    --------------
<S>                                                         <C>          <C>          <C>
Balances, December 31, 1995...............................    1,147        2,539          $4.83
  Authorized..............................................      500           --
  Granted.................................................     (838)         838          $9.70
  Exercised...............................................       --         (484)         $2.29
  Canceled................................................      558         (558)         $8.01
                                                             ------       ------
Balances, December 31, 1996...............................    1,367        2,335          $6.36
  Authorized..............................................    1,750           --
  Granted.................................................   (2,410)       2,410          $6.99
  Exercised...............................................       --         (442)         $4.48
  Canceled................................................    1,372       (1,372)         $8.52
                                                             ------       ------
Balances, December 31, 1997...............................    2,079        2,931          $6.13
  Authorized..............................................      623           --
  Granted.................................................   (2,940)       2,940          $5.46
  Exercised...............................................       --         (177)         $4.32
  Canceled................................................    2,419       (2,419)         $7.14
                                                             ------       ------
Balances, December 31, 1998...............................    2,181        3,275          $4.88
                                                             ======       ======
 
Exercisable at December 31, 1998.....................................      1,038          $5.43
Exercisable at December 31, 1997.....................................      1,425          $5.68
Exercisable at December 31, 1996.....................................      1,313          $5.10
 
Weighted average fair value of options granted during 1998........................        $3.55
Weighted average fair value of options granted during 1997........................        $3.78
Weighted average fair value of options granted during 1996........................        $5.97
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                                           OPTIONS EXERCISABLE
                                OPTIONS OUTSTANDING                    ----------------------------
                    NUMBER       WEIGHTED-AVERAGE       WEIGHTED-        NUMBER        WEIGHTED-
   RANGE OF       OUTSTANDING        REMAINING           AVERAGE       EXERCISABLE      AVERAGE
EXERCISE PRICES      (000)       CONTRACTUAL LIFE     EXERCISE PRICE      (000)      EXERCISE PRICE
---------------   -----------   -------------------   --------------   -----------   --------------
<S>               <C>           <C>                   <C>              <C>           <C>
$0.30 -  1.50          133           2.7 years            $ 1.27            133          $ 1.27
$3.00 -  4.38        1,998           9.2 years            $ 4.02            232          $ 3.28
$4.75 -  6.75          513           8.1 years            $ 5.86            251          $ 5.94
$7.00 - 10.13          590           8.3 years            $ 7.32            382          $ 7.22
$11.00 - 11.75          41           4.4 years            $11.19             41          $11.19
                     -----                                                -----
                     3,275                                                1,038
                     =====                                                =====
</TABLE>
 
                                       45
<PAGE>   47
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Somatix 1992 Stock Option Plan
 
     Under the terms of the merger agreement with Somatix, the Company adopted
the 1992 Stock Option Plan. Information with respect to the plan activity from
the date of acquisition, May 30, 1997 to December 31, 1998 follows:
 
<TABLE>
<CAPTION>
                                                                NUMBER OF       WEIGHTED AVERAGE
                                                                  SHARES        PRICE PER SHARE
                                                              --------------    ----------------
                                                              (IN THOUSANDS)
<S>                                                           <C>               <C>
Outstanding at acquisition..................................        1,018            $8.94
  Granted...................................................           --               --
  Exercised.................................................          (44)            4.69
  Canceled..................................................         (137)           10.15
                                                                ---------
Authorized and Outstanding at December 31, 1997.............          837             8.97
  Granted...................................................           --               --
  Exercised.................................................           --               --
  Canceled..................................................         (108)           16.04
                                                                ---------
Outstanding at December 31, 1998............................          729            $9.01
                                                                =========
Exercisable at December 31, 1998............................          719            $8.92
Exercisable at December 31, 1997............................          810            $8.73
Weighted average remaining contractual life at December 31,
  1998......................................................    5.6 years
</TABLE>
 
1992 Employee Stock Purchase Plan
 
     The 1992 Employee Stock Purchase Plan allows eligible employees to
participate and purchase common stock at 85% of its fair value at certain
specified dates. Employee contributions are limited to 10% of compensation. A
total of 500,000 shares of common stock have been reserved for issuance under
the Purchase Plan. As of December 31, 1998, 315,759 shares have been issued
pursuant to the Purchase Plan.
 
Pro forma information
 
     Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for options
granted under its employee stock option plans and the Purchase Plan under the
fair value method of that Statement. The fair value of Cell Genesys' options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions for 1996, 1997 and 1998, respectively: risk-free
interest rates of 5.29%, 6.46% and 4.64%; no dividend yields; volatility factors
of the expected market price of the Company's common stock of 0.68, 0.68 and
0.67; and an expected life of the option of 5 years under the stock option plan
and 0.5 years for options granted under the Purchase Plan.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
 
                                       46
<PAGE>   48
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table illustrates what net loss would have been had the Company accounted for
its stock options under the provisions of FAS 123.
 
<TABLE>
<CAPTION>
                                                          1998          1997           1996
                                                        --------      ---------      --------
                                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                     <C>           <C>            <C>
Net loss
  As reported.........................................  $(12,128)     $(123,529)     $ (9,274)
  Pro forma...........................................  $(14,463)     $(126,549)     $(11,028)
Net loss per share
  As reported.........................................  $  (0.46)     $   (5.33)     $  (0.57)
  Pro forma...........................................  $  (0.51)     $   (5.46)     $  (0.67)
</TABLE>
 
Stockholder Rights Plan
 
     In July 1995, the Board of Directors approved a stockholder rights plan
under which stockholders of record on August 21, 1995 received one preferred
share purchase right for each outstanding share of the Company's common stock.
The rights are exercisable only if an acquirer purchases 20% or more of the
Company's common stock or announces a tender offer for 20% or more of the
Company's common stock. Upon exercise, holders other than the acquirer may
purchase Cell Genesys stock at a discount. The Board of Directors may terminate
the rights plan at any time or under certain circumstances redeem the rights.
 
Warrants
 
     In connection with its collaboration agreement with Hoechst Marion Roussel,
the Company has a warrant outstanding for the purchase of 750,000 shares of
common stock at an exercise price of $13.00 per share, which expires in 2000.
 
     The Company has assumed various warrants issued by Somatix for the purchase
of common stock, of which 51,841 shares were outstanding at December 31, 1998,
at exercise prices ranging from $0.03 to $18.83 per share, all of which expire
at various dates during 1999.
 
Shares reserved
 
     At December 31, 1998, the Company has reserved shares of common stock for
potential future issuance consisting of (i) 3,238,217 upon conversion of
preferred stock; (ii) 801,841 upon exercises of warrants; and (iii) 5,633,117
for exercises under the employee stock option plans or the stock purchase plan.
 
11. INCOME TAXES
 
     As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $119 million. The Company also had federal
research and development tax credit carryforwards of approximately $2.4 million
as of December 31, 1998. The net operating loss and credit carryforwards will
expire in the years 1999 through 2018, 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.
 
                                       47
<PAGE>   49
                               CELL GENESYS, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
     Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31 are as follows in thousands:
 
<TABLE>
<CAPTION>
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
DEFERRED TAX ASSETS:
Net operating loss carryforwards............................  $ 41,400    $ 44,700
Research credit carryforwards...............................     3,200       3,100
Capitalized research and development........................     1,300       2,300
Capitalized license agreements..............................        --       8,000
Other -- net................................................     3,700       3,700
                                                              --------    --------
Net deferred tax assets.....................................    51,500      61,800
Valuation allowance.........................................   (51,500)    (61,800)
                                                              --------    --------
                                                              $      0    $      0
                                                              ========    ========
</TABLE>
 
     The net valuation allowance increased by $38.0 million during the year
ended December 31, 1997 and decreased by $10,300 in 1998. Approximately $2.6
million of the valuation allowance for deferred tax assets relates to benefits
of stock option deductions which, when recognized, will be allocated directly to
contributed capital.
 
12. LITIGATION AND CONTINGENCIES
 
     The Company is party to various claims, investigations and legal
proceedings arising out of the normal course of its business. These claims,
investigations and legal proceedings relate primarily to intellectual property
of which certain of them are the subject of ongoing interference or opposition
proceedings with patent authorities. While there can be no assurance that an
adverse determination of any such matters could not have a material adverse
impact in any future period, management does not believe, based upon information
known to it, that the final resolution of these matters will have a material
adverse effect upon the Company's business, financial position or results of
operations.
 
                                       48
<PAGE>   50
 
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
       DISCLOSURE
 
     Not applicable
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     (a) The information required by this Item concerning the Company's
directors is incorporated by reference to the Company's Proxy Statement related
to the 1999 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the Company's fiscal year end (the
"1999 Proxy Statement").
 
     (b) The information required by this Item concerning the Company's
executive officers is set forth in Part I of this Form 10-K.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item is incorporated by reference to the
Company's 1999 Proxy Statement.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is incorporated by reference to the
Company's 1999 Proxy Statement.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item is incorporated by reference to the
Company's 1999 Proxy Statement.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
 
(a) 1. INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Balance Sheets at December 31, 1998 and 1997................   31
Statements of Operations for the years ended December 31,
  1998, 1997 and 1996.......................................   32
Statement of Stockholders' Equity for the years ended
  December 31, 1998, 1997
  and 1996..................................................   33
Statements of Cash Flows for the years ended December 31,
  1998, 1977 and 1996.......................................   34
Notes to Financial Statements...............................   35
</TABLE>
 
     2. INDEX TO FINANCIAL STATEMENT SCHEDULES
 
     All financial statement schedules are omitted because they are not
applicable or not required or because the required information is included in
the financial statements or notes thereto.
 
(b) Reports on Form 8-K
 
     None.
 
                                       49
<PAGE>   51
 
(c) EXHIBITS
 
<TABLE>
<CAPTION>
    NUMBER                                 DESCRIPTION
    ------                                 -----------
    <S>      <C>   <C>
     2.1*     (9)  Stock Purchase Agreement, dated as of October 9, 1995,
                   between the Registrant and Hoechst Marion Roussel, Inc.
     2.2     (15)  Agreement and plan of merger and reorganization, dated as of
                   January 12, 1997, among Registrant, S Merger Corp. and
                   Somatix Therapy Corporation.
     3.1      (2)  Restated Certificate of Incorporation.
     3.2      (1)  Bylaws.
    10.1      (1)  Form of Indemnification Agreement for Directors and
                   Officers.
    10.2     (13)  Amended 1989 Incentive Stock Plan.
    10.3     (13)  Amended 1992 Employee Stock Purchase Plan.
    10.4      (1)  Representative Preferred Stock Purchase Agreement.
    10.5      (1)  Fourth Amended and Restated Stockholder Rights Agreement.
    10.6      (1)  License Agreement dated August 13, 1990 between Registrant
                   and the University of North Carolina at Chapel Hill.
    10.7      (1)  First page only of Exhibit 10.7.
    10.8*     (8)  Amended and Restated Exclusive License Agreement dated
                   September 5, 1995 between the Company and the Regents of the
                   University of California.
    10.9      (1)  License Agreement dated June 28, 1991 between Registrant and
                   the University of Utah Research Foundation.
    10.10*    (1)  First page only of Exhibit 10.9.
    10.11     (2)  Amended Employment Agreement with Stephen A. Sherwin, M.D.
    10.12     (3)  Master Loan and Security Agreement dated April 26, 1993
                   between Registrant and Financing for Science International,
                   Inc.
    10.13     (4)  Commitment Letter dated march 1, 1994 between Registrant and
                   Financing for Science International, Inc.
    10.14     (5)  Amendment dated April 25, 1994 to Commitment Letter with
                   Financing for Science International, Inc.
    10.15     (7)  Commitment Letter dated April 20, 1995 between the Company
                   and Financing for Science International, Inc.
    10.16    (13)  Amendment dated January 22, 1996 to Commitment Letter with
                   Financing for Science International, Inc.
    10.17     (6)  Research and Development Leases dated November 1, 1994
                   between Registrant and Vintage Park Associates and Addendums
                   thereto.
    10.18*   (10)  Collaboration Agreement, dated as of October 9,1995, by and
                   among the Registrant, Hoechst Aktiengesellschaft and Hoechst
                   Marion Roussel, Inc., including the letter agreement dated
                   as of October 9, 1995 between the parties.
    10.19*   (11)  Cross License Agreement. dated as of October 9, 1995,
                   between the Registrant and Hoechst Aktiengesellschaft.
    10.20*   (12)  Settlement Procedure Agreement, dated as of October 9, 1995,
                   by and among the Registrant, Hoechst Aktiengesellschft and
                   Massachusetts General Hospital.
    10.21*   (14)  Amendment No. 1 dated June 7, 1996 to Vintage Park Research
                   and Development lease.
    10.22    (16)  Stock Option Agreement, dated as of January 12, 1997,
                   between Somatix Therapy Corporation, as grantor, and
                   Registrant, as grantee.
</TABLE>
 
                                       50
<PAGE>   52
 
<TABLE>
<CAPTION>
    NUMBER                                 DESCRIPTION
    ------                                 -----------
    <S>      <C>   <C>
    10.23    (17)  Stock Option Agreement, dated as of January 12, 1997,
                   between Registrant, as grantor, and Somatix Therapy
                   Corporation, as grantee.
    10.24*   (18)  Release and Settlement Agreement, dated March 26, 1997,
                   among Cell Genesys, Inc., Abgenix. Inc., Xenotech, L.P.,
                   Japan Tobacco Inc. and GenPharm International. Inc.
    10.25*   (18)  Cross License Agreement, effective as of March 26, 1997,
                   among Cell Genesys, Inc. Abgenix, Inc., Xenotech, L.P.,
                   Japan Tobacco Inc. and GenPharm International, Inc.
    10.26*   (18)  Interference Settlement Procedure Agreement, effective as of
                   March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,
                   Xenotech. L.P., Japan Tobacco Inc. and GenPharm
                   International, Inc.
    10.27    (18)  Convertible Note Purchase Agreement, dated as of March 26,
                   1997, between Cell Genesys, Inc. and GenPharm International,
                   Inc.
    10.28    (18)  Convertible Subordinated Promissory Note, dated March 26,
                   1997, made by Cell Genesys Inc. to the order of GenPharm
                   International, Inc.
    10.29*         GVAX(TM) Agreement By and Between Japan Tobacco Inc. and
                   Cell Genesys, Inc. dated December 18, 1998.
    23.1           Consent of Ernst & Young LLP, Independent Auditors.
    24.1           Power of Attorney, (Reference is made to page 52).
    27.1           Financial Data Schedule.
</TABLE>
 
---------------
  *  Confidential treatment has been granted with respect to specific portions
     of this exhibit.
 
 (1) Incorporated by reference to the same numbered exhibit filed with the
     Company's Registration statement on Form S-1 (Reg. No. 33-46452) as
     amended.
 
 (2) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1992.
 
 (3) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     1993.
 
 (4) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1993.
 
 (5) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-K for the quarter ended March 31,
     1994.
 
 (6) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1994.
 
 (7) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
     1995.
 
 (8) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     1995.
 
 (9) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
     1995.
 
(10) Incorporated by reference to the same numbered exhibit filed with the
     Company's Form 8-K dated October 9, 1995.
 
(11) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
     dated October 9, 1995.
 
(12) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
     dated October 9, 1995.
 
(13) Incorporated by reference to Exhibit 10.3 filed with the Company's Form 8-K
     dated October 9, 1995.
 
(14) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1995.
 
                                       51
<PAGE>   53
 
(15) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     1996.
 
(16) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
     1996.
 
(17) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K
     dated January 12, 1997.
 
(18) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
     dated January 12, 1997.
 
(19) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
     dated January 12, 1997.
 
(20) Incorporated by reference to the Company's Form 10-K/A for the fiscal year
     ended December 31, 1996 as filed April 30, 1997.
 
                                       52
<PAGE>   54
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in Foster City, California, on
March 30, 1999:
 
                                          CELL GENESYS, INC.
 
                                          By:    /s/ MATTHEW J. PFEFFER
 
                                            ------------------------------------
                                                     Matthew J. Pfeffer
                                                  Chief Financial Officer
                                               (Principal Accounting Officer)
 
Date: March 30, 1999
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Stephen A. Sherwin, M.D. and Matthew J.
Pfeffer, jointly and severally, as his or her attorneys-in-fact, each with the
full power of substitution, for him or her, in any and all capacities, to sign
any amendment to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting to said attorneys-in-fact, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<S>                                                    <C>                              <C>
            /s/ STEPHEN A. SHERWIN, M.D.                   Chairman of the Board,       March 30, 1999
-----------------------------------------------------           President and
              Stephen A. Sherwin, M.D.                     Chief Executive Officer
                                                        (Principal Executive Officer)
 
               /s/ MATTHEW J. PFEFFER                      Chief Financial Officer      March 30, 1999
-----------------------------------------------------     (Principal Financial and
                 Matthew J. Pfeffer                          Accounting Officer)
 
                 /s/ DAVID W. CARTER                              Director              March 30, 1999
-----------------------------------------------------
                   David W. Carter
 
                 /s/ JAMES M. GOWER                               Director              March 30, 1999
-----------------------------------------------------
                   James M. Gower
 
           /s/ RAJU S. KUCHERLAPATI, PH.D.                        Director              March 30, 1999
-----------------------------------------------------
             Raju S. Kucherlapati, Ph.D.
</TABLE>
 
                                       53
<PAGE>   55
 
<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<S>                                                    <C>                              <C>
                /s/ JOSEPH E. MAROUN                              Director              March 30, 1999
-----------------------------------------------------
                  Joseph E. Maroun
 
            /s/ JOHN T. POTTS, JR., M.D.                          Director              March 30, 1999
-----------------------------------------------------
              John T. Potts, Jr., M.D.
 
                 /s/ EUGENE L. STEP                               Director              March 30, 1999
-----------------------------------------------------
                   Eugene L. Step
 
              /s/ INDER M. VERMA, PH.D.                           Director              March 30, 1999
-----------------------------------------------------
                Inder M. Verma, Ph.D.
</TABLE>
 
                                       54
<PAGE>   56
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
    NUMBER                                 DESCRIPTION
    ------                                 -----------
    <S>      <C>   <C>
     2.1*     (9)  Stock Purchase Agreement, dated as of October 9, 1995,
                   between the Registrant and Hoechst Marion Roussel, Inc.
     2.2     (15)  Agreement and plan of merger and reorganization, dated as of
                   January 12, 1997, among Registrant, S Merger Corp. and
                   Somatix Therapy Corporation.
     3.1      (2)  Restated Certificate of Incorporation.
     3.2      (1)  Bylaws.
    10.1      (1)  Form of Indemnification Agreement for Directors and
                   Officers.
    10.2     (13)  Amended 1989 Incentive Stock Plan.
    10.3     (13)  Amended 1992 Employee Stock Purchase Plan.
    10.4      (1)  Representative Preferred Stock Purchase Agreement.
    10.5      (1)  Fourth Amended and Restated Stockholder Rights Agreement.
    10.6      (1)  License Agreement dated August 13, 1990 between Registrant
                   and the University of North Carolina at Chapel Hill.
    10.7      (1)  First page only of Exhibit 10.7.
    10.8*     (8)  Amended and Restated Exclusive License Agreement dated
                   September 5, 1995 between the Company and the Regents of the
                   University of California.
    10.9      (1)  License Agreement dated June 28, 1991 between Registrant and
                   the University of Utah Research Foundation.
    10.10*    (1)  First page only of Exhibit 10.9.
    10.11     (2)  Amended Employment Agreement with Stephen A. Sherwin, M.D.
    10.12     (3)  Master Loan and Security Agreement dated April 26, 1993
                   between Registrant and Financing for Science International,
                   Inc.
    10.13     (4)  Commitment Letter dated march 1, 1994 between Registrant and
                   Financing for Science International, Inc.
    10.14     (5)  Amendment dated April 25, 1994 to Commitment Letter with
                   Financing for Science International, Inc.
    10.15     (7)  Commitment Letter dated April 20, 1995 between the Company
                   and Financing for Science International, Inc.
    10.16    (13)  Amendment dated January 22, 1996 to Commitment Letter with
                   Financing for Science International, Inc.
    10.17     (6)  Research and Development Leases dated November 1, 1994
                   between Registrant and Vintage Park Associates and Addendums
                   thereto.
    10.18*   (10)  Collaboration Agreement, dated as of October 9,1995, by and
                   among the Registrant, Hoechst Aktiengesellschaft and Hoechst
                   Marion Roussel, Inc., including the letter agreement dated
                   as of October 9, 1995 between the parties.
    10.19*   (11)  Cross License Agreement. dated as of October 9, 1995,
                   between the Registrant and Hoechst Aktiengesellschaft.
    10.20*   (12)  Settlement Procedure Agreement, dated as of October 9, 1995,
                   by and among the Registrant, Hoechst Aktiengesellschft and
                   Massachusetts General Hospital.
    10.21*   (14)  Amendment No. 1 dated June 7, 1996 to Vintage Park Research
                   and Development lease.
    10.22    (16)  Stock Option Agreement, dated as of January 12, 1997,
                   between Somatix Therapy Corporation, as grantor, and
                   Registrant, as grantee.
</TABLE>
<PAGE>   57
 
<TABLE>
<CAPTION>
    NUMBER                                 DESCRIPTION
    ------                                 -----------
    <S>      <C>   <C>
    10.23    (17)  Stock Option Agreement, dated as of January 12, 1997,
                   between Registrant, as grantor, and Somatix Therapy
                   Corporation, as grantee.
    10.24*   (18)  Release and Settlement Agreement, dated March 26, 1997,
                   among Cell Genesys, Inc., Abgenix. Inc., Xenotech, L.P.,
                   Japan Tobacco Inc. and GenPharm International. Inc.
    10.25*   (18)  Cross License Agreement, effective as of March 26, 1997,
                   among Cell Genesys, Inc. Abgenix, Inc., Xenotech, L.P.,
                   Japan Tobacco Inc. and GenPharm International, Inc.
    10.26*   (18)  Interference Settlement Procedure Agreement, effective as of
                   March 26, 1997, among Cell Genesys, Inc., Abgenix, Inc.,
                   Xenotech. L.P., Japan Tobacco Inc. and GenPharm
                   International, Inc.
    10.27    (18)  Convertible Note Purchase Agreement, dated as of March 26,
                   1997, between Cell Genesys, Inc. and GenPharm International,
                   Inc.
    10.28    (18)  Convertible Subordinated Promissory Note, dated March 26,
                   1997, made by Cell Genesys Inc. to the order of GenPharm
                   International, Inc.
    10.29*         GVAX(TM) Agreement By and Between Japan Tobacco Inc. and
                   Cell Genesys, Inc. dated December 18, 1998.
    23.1           Consent of Ernst & Young LLP, Independent Auditors.
    24.1           Power of Attorney, (Reference is made to page 52).
    27.1           Financial Data Schedule.
</TABLE>
 
---------------
  *  Confidential treatment has been granted with respect to specific portions
     of this exhibit.
 
 (1) Incorporated by reference to the same numbered exhibit filed with the
     Company's Registration statement on Form S-1 (Reg. No. 33-46452) as
     amended.
 
 (2) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1992.
 
 (3) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     1993.
 
 (4) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1993.
 
 (5) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-K for the quarter ended March 31,
     1994.
 
 (6) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1994.
 
 (7) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
     1995.
 
 (8) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     1995.
 
 (9) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
     1995.
 
(10) Incorporated by reference to the same numbered exhibit filed with the
     Company's Form 8-K dated October 9, 1995.
 
(11) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
     dated October 9, 1995.
 
(12) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
     dated October 9, 1995.
 
(13) Incorporated by reference to Exhibit 10.3 filed with the Company's Form 8-K
     dated October 9, 1995.
 
(14) Incorporated by reference to the same numbered exhibit filed with the
     Company's Annual Report on Form 10-K for the year ended December 31, 1995.
<PAGE>   58
 
(15) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
     1996.
 
(16) Incorporated by reference to the same numbered exhibit filed with the
     Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
     1996.
 
(17) Incorporated by reference to Exhibit 2.1 filed with the Company's Form 8-K
     dated January 12, 1997.
 
(18) Incorporated by reference to Exhibit 10.1 filed with the Company's Form 8-K
     dated January 12, 1997.
 
(19) Incorporated by reference to Exhibit 10.2 filed with the Company's Form 8-K
     dated January 12, 1997.
 
(20) Incorporated by reference to the Company's Form 10-K/A for the fiscal year
     ended December 31, 1996 as filed April 30, 1997.