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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



---



FORM 10-Q



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



FOR THE PERIOD ENDED September 30, 2003



OR



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



FOR THE TRANSITION PERIOD FROM
 TO
.



COMMISSION FILE NUMBER: 0-31265



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TELIK, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



|DELAWARE                                                       |  | 93-0987903                          
|-------------------------------------------------------------- |  | ------------------------------------
|(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) |  | (I.R.S. EMPLOYER IDENTIFICATION NO.)



3165 PORTER DRIVE,
PALO ALTO, CA 94304

(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)



REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 845-7700



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:



COMMON STOCK $0.01 PAR VALUE

(TITLE OF CLASS)



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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 for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x  No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  x  No ̈



Indicate the number of shares outstanding of each of the issuers
classes of common stock, as of the latest practicable date.



|Class: Common Stock $0.01 par value |  | Outstanding at October 31, 2003: 35,941,303 shares
|----------------------------------- |  | --------------------------------------------------



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##### Table of Contents

TELIK, INC.



INDEX



|           |  |                                                                                                           |  | Page
|---------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                          
|PART I.    |  | FINANCIAL INFORMATION                                                                                     |  |     
|           |  |                                                                                                          
|Item 1:    |  | Financial Statements (Unaudited)                                                                          |  |     
|           |  |                                                                                                          
|           |  | Condensed Balance Sheets as of September 30, 2003 and December 31, 2002                                   |  | 3   
|           |  |                                                                                                          
|           |  | Condensed Statements of Operations for the three months and nine months ended September 30, 2003 and 2002 |  | 4   
|           |  |                                                                                                          
|           |  | Condensed Statements of Cash Flows for the nine months ended September 30, 2003 and 2002                  |  | 5   
|           |  |                                                                                                          
|           |  | Notes to Condensed Financial Statements                                                                   |  | 6   
|           |  |                                                                                                          
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 12  
|           |  |                                                                                                          
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 30  
|           |  |                                                                                                          
|Item 4:    |  | Controls and Procedures                                                                                   |  | 31  
|           |  |                                                                                                          
|PART II.   |  | OTHER INFORMATION                                                                                         |  |     
|           |  |                                                                                                          
|Item 6:    |  | Exhibits and Reports on Form 8-K                                                                          |  | 32  
|           | 
|SIGNATURES |  | 33                                                                                                       



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TELIK, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                                                 |  | September 30, 2003 |          |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------ | -------- | - | ----------------- | -
|                                                                                                                                                                                                 |  | (Unaudited)        |          |   | (Note 1)          |  
|Assets                                                                                                                                                                                           |  |                    |          |   |                   |  
|Current assets:                                                                                                                                                                                  |  |                    |          |   |                   |  
|Cash and cash equivalents                                                                                                                                                                        |  | $                  | 21,891   |   |                   | $
|Short-term investments                                                                                                                                                                           |  |                    | 31,822   |   |                   |  
|Other receivables                                                                                                                                                                                |  |                    | 194      |   |                   |  
|Prepaids and other current assets                                                                                                                                                                |  |                    | 1,715    |   |                   |  
|                                                                                                                                                                                                 |  |                    |          |   |                   |  
|Total current assets                                                                                                                                                                             |  |                    | 55,622   |   |                   |  
|Property and equipment, net                                                                                                                                                                      |  |                    | 5,559    |   |                   |  
|Long-term investments                                                                                                                                                                            |  |                    | 13,601   |   |                   |  
|Restricted investments                                                                                                                                                                           |  |                    | 1,796    |   |                   |  
|Other assets                                                                                                                                                                                     |  |                    | 60       |   |                   |  
|                                                                                                                                                                                                 |  |                    |          |   |                   |  
|Total assets                                                                                                                                                                                     |  | $                  | 76,638   |   |                   | $
|                                                                                                                                                                                                 |  |                    |          |   |                   |  
|Liabilities and Stockholders Equity                                                                                                                                                             |  |                    |          |   |                   |  
|Current liabilities:                                                                                                                                                                             |  |                    |          |   |                   |  
|Accounts payable                                                                                                                                                                                 |  | $                  | 2,695    |   |                   | $
|Accrued clinical trials                                                                                                                                                                          |  |                    | 2,779    |   |                   |  
|Accrued compensation                                                                                                                                                                             |  |                    | 1,341    |   |                   |  
|Accrued liabilities                                                                                                                                                                              |  |                    | 879      |   |                   |  
|Deferred revenue                                                                                                                                                                                 |  |                    | 25       |   |                   |  
|Current portion of capital leases and equipment loans                                                                                                                                            |  |                    | 888      |   |                   |  
|                                                                                                                                                                                                 |  |                    |          |   |                   |  
|Total current liabilities                                                                                                                                                                        |  |                    | 8,607    |   |                   |  
|Non-current portion of capital leases and equipment loans                                                                                                                                        |  |                    | 1,728    |   |                   |  
|Other liabilities                                                                                                                                                                                |  |                    | 548      |   |                   |  
|Commitments                                                                                                                                                                                      |  |                    |          |   |                   |  
|Stockholders equity:                                                                                                                                                                            |  |                    |          |   |                   |  
|Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued or outstanding                                                                                                        |  |                    |         |   |                   |  
|Common stock, $0.01 par value, and additional paid-in capital:100,000,000 shares authorized; shares issued and outstanding:
35,936,428 at September 30, 2003 and 35,567,081 at December 31, 2002 |  |                    | 219,311  |   |                   |  
|Deferred stock compensation, net                                                                                                                                                                 |  |                    | (185     | ) |                   |  
|Accumulated other comprehensive income                                                                                                                                                           |  |                    | 30       |   |                   |  
|Accumulated deficit                                                                                                                                                                              |  |                    | (153,401 | ) |                   |  
|                                                                                                                                                                                                 |  |                    |          |   |                   |  
|Total stockholders equity                                                                                                                                                                       |  |                    | 65,755   |   |                   |  
|                                                                                                                                                                                                 |  |                    |          |   |                   |  
|Total liabilities and stockholders equity                                                                                                                                                       |  | $                  | 76,638   |   |                   | $
|                                                                                                                                                                                                 |  |                    |          |   |                   |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                     |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|-------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | -
|                                                                     |  | 2003                            |         |   | 2002                           |  
|Contract revenue from collaborations:                                |  |                                 |         |   |                                |  
|With related parties                                                 |  | $                               |        |   |                                | $
|Other                                                                |  |                                 | 6       |   |                                |  
|Other revenue                                                        |  |                                 |        |   |                                |  
|                                                                     |  |                                 |         |   |                                |  
|Total revenues                                                       |  |                                 | 6       |   |                                |  
|Operating costs and expenses:                                        |  |                                 |         |   |                                |  
|Research and development                                             |  |                                 | 10,671  |   |                                |  
|General and administrative                                           |  |                                 | 2,628   |   |                                |  
|                                                                     |  |                                 |         |   |                                |  
|Total operating costs and expenses                                   |  |                                 | 13,299  |   |                                |  
|Loss from operations                                                 |  |                                 | (13,293 | ) |                                |  
|Interest income                                                      |  |                                 | 241     |   |                                |  
|Interest expense                                                     |  |                                 | (51     | ) |                                |  
|                                                                     |  |                                 |         |   |                                |  
|Net loss                                                             |  | $                               | (13,103 | ) |                                | $
|                                                                     |  |                                 |         |   |                                |  
|Basic and diluted net loss per common share                          |  | $                               | (0.37   | ) |                                | $
|                                                                     |  |                                 |         |   |                                |  
|Shares used to calculate basic and diluted net loss per common share |  |                                 | 35,895  |   |                                |  
|                                                                     |  |                                 |         |   |                                |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  | Nine Months Ended September 30, |        
|--------------------------------------------------------------------------- |  | ------------------------------- | -------
|                                                                            |  | 2003                            |        
|Cash flows from operating activities:                                       |  |                                 |        
|Net loss                                                                    |  | $                               | (36,112
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |        
|Depreciation and amortization                                               |  |                                 | 688    
|Amortization of deferred stock compensation                                 |  |                                 | 327    
|Stock options granted to non-employees                                      |  |                                 | 203    
|Forgiveness of note receivable from related party                           |  |                                 |       
|Changes in assets and liabilities:                                          |  |                                 |        
|Other receivables                                                           |  |                                 | 1,711  
|Prepaid expenses and other current assets                                   |  |                                 | (718   
|Other assets                                                                |  |                                 | 50     
|Accounts payable                                                            |  |                                 | (3,527 
|Accrued clinical trials, compensation and other liabilities                 |  |                                 | 2,827  
|Deferred revenue                                                            |  |                                 | (380   
|                                                                            |  |                                 |        
|Net cash used in operating activities                                       |  |                                 | (34,931
|                                                                            |  |                                 |        
|Cash flows from investing activities:                                       |  |                                 |        
|Purchases of investments                                                    |  |                                 | (75,375
|Sales of investments                                                        |  |                                 | 77,530 
|Maturities of investments                                                   |  |                                 | 18,220 
|Change in restricted investments                                            |  |                                 | 2,000  
|Purchases of property and equipment                                         |  |                                 | (3,729 
|                                                                            |  |                                 |        
|Net cash provided by (used in) investing activities                         |  |                                 | 18,646 
|                                                                            |  |                                 |        
|Cash flows from financing activities:                                       |  |                                 |        
|Proceeds from equipment loans                                               |  |                                 | 1,688  
|Principal payments under capital leases and equipment loans                 |  |                                 | (332   
|Net proceeds from issuance of common stock                                  |  |                                 | 2,132  
|Payment of promissory note from employee                                    |  |                                 |       
|                                                                            |  |                                 |        
|Net cash provided by financing activities                                   |  |                                 | 3,488  
|                                                                            |  |                                 |        
|Net decrease in cash and cash equivalents                                   |  |                                 | (12,797
|Cash and cash equivalents at beginning of period                            |  |                                 | 34,688 
|                                                                            |  |                                 |        
|Cash and cash equivalents at end of period                                  |  | $                               | 21,891 
|                                                                            |  |                                 |        
|Supplementary information:                                                  |  |                                 |        
|Interest paid                                                               |  | $                               | 103    
|Non-cash financing activities:                                              |  |                                 |        
|Equipment acquired under capital leases                                     |  | $                               | 839    



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

Notes to Condensed Financial Statements

(Unaudited)



1. Basis of presentation and summary of significant accounting policies



We have prepared the accompanying financial statements in accordance with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial
statements. We believe all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2003 or any other period. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date. You should read these
financial statements and notes in conjunction with our audited financial statements for the year ended December 31, 2002, which are included in our Annual Report on Form 10-K.



Use of estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.



Revenue recognition



Contract revenue consists of revenue from research and development collaboration agreements. Our research and development collaboration agreements provide
for periodic payments in support of our research activities. We recognize contract revenue from these agreements as earned based upon the performance requirements of the agreements and we recognize payments of up-front technology access and license
fees ratably over the period of the related research program. Payments received, which are related to future performance, are deferred and recognized as revenue when earned over future performance periods.



We have received United States government grants, which support research
efforts in defined projects. We recognize revenue from such government grants as costs relating to the grants are incurred.



Stock-based compensation



We issue stock options to our employees and outside directors and provide employees the right to purchase our stock pursuant to stockholder approved stock
option and employee stock purchase programs. We account for our stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. For pro forma disclosures, the estimated fair value of the options is amortized over the vesting period, typically four years, and the estimated fair value of the stock purchases is amortized over the
six-month purchase period. The following table illustrates the effect on net loss and net loss per common share if we had accounted for our stock option and stock purchase plans under the fair value method of accounting under Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148 (in thousands):



|                                                                                                         |  | Three Months EndedSeptember 30, |         |   | Nine Months Ended September 30, |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | -
|                                                                                                         |  | 2003                            |         |   | 2002                            |  
|Net loss  as reported                                                                                   |  | $                               | (13,103 | ) |                                 | $
|Add: Stock-based employee compensation included in reported net loss                                     |  |                                 | 99      |   |                                 |  
|Deduct: Total stock-based employee compensation expense under the fair value based method for all awards |  |                                 | (2,352  | ) |                                 |  
|                                                                                                         |  |                                 |         |   |                                 |  
|Net loss  pro forma                                                                                     |  | $                               | (15,356 | ) |                                 | $
|                                                                                                         |  |                                 |         |   |                                 |  
|Basic and diluted net loss per common share  as reported                                                |  | $                               | (0.37   | ) |                                 | $
|                                                                                                         |  |                                 |         |   |                                 |  
|Basic and diluted net loss per common share  pro forma                                                  |  | $                               | (0.43   | ) |                                 | $
|                                                                                                         |  |                                 |         |   |                                 |  



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Stock compensation expense for options granted to non-employees has been determined in accordance with
SFAS 123 and EITF 96-18, Accounting for Equity Investments that are issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services, as the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measured. The fair value of options granted to non-employees is periodically re-measured as the underlying options vest.



We estimate the fair value of our options using the Black-Scholes option value model, which is one of several methods that
can be used to estimate option values. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the
input of highly subjective assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the
fair value estimates. The fair value of options granted and employee purchase plan shares were estimated at the date of grant using a Black-Scholes pricing model with the following weighted-average assumptions:



|                                |  | Stock Option Plans             |   |  | StockPurchase Plan             |  
|------------------------------- |  | ------------------------------ | - |  | ------------------------------ | -
|                                |  | Three MonthsEndedSeptember 30, |   |  | Three MonthsEndedSeptember 30, |  
|                                |  | 2003                           |   |  | 2002                           |  
|Expected stock price volatility |  | 75.1                           | % |  | 81.5                           | %
|Risk-free interest rate         |  | 3.13                           | % |  | 3.54                           | %
|Expected life (in years)        |  | 5.1                            |   |  | 5.0                            |  
|Expected dividend yield         |  |                               |   |  |                               |  



|                                |  | Stock Option Plans            |   |  | StockPurchase Plan            |  
|------------------------------- |  | ----------------------------- | - |  | ----------------------------- | -
|                                |  | Nine MonthsEndedSeptember 30, |   |  | Nine MonthsEndedSeptember 30, |  
|                                |  | 2003                          |   |  | 2002                          |  
|Expected stock price volatility |  | 77.7                          | % |  | 81.5                          | %
|Risk-free interest rate         |  | 2.94                          | % |  | 3.54                          | %
|Expected life (in years)        |  | 5.0                           |   |  | 5.0                           |  
|Expected dividend yield         |  |                              |   |  |                              |  



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Recent accounting pronouncements



In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46), which is effective for the Company on July 1, 2003. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entitys activities or entitled to receive a majority of the entitys residual returns or both. The adoption of FIN 46 did not have a material impact on our results of operations or financial
position.



Reclassification



Intellectual property related legal fees of $202,000 and $896,000 for the
three and nine months ended September 30, 2002, presented in prior periods as research and development expenses, are now reflected in general and administrative expenses.



2. Comprehensive loss



Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes changes in unrealized gains
(losses) on investments. Comprehensive loss for the three and nine months ended September 30, 2003 and 2002 are as follows (in thousands):



|                                                    |  | Three Months EndedSeptember 30, |         |   | Nine Months Ended September 30, |  
|--------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | -
|                                                    |  | 2003                            |         |   | 2002                            |  
|Net loss                                            |  | $                               | (13,103 | ) |                                 | $
|Changes in unrealized gains (losses) on investments |  |                                 | (22     | ) |                                 |  
|                                                    |  |                                 |         |   |                                 |  
|Comprehensive loss                                  |  | $                               | (13,125 | ) |                                 | $
|                                                    |  |                                 |         |   |                                 |  



3. Basic and diluted net loss per
share



We have computed net loss per common share
according to SFAS No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share exclude any dilutive effects of options, shares subject to repurchase, warrants and convertible
securities. Diluted earnings per share include the impact of potentially dilutive securities. A reconciliation of shares used in the calculation is as follows (in thousands, except per share data):



|                                                                                      |  | Three Months EndedSeptember 30, |         |   | Nine Months Ended September 30, |  
|------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------- | -
|                                                                                      |  | 2003                            |         |   | 2002                            |  
|Net loss                                                                              |  | $                               | (13,103 | ) |                                 | $
|Weighted-average common shares outstanding                                            |  |                                 | 35,895  |   |                                 |  
|Less: weighted-average common shares subject to repurchase                            |  |                                 |        |   |                                 |  
|                                                                                      |  |                                 |         |   |                                 |  
|Weighted-average shares used in computing basic and diluted net loss per common share |  |                                 | 35,895  |   |                                 |  
|                                                                                      |  |                                 |         |   |                                 |  
|Basic and diluted net loss per common share                                           |  | $                               | (0.37   | ) |                                 | $
|                                                                                      |  |                                 |         |   |                                 |  



Outstanding options to
purchase, in the aggregate 5,055,416 and 4,622,469 shares of common stock for the three months ending September 30, 2003 and 2002 were excluded from diluted net loss per common share calculations because inclusion of such options would have an
anti-dilutive effect on losses in these periods. Options to purchase 4,951,345 and 4,197,668 shares of common stock were outstanding for the nine months ending September 30, 2003 and 2002, but were excluded because such options were anti-dilutive in
these periods.



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4. Cash, cash equivalents, investments and restricted investments



The following is a summary of cash equivalents, investments and restricted
investments (in thousands):



|                            |  | September 30, 2003
|--------------------------- |  | ------------------
|                            |  | AmortizedCosts    
|Certificate of deposit      |  | $                 
|Corporate notes             |  |                   
|Commercial paper            |  |                   
|Government agencies         |  |                   
|Cash and money market funds |  |                   
|                            |  |                   
|Total                       |  | $                 
|                            |  |                   
|Reported as:                |  |                   
|Cash and cash equivalents   |  |                   
|Short-term investments      |  |                   
|Long-term investments       |  |                   
|Restricted investments      |  |                   
|                            |  |                   
|Total                       |  |                   
|                            |  |                   



|                            |  | December 31, 2002
|--------------------------- |  | -----------------
|                            |  | AmortizedCosts   
|Certificate of deposits     |  | $                
|Corporate notes             |  |                  
|Commercial paper            |  |                  
|Government notes            |  |                  
|Cash and money market funds |  |                  
|                            |  |                  
|Total                       |  | $                
|                            |  |                  
|Reported as:                |  |                  
|Cash and cash equivalents   |  |                  
|Short-term investments      |  |                  
|Long-term investments       |  |                  
|Restricted investments      |  |                  
|                            |  |                  
|Total                       |  |                  
|                            |  |                  



The net realized gains
on sales of available for sale investments were not material for any periods presented. Realized gains and losses were calculated based on the specific identification method. At September 30, 2003 and December 31, 2002, the weighted-average
maturities of our available-for-sale securities were 131 days and 60 days, respectively.



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5. Property and equipment



Property and equipment consist of the following (in thousands):



|                                               |  | September30, 2003 |        |   | December31, 2002 |  
|---------------------------------------------- |  | ----------------- | ------ | - | ---------------- | -
|Laboratory equipment                           |  | $                 | 5,644  |   |                  | $
|Office furniture and equipment                 |  |                   | 1,550  |   |                  |  
|Leasehold improvements                         |  |                   | 4,338  |   |                  |  
|                                               |  |                   |        |   |                  |  
|                                               |  |                   | 11,532 |   |                  |  
|Less accumulated depreciation and amortization |  |                   | (5,973 | ) |                  |  
|                                               |  |                   |        |   |                  |  
|Property and equipment, net                    |  | $                 | 5,559  |   |                  | $
|                                               |  |                   |        |   |                  |  



6. Capital leases and equipment
loan



In August 2002, we entered into a Master Lease
Agreement, as amended, relating to an equipment lease facility and a related Master Security Agreement, as amended, relating to a line of credit secured by equipment and tenant improvements. Collectively, these credit facilities provide for a line
of credit of up to approximately $2.5 million. Both credit facilities have a drawdown period of one year. Draws on the Master Lease Agreement have a payment term of 42 months with an early buyout option at 36 months. Draws on the Master Security
Agreement have a payment term of 36 months. Draws under both agreements will bear interest at a rate to be fixed at the time of drawdown, calculated as 675 basis points above the current four-year Treasury Constant Maturities rate. In March 2003, we
drew down $1.3 million under the Master Security Agreement and in May 2003 we drew down $839,000 under the Master Lease Agreement. At September 30, 2003, draws under both credit facilities totaled approximately $2.5 million, bearing interest rates
between 4.3% and 11.5%. Pursuant to the terms of these credit facilities, we are required to maintain a balance of cash and investments of at least $20.5 million. In the event our cash and investments balance falls below $20.5 million, we are
obligated to provide the lessor with a continuing irrevocable letter of credit from a financial institution acceptable to the lessor in an amount equal to 100% of the outstanding balance of all indebtedness and loans.



In August 2003, we entered into a Loan and Security Agreement relating to an
equipment facility secured by equipment purchased. The Agreement provides for a line of credit of up to $1.5 million and has a drawdown period of one year. Draws on the Loan and Security Agreement have a payment term of 36 months and will bear
interest at a rate fixed at the time of each advance at a per annum rate of 375 basis points above the current thirty-six (36) month Treasury Constant Maturity rate provided that at no time shall such interest rate be less than 5.09% per annum. At
September 30, 2003, draws under this credit facility totaled approximately $368,000, bearing an interest rate of 5.9%. Pursuant to the terms of the credit facility, we are required to maintain a balance of cash and investments with the lender of at
least $5.0 million.



As of September 30, 2003, future payments
under capital leases and loans are as follows (in thousands):



|                                  |  | CapitalLeases |     | Loans |   | Total
|--------------------------------- |  | ------------- | --- | ----- | - | -----
|Year ending December 31:          |  |               |     |       |   |      
|2003                              |  | $             | 96  |       | $ | 275  
|2004                              |  |               | 301 |       |   | 771  
|2005                              |  |               | 318 |       |   | 751  
|2006                              |  |               | 246 |       |   | 273  
|                                  |  |               |     |       |   |      
|Total                             |  | $             | 961 |       | $ | 2,070
|Less amount representing interest |  |               |     |       |   |      
|                                  |  |               |     |       |   |      
|Present value of future payments  |  |               |     |       |   |      
|                                  |  |               |     |       |   |      
|Reported as current portion       |  |               |     |       |   |      
|                                  |  |               |     |       |   |      
|Non-current portion               |  |               |     |       |   |      
|                                  |  |               |     |       |   |      



|7. | Registration statement on Form S-3
|-- | ----------------------------------



In September 2003, we filed a registration statement on Form S-3 to offer and sell, from time to time, equity and debt securities in one or more offerings
up to a total dollar amount of $150 million. On November 6, 2003, we sold 6.5 million shares of common stock and a selling stockholder sold 1.0 million



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shares of common stock at a price of $20 per share in an underwritten public offering pursuant to this registration statement. We expect to receive
approximately $122.2 million in proceeds from the issuance of 6.5 million shares, representing gross proceeds of $130 million less underwriting discounts and commissions. The underwriters will have an option to purchase from us up to an additional
1,125,000 shares to cover over-allotments, if any.



8. Lease exit costs



In September 2003, we determined that there was excess
office space associated with our move in March 2003 from South San Francisco to Palo Alto, California for which a sublease could not be obtained. We vacated approximately 7,000 square feet of leased office space with a lease term through September
2004. We recorded a charge of approximately $206,000 to general and administrative expense, representing the future minimum lease payments related to the excess space.



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ITEM 2.



MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



Special Note Regarding Statements of Expected Future Performance



This Quarterly Report on Form 10-Q contains statements indicating
expectations about future performance and other forward-looking statements that involve risks and uncertainties. We usually use words such as may, will, should, expect, plan,
anticipate, believe, estimate, predict, future, intend, potential, or continue or the negative of these terms or similar expressions to identify
forward-looking statements. These statements appear throughout this Quarterly Report on Form 10-Q and are statements regarding our current intent, belief or expectation, primarily with respect to our operations and related industry developments.
Examples of these statements include, but are not limited to, statements regarding the following: the implications of positive interim results of our Phase 2 clinical trials, the progress of our research programs, including clinical testing, the
extent to which our issued and pending patents may protect our products and technology, our ability to identify new product candidates using TRAP technology (our proprietary Target-Related Affinity Profiling technology), the potential of such
product candidates to lead to the development of safer or more effective therapies, our ability to develop the technology derived from our collaborations, our anticipated timing for filing additional INDs (Investigational New Drug applications) with
the Food and Drug Administration (FDA) or for the initiation or completion of Phase 1, Phase 2 or Phase 3 testing for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and
development and the sufficiency of our cash resources. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from
those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in the section of this Item 2 titled Additional Factors That May Affect Future Results and elsewhere in this Quarterly
Report on Form 10-Q.



The following discussion and analysis
should be read in conjunction with the unaudited financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with the financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on March 10, 2003.



Overview



Telik is engaged in the discovery, development and commercialization of small molecule therapeutics. We have incurred net losses since inception and
expect to incur substantial and increasing losses for the next several years as we expand our research and development activities and move our product candidates into later stages of development. As of September 30, 2003, we had an accumulated
deficit of $153.4 million.



Our expenses have consisted
primarily of those incurred for research and development and general and administrative costs associated with our operations. The process of carrying out the development of our own unpartnered products to later stages of development and our research
programs for our corporate partners may require significant additional research and development expenditures, including preclinical testing and clinical trials, as well as for obtaining regulatory approval. To date, we have funded our operations
primarily through the sale of equity securities and non-equity payments from collaborative partners.



We expect that our quarterly and annual results of operations will fluctuate for the foreseeable future due to several factors, including the timing and
extent of our research and development efforts and the outcome of our clinical trial activities. Our limited operating history makes accurate prediction of future operating results difficult or impossible.



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During the third quarter of 2003 we announced the following:



| |  | Our Phase 3 protocol for TELCYTA (TLK286) in non-small cell lung cancer (NSCLC) successfully completed Special Protocol Assessment (SPA) review by the U.S. Food and Drug Administration.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The U.S Food and Drug Administration granted Fast Track designation for TELCYTA (TLK286) for third line therapy in patients with platinum refractory or resistant ovarian cancer.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Positive follow-up data from a Phase 2 clinical trial of TELCYTA (TLK286) in patients with non-small cell lung cancer whose disease progressed following platinum-containing regimens. The data was reported at the
Tenth World Conference on Lung Cancer in Vancouver, British Columbia.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical accounting policies



We believe the
following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.



Revenue recognition



Since our inception, most of our revenues have been generated from license and research agreements with collaborators. We recognize cost reimbursement
revenue under these collaborative agreements as the related research and development costs are incurred. We recognize milestone fees upon completion of specified milestones according to contract terms. Deferred revenue represents the portion of
research payments received that has not been earned.



We also
have several royalty and licensing agreements with other pharmaceutical, biotechnology and genomics companies. Under these agreements, we may receive fees for collaborative research efforts, royalties on future sales of products, or some combination
of these items. We recognize nonrefundable signing or license fees that are not dependent on future performance under these agreements as revenue when received or over the term of the arrangement if we have continuing performance obligations.



We have received United States governmental grants, which
support research efforts in defined projects. We recognize revenue from such government grants as costs relating to the grants are incurred.



Research and development expenses



Our research and development expenses include salaries and benefits costs, fees for contractors and consultants, and an allocation of facility and
administrative costs. Research and development expenses consist of costs incurred for drug and product development, manufacturing, clinical activities, discovery research, screening and identification of drug candidates, and preclinical studies. All
such costs are charged to research and development expenses as incurred.



Clinical development costs are a significant component of research expenses. We accrue costs for clinical trial activities performed by contract research organizations based upon estimates of the percentage of work
completed over the life of the individual study. These estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels and related activities. We monitor patient enrollment levels and
related activities to the extent possible; however, if we underestimated activity levels associated with various studies at a given point in time, we could record significant research and development expenses in future periods.



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Deferred stock compensation



In connection with the grant of stock options to employees, we recorded deferred stock compensation totaling $2.6 million
and $0.3 million in the years ended December 31, 2000 and 1999. Deferred stock compensation for options granted to employees has been determined as the difference between the deemed fair value of our common stock for financial reporting purposes on
the date such options were granted and the applicable exercise prices. Such amount is included as a reduction of stockholders equity and is being amortized using straight-line vesting. We recorded amortization of deferred stock compensation of
$99,000 and $327,000 for the three and nine months ended September 30, 2003 and $118,000 and $386,000 for the three and nine months ended September 30, 2002. At September 30, 2003, we had a total of $185,000 to be amortized over the remaining
vesting periods of the stock options.



Use of estimates



In preparing our financial statements to conform with accounting principles
generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates include useful lives for fixed assets for depreciation calculations and
assumptions for valuing options and warrants. Actual results may differ from these estimates.



Results of operations



Three
Months Ended September 30, 2003 and 2002



Revenues



Revenues for the three months ended September 30, 2003 and 2002 were
$6,000 and $250,000. Revenues in 2003 resulted primarily from our collaborative agreement with Roche, while revenues in 2002 resulted from our collaborative agreement with Sanwa and also included funded research related to grants received from the
National Institutes of Health. The decrease in revenues of $244,000 was primarily due to the completion of our remaining collaboration with Sanwa in May 2003.



We expect near-term future revenues to fluctuate primarily depending upon the extent to which we enter into new collaborative research agreements and
the amounts of payments relating to such agreements.



Research and
development expenses



Research and development expenses
for the three months ended September 30, 2003 and 2002 were $10.7 million and $6.7 million, representing an increase of 60% or $4.0 million. Research and development expenses of $6.7 million for the three months ended September 30, 2002 reflect the
reclassification of intellectual property related legal fees of $202,000 to general and administrative expenses to conform with our presentation in 2003. We previously reported research and development expenses of $6.9 million for the same period in
2002. Our research and development activities consist primarily of drug development, clinical supply manufacturing, clinical activities, discovery research, screening and identification of drug candidates, and preclinical studies. We group these
activities into two major categories: research and preclinical and clinical development. Research and preclinical costs primarily represent our new drug discovery efforts and preclinical work for our selected clinical
candidates. Costs associated with clinical development represent the advancement of our existing product candidates through clinical trials.



The costs associated with research and preclinical and clinical development activities approximate the following (in thousands):



|                               |  | Three Months EndedSeptember 30,
|------------------------------ |  | -------------------------------
|                               |  | 2003                           
|Research and preclinical       |  | $                              
|Clinical development           |  |                                
|                               |  |                                
|Total research and development |  | $                              
|                               |  |                                



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The increase in research and development expenses for the three months ended September 30, 2003 compared
to the same period in 2002 was principally due to increased costs for the following:



| |  | TELCYTA (TLK286)
| | - | -----------------



-
start-up costs associated with the initiation of our Phase 3 registration trial in ovarian cancer of $2.3 million

- costs associated with
Phase 1-2a clinical trials in ovarian and lung cancer in combination with standard chemotherapy drugs                 of $125,000, offset by a reduction of $328,000 in
costs associated with Phase 2 single agent trials in ovarian, lung and                 breast cancers



| |  | Other expenses
| | - | --------------



- higher facility and information technology related allocations as a result of our new Palo Alto facility of approximately $1.4
                million

- costs associated with headcount
growth including increased expenses to support clinical activities of approximately                 $481,000



We expect research and development expenditures to increase in the future as
a result of increased manufacturing and clinical development costs primarily relating to our TELCYTA (TLK286) and TELINTRA (TLK199) product development. The timing and the amount of these expenditures will depend upon the outcome of our ongoing clinical trials, the costs associated with the Phase 3 clinical trials of TELCYTA (TLK286), including related expansion of our clinical
development organization, regulatory requirements, advancement of our preclinical programs and product manufacturing costs.



General and administrative expenses



General and administrative expenses for the three months ended September 30, 2003 and 2002 were $2.6 million and $1.6 million, representing an increase of
65% or $1.0 million. General and administrative expense of $1.6 million for the three months ended September 30, 2002 reflect the reclassification of intellectual property related legal fees of $202,000 from research and development expense to
conform with our presentation in 2003. We previously reported general and administrative expenses of $1.4 million for the same period in 2002. The increase in 2003 was due primarily to increased costs for the following:



| |  | costs associated with headcount growth including increased expenses to support corporate activities of approximately $646,000;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | rent and related costs associated with our new Palo Alto facility of approximately $183,000; and
| | - | ------------------------------------------------------------------------------------------------



| |  | lease exit costs associated with our South San Francisco office space of approximately $206,000.
| | - | ------------------------------------------------------------------------------------------------



We expect future general and administrative expenses to increase in support of expanded business activities.



Interest income and interest expense



Interest income of $241,000 and $181,000 for the three months ended
September 30, 2003 and 2002 resulted primarily from earnings on investments. The increase in net interest income was due to higher principal balance of our investments as a result of proceeds obtained from our follow-on offering in October 2002,
offset in part by lower average interest rates in 2003.



Interest expense was $51,000 and $2,000 for the three months ended September 30, 2003 and 2002. The increase in interest expense was due to our utilization of the capital lease and equipment loan facilities.



Nine Months Ended September 30, 2003 and 2002



Revenues



Revenues for the nine months ended September 30, 2003 and 2002 were $429,000 and $1.0 million. Revenues in 2003 resulted
primarily from our collaborative agreements with Sanwa and Roche, while



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revenues in 2002 also included funded research related to grants received from the National Institutes of Health. The decrease in revenues of 59% or $608,000
was the result of the following:



| |  | $578,000 due to the completion of our remaining collaboration with Sanwa in May 2003;
| | - | -------------------------------------------------------------------------------------



| |  | $42,000 due to the completion of our research with the National Institutes of Health in the second quarter of 2002 and no further research grants in 2003; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | offset by $12,000 from our collaboration with Roche in April 2003.
| | - | ------------------------------------------------------------------



Research and development expenses



Research and development expenses for the nine months ended September 30, 2003 and 2002 were $30.7 million and $19.0 million, representing an increase of
61% or $11.7 million. Research and development expenses of $19.0 million for the nine months ended September 30, 2002 reflected the reclassification of intellectual property related legal fees of $896,000 to general and administrative expenses to
conform with our presentation in 2003. We previously reported research and development expenses of $19.9 million for the same period in 2002. Our research and development activities consist primarily of drug development, clinical supply
manufacturing, clinical activities, discovery research, screening and identification of drug candidates, and preclinical studies. We group these activities into two major categories: research and preclinical and clinical
development.



The costs associated with research and
preclinical and clinical development activities approximate the following (in thousands):



|                               |  | Nine Months EndedSeptember 30,
|------------------------------ |  | ------------------------------
|                               |  | 2003                          
|Research and preclinical       |  | $                             
|Clinical development           |  |                               
|                               |  |                               
|Total research and development |  | $                             
|                               |  |                               



The increase in
research and development expenses for the nine months ended September 30, 2003 compared to the same period in 2002 was principally due to increased costs for the following:



| |  | TELCYTA (TLK286)
| | - | -----------------



-
start-up costs associated with the initiation of our Phase 3 registration trial in ovarian cancer of $4.6 million

- costs associated with
Phase 1-2a clinical trials in ovarian and lung cancer in combination with standard chemotherapy drugs    of $385,000, offset by decrease of $613,000 in costs due to the wind down of Phase 2 single agent clinical trials in ovarian,
   lung and breast cancer and completion of the Phase 1 advanced cancer clinical trial

- clinical drug supply manufacturing
costs of approximately $1.3 million



| |  | TELINTRA (TLK199)
| | - | ------------------



- costs
associated with the Phase 1-2a clinical trial in MDS of approximately $200,000 offset by a decrease in clinical drug    supply manufacturing costs of approximately $1.3 million due to adequate supplies on hand



| |  | TLK19781
| | - | --------



- clinical drug supply manufacturing costs of approximately $336,000 and toxicology studies related costs of approximately    $203,000



| |  | Other expenses
| | - | --------------



- higher facility and information technology related allocations as a result of our new Palo Alto facility of approximately $4.2
               million

- approximately $2.3 million associated
with headcount growth and increased expenses to support clinical activities



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##### Table of Contents

The following table summarizes our principal product development initiatives, including the related
stages of development for each product in development and the research and development expenses recognized in connection with each product. The information in the column labeled Estimated Completion of Current Phase is our current
estimate of the timing of completion of product development phases. The actual timing of completion of those phases could differ materially from the estimates provided in the table. For a discussion of the risks and uncertainties associated with the
timing of completing a product development phase, see the All of our product candidates are in research and development. If clinical trials of TELCYTA (TLK286), TELINTRA (TLK199) and TLK19781 are delayed or unsuccessful or if we are unable to complete the preclinical development of our other preclinical product
candidates, our business may suffer, If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to commercialize our product candidates,
As our product programs advance, we will need to hire additional scientific and management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel, and If
we are unable to contract with third parties to manufacture our product candidates or any products that we may develop in sufficient quantities and at an acceptable cost, clinical development of product candidates could be delayed and we may be
unable to meet demand for any products that we may develop and lose potential revenue sections of our Risk Factors below. For further information on our products refer to our Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 2002 on March 10, 2003.



|Product                                |  | Description                    |  | Phase ofDevelopment |  | EstimatedCompletionof Phase |  | Related R&D ExpenseNine Months EndedSeptember 30,
|-------------------------------------- |  | ------------------------------ |  | ------------------- |  | --------------------------- |  | -------------------------------------------------
|                                       |  |                                |  | 2003                |  | 2002                       
|TELCYTA (TLK286)                      |  |                                |  |                     |  |                             |  | $                                                
|                                       |  | Ovarian                        |  | Phase III           |  | 2005                        |  |                                                  
|                                       |  | Colorectal                     |  | Phase II            |  | 2003                        |  |                                                  
|                                       |  | Ovarian                        |  | Phase II            |  | 2004                        |  |                                                  
|                                       |  | Lung                           |  | Phase II            |  | 2004                        |  |                                                  
|                                       |  | Breast                         |  | Phase II            |  | 2004                        |  |                                                  
|                                       |  | Combination (with other drugs) |  | Phase II            |  | 2004                        |  |                                                  
|                                       |  | Advanced cancers               |  | Phase I             |  | 2002                        |  |                                                  
|TELINTRA (TLK199)                     |  | Myelodysplastic syndrome       |  | Phase I/II          |  | 2005                        |  |                                                  
|TLK19781                               |  | Type 2 diabetes                |  | Preclinical         |  | 2004                        |  |                                                  
|Other(1)                               |  |                                |  |                     |  |                             |  |                                                  
|                                       |  |                                |  |                     |  |                             |  |                                                  
|Total research and development expense |  |                                |  |                     |  |                             |  | $                                                
|                                       |  |                                |  |                     |  |                             |  |                                                  



|(1) | Other constitutes research and development activities performed by our Chemistry, Biology, Pre-clinical and Quality Assurance departments as these costs
cannot be allocated to any individual project.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The largest component of our total operating expenses is our ongoing investments in research and development and, in particular, the clinical development of our product pipeline. The process of conducting



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the clinical research necessary to obtain FDA approval is costly and time consuming. Current FDA requirements for a new human drug to be marketed in the
United States include:



| |  | the successful conclusion of pre-clinical laboratory and animal tests, if appropriate, to gain preliminary information on the products safety;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | filing with the FDA of an IND, to conduct human clinical trials for drugs;
| | - | --------------------------------------------------------------------------



| |  | the successful completion of adequate and well-controlled human clinical investigations to establish the safety and efficacy of the product for its recommended use; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | filing by a company and acceptance and approval by the FDA of a New Drug Application (NDA) for a drug product to allow commercial distribution of the drug.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



In light of the factors mentioned above, we
consider the active management and development of our clinical pipeline to be crucial to our long-term success. The actual probability of success for each candidate and clinical program may be impacted by a variety of factors, including, among
others, the quality of the candidate, the validity of the target and disease indication, early clinical data, investment in the program, competition, manufacturing capability and commercial viability. Due to these factors, it is difficult to give
accurate guidance on the anticipated proportion of our research and development investments or the future cash inflows from these programs.



General and administrative expenses



General and administrative expenses for the nine months ended September 30, 2003 and 2002 were $6.7 million and $4.8 million, representing an increase of
39% or $1.9 million. General and administrative expense of $4.8 million for the nine months ended September 30, 2002 reflect the reclassification of intellectual property related legal fees of $896,000 from research and development expense to
conform with our presentation in 2003. We previously reported general and administrative expenses of $3.9 million for the same period in 2002. The increase in 2003 was due primarily to increased costs for the following:



| |  | approximately $1.2 million in costs associated with headcount growth and increased expenses necessary to manage the growth of our operations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  | rent and related facility costs associated with our new Palo Alto facility effective January 2003 of approximately $464,000; and
| | - | --------------------------------------------------------------------------------------------------------------------------------



| |  | lease exit cost of approximately $206,000 associated with our South San Francisco office space.
| | - | -----------------------------------------------------------------------------------------------



Interest income and interest expense



Interest income of $926,000 and $662,000 for the nine months ended September 30, 2003 and 2002 resulted primarily from earnings on investments. The
increase in net interest income was due to higher principal balance of our investments as a result of $80.3 million in net proceeds obtained from our follow-on offering in October 2002, offset in part by lower average interest rates in 2003.



Interest expense was $103,000 and $6,000 for the nine months
ended September 30, 2003 and 2002. The increase in interest expense was due to our utilization of the capital lease and equipment loan facilities.



Liquidity and capital resources



Sources and Uses of Cash. Since inception we have funded our research and development operations through sales of equity, collaborative
arrangements with corporate partners, interest earned on investments and equipment lease financings. At September 30, 2003, we had available cash, cash equivalents, investments and restricted investments of $69.1 million. Our cash and investment
balances are held in a variety of interest-bearing instruments including obligations of U.S. government agencies, high-grade corporate and municipal bonds, commercial paper and money market accounts. Cash in excess of



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immediate requirements is invested with regard to liquidity and capital preservation. Wherever possible, we seek to minimize the potential effects of
concentration and degrees of risk.



Cash Flows from
Operating Activities. Cash used in operations for the nine months ended September 30, 2003 was $34.9 million compared with $21.4 million for the same period in 2002. Net loss of $36.1 million in 2003 included non-cash charges of $688,000 for
depreciation and amortization, $327,000 for the amortization of deferred stock compensation and $203,000 related to non-cash stock based compensation to non employees. Cash outflows of $4.6 million in 2003 resulted from a change in accounts payable
of $3.5 million, prepaids and other assets of $718,000 and deferred revenue of $380,000, which were primarily for operating activities and drug supplies. Cash outflows were offset by changes in other receivables by $1.7 million and an increase of
$2.8 million in accrued liabilities related to a higher level of research and development activities. Operating cash outflows for the same period in 2002 resulted primarily from our net loss of $22.1 million offset by increases of $1.6 million in
accrued liabilities and the effect of $936,000 in non-cash charges for depreciation expense, deferred stock compensation, stock based compensation expense and a loan forgiveness.



Cash Flows from Investing Activities. Cash provided from investing activities for the nine months ended September 30,
2003 was $18.6 million compared with $3.9 million cash used for the same period in 2002. Investing activities in 2003 were primarily related to the $20.4 million in net purchases, sales and maturities of investments. We reduced restricted
investments by $2.0 million for the portion of tenant improvements completed on the Palo Alto facility that no longer require a security deposit. Cash in-flow was offset by purchases of property and equipment of $3.7 million primarily due to
leasehold improvements on our new Palo Alto facility and laboratory equipment expenditures. Cash used in the same period in 2002 was related to $872,000 in net purchases of investments, $1.8 million in restricted cash for a security deposit on our
Palo Alto facility and $1.2 million laboratory equipment purchases.



Cash Flows from Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2003 was approximately $3.5 million compared with $832,000 for the same period in 2002. Financing activities in 2003
included approximately $1.7 million in proceeds obtained through equipment loans and $2.1 million in proceeds from stock option exercises and our employee stock purchase plan, offset in part by $332,000 in payments under capital leases and equipment
loan. Financing activities for the same period in 2002 were primarily due to $303,000 in proceeds obtained through an equipment loan, $452,000 from stock option exercises and our employee stock purchase plan and $81,000 from payments on a promissory
note from an employee.



Working Capital. Working capital
decreased to $47.0 million at September 30, 2003 from $89.7 million at December 31, 2002. The decrease in working capital was due to our use of cash in operations primarily due to the expansion of our TELCYTA (TLK286) development program and costs associated with headcount growth.



In August 2003, we obtained a $1.5 million equipment loan facility from a
banking institution, secured by equipment purchased. At September 30, 2003, draws under this credit facility totaled approximately $368,000 and approximately $1.1 million remains available for future draws through July 2004.



We believe our existing cash resources will be sufficient to satisfy our
anticipated cash requirements through 2004. We expect the increase in clinical development expenses as a result of Phase 3 clinical trials to consume a large portion of our existing cash resources. Changes in our research and development plans or
other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will need to raise substantial additional capital to fund our operations in the future. We expect to finance our
future cash needs through the sale of equity securities, strategic collaborations and possibly debt financing or through other sources that may be dilutive to existing stockholders. In September 2003, we filed a registration statement on Form S-3 to
offer and sell, from time to time, equity and debt securities in one or more offerings up to a total dollar amount of $150 million. On November 6, 2003, we sold 6.5 million shares of common stock and a selling stockholder sold 1.0 million shares of
common stock at a price of $20 per share in an underwritten public offering pursuant to this registration statement. We expect to receive approximately $122.2 million in proceeds from the issuance of 6.5 million shares, representing gross proceeds
of $130 million less underwriting discounts and



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commissions. The underwriters will have an option to purchase from us up to an additional 1,125,000 shares to cover over-allotments, if any.



In addition, in the event that additional funds are obtained through
arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development that we would otherwise seek to develop or commercialize
ourselves. Our future capital uses and requirements depend on numerous factors, including the following:



| |  | the progress and success of preclinical studies and clinical trials of our product candidates;
| | - | ----------------------------------------------------------------------------------------------



| |  | the progress and number of research programs in development;
| | - | ------------------------------------------------------------



| |  | the costs associated with conducting Phase 3 clinical trials;
| | - | -------------------------------------------------------------



| |  | the costs and timing of obtaining regulatory approvals;
| | - | -------------------------------------------------------



| |  | our ability to establish, and the scope of, any new collaborations;
| | - | -------------------------------------------------------------------



| |  | our ability to meet the milestones identified in our collaborative agreements that trigger payments;
| | - | ----------------------------------------------------------------------------------------------------



| |  | the costs and timing of obtaining, enforcing and defending our patent and intellectual property rights;
| | - | -------------------------------------------------------------------------------------------------------



| |  | competing technological and market developments; and
| | - | ----------------------------------------------------



| |  | the timing and scope of commercialization expenses for our product candidates as they approach regulatory approval.
| | - | -------------------------------------------------------------------------------------------------------------------



Our future contractual obligations at September 30, 2003 are as follows (in
thousands):



|                                   |  | Total |        | 2003 |   | 2004-2005 |  | 2006-2007 |        | After 2007
|---------------------------------- |  | ----- | ------ | ---- | - | --------- |  | --------- | ------ | ----------
|Capital lease obligations          |  | $     | 961    |      | $ | 96        |  | $         | 619    |           
|Equipment loan                     |  |       | 2,070  |      |   | 275       |  |           | 1,522  |           
|Operating leases                   |  |       | 39,472 |      |   | 742       |  |           | 8,466  |           
|                                   |  |       |        |      |   |           |  |           |        |           
|Total contractual cash obligations |  | $     | 42,503 |      | $ | 1,113     |  | $         | 10,607 |           
|                                   |  |       |        |      |   |           |  |           |        |           



ADDITONAL FACTORS
THAT MAY AFFECT FUTURE RESULTS



You should carefully
consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition.



We have a history of net losses, which we expect to continue for at least several years. We will never be profitable unless we develop, and obtain regulatory approval
and market acceptance of, our product candidates.



Due to
the significant research and development expenditures required to develop our TRAP technology and identify new product candidates, and the lack of any products to generate revenue, we have not been profitable and have incurred operating losses since
we were incorporated in 1988. As of September 30, 2003, we had an accumulated deficit of $153.4 million. Net losses were $36.1 million for the nine months ended September 30, 2003, $34.8 million in 2002, $18.6 million in 2001 and $12.6 million in
2000. We expect to incur losses for at least the next several years and expect that these losses will increase as we expand our research and development activities and incur significant clinical testing costs. We do not anticipate that we will
generate product revenue for several years. Our losses, among other things, have caused and will cause our stockholders equity and working capital to decrease. To date, we have derived substantially all of our revenues, which have not been
significant, from project initiation fees and research reimbursement paid pursuant to existing collaborative agreements with third parties and



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achievement of milestones under current collaborations. We expect that this trend will continue until we develop, and obtain regulatory approval and market
acceptance of, our product candidates, if at all. We may never generate product revenue sufficient to become profitable.



All of our product candidates are in research and development. If clinical trials of TELCYTA (TLK286), TELINTRA (TLK199) and TLK19781 are delayed or unsuccessful or if we are unable to complete the preclinical development of our other preclinical product
candidates, our business may suffer.



Preclinical testing
and clinical trials are long, expensive and uncertain processes. It may take us or our collaborators several years to complete this testing, and failure can occur at any stage of the process. Success in preclinical testing and early clinical trials
does not ensure that later clinical trials will be successful, and interim results of trials do not necessarily predict final results. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier trials.



TELCYTA has to date been evaluated in Phase 1 and Phase 2 clinical trials. We initiated a Phase 3 registration trial of TELCYTA in ovarian cancer in the first quarter of 2003 and expect to initiate a Phase 3
registration trial of TELCYTA in non small cell lung cancer in 2004. These trials would test TELCYTA against a control arm consisting of currently established standard drug treatments for these cancers. Changes in standards of care during our Phase
3 trials may cause us to, or the FDA may require us to, perform additional clinical testing of TELCYTA against a different control arm prior to filing a New Drug Application for marketing approval.



We are currently in a Phase 1-2a clinical trial of TELINTRA in
myelodysplastic syndrome (MDS), a form of pre-leukemia, to evaluate safety, pharmacokinetics, pharmacodynamics and efficacy. In July 2002, we selected TLK19781, one of a family of orally active small molecule insulin receptor activators that we are
developing for potential treatment of diabetes, for advancement into IND-stage development. We are currently conducting preclinical studies for clinical testing of TLK19781. Our success depends, in part, on our ability to complete clinical
development of TELINTRA and preclinical development of TLK19781 or other preclinical product candidates and take them through early clinical trials.



Any clinical trial may fail to produce results satisfactory to the FDA. Preclinical and clinical data can be interpreted in different ways, which could
delay, limit or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated or a program to be terminated. We typically rely on third-party clinical
investigators to conduct our clinical trials and, as a result, we may face additional delays outside our control. We have engaged a contract research organization, or CRO, to facilitate the administration of our Phase 3 trials of TELCYTA. Dependence
on a CRO will subject us to a number of risks. Delays in identifying and engaging a CRO may result in delays in the initiation of other clinical trials. We may not be able to control the amount and timing of resources the CRO may devote to our
trials. Should the CRO fail to administer our Phase 3 trials properly, regulatory approval, development and commercialization of TELCYTA will be delayed.



We do not know whether we will begin planned clinical trials on time or whether we will complete any of our ongoing clinical trials on schedule, if at
all. We do not know whether any clinical trials will result in marketable products. Typically, there is a high rate of attrition for product candidates in preclinical and clinical trials. We do not anticipate that any of our product candidates will
reach the market for at least several years.



Significant
delays in clinical testing could materially impact our product development costs. We do not know whether planned clinical trials will begin on time, will need to be revamped or will be completed on schedule, if at all. In addition to the reasons
stated above, clinical trials can be delayed for a variety of reasons, including delays in obtaining regulatory approval to commence a study, delays in reaching agreement on acceptable clinical study agreement terms with prospective clinical sites,
delays in obtaining institutional review board approval to conduct a study at a prospective clinical site and delays in recruiting subjects to participate in a study.



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While we have not yet experienced delays that have materially impacted our clinical trials or product
development costs, delays of this sort could occur for the reasons identified above or other reasons. If we have delays in testing or approvals, our product development costs will increase. For example, we may need to make additional payments to
third-party investigators and organizations to retain their services or we may need to pay recruitment incentives. If the delays are significant, our financial results and the commercial prospects for our product candidates will be harmed, and our
ability to become profitable will be delayed.



We believe that our ability
to compete depends, in part, on our ability to use our proprietary TRAP technology to discover new pharmaceutical products. We may not be competitive if our TRAP technology proves ineffective.



TRAP, our proprietary drug discovery technology, is a relatively new drug
discovery method that uses a protein panel of approximately 20 proteins selected for their distinct patterns of interacting with small molecules. This panel may lack essential types of interactions that we have not yet identified, which may result
in our inability to identify active compounds that have the potential for us to develop into commercially viable drugs.



If we are unable to continue to identify new product candidates using TRAP technology, we may not be able to maintain our product pipeline and develop
commercially viable drugs.



If we are unable to raise adequate funds in the
future, we will not be able to continue to fund our operations, research programs, preclinical testing and clinical trials to develop our product candidates.



The process of carrying out the development of our own unpartnered product candidates to later stages of development and
developing other research programs to the stage that they may be partnered will require significant additional expenditures, including the expenses associated with preclinical testing, clinical trials and obtaining regulatory approval. We believe
that our existing cash and investment securities together with the net proceeds to us from this offering will be sufficient to support our current operating plan through 2005. We will require additional financing to fund our operations. We do not
know whether additional financing will be available when needed or that, if available, we will obtain financing on terms favorable to our stockholders. As of September 30, 2003, our accumulated deficit was $153.4 million, and we expect capital
outlays and operating expenditures to increase over the next several years as we expand our clinical, research and development activities. The extent of any actual increase in operating or capital spending will depend in part on the clinical success
of our product candidates.



Raising additional capital by issuing securities
or through collaboration and licensing arrangements may cause dilution to existing stockholders or require us to relinquish rights to our technologies or product candidates.



We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with
corporate partners or other sources. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. To the extent that we raise additional capital through licensing arrangements or arrangements
with collaborative partners, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves.



If our competitors develop and market products that are more effective than our product
candidates or any products that we may develop, or obtain marketing approval before we do, our commercial opportunity will be reduced or eliminated.



The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. Some of the drugs
that we are attempting to develop, such as TELINTRA, will have to compete with existing therapies. In addition, a large number of companies are pursuing the



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development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face competition from pharmaceutical and biotechnology
companies in the United States and abroad. Our competitors may develop new screening technologies and may utilize discovery techniques or partner with collaborators in order to develop products more rapidly or successfully than we or our
collaborators are able to do.



Many of our competitors,
particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures,
licensing arrangements or other collaborations. In addition, academic institutions, government agencies and other public and private organizations conducting research may seek patent protection with respect to potentially competing products or
technologies and may establish exclusive collaborative or licensing relationships with our competitors.



Our competitors may succeed in developing technologies and drugs that are more effective, better tolerated or less costly than any which are being
developed by us or which would render our technology and potential drugs obsolete and noncompetitive. In addition, our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates more rapidly than us or our
collaborators. Any drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, may not be able to compete successfully with our competitors existing products or
products under development or may not obtain regulatory approval in the United States or elsewhere.



If we do not obtain regulatory approval to market products in the United States and foreign countries, we or our collaborators will not be permitted to commercialize our product candidates.



Even if we are able to achieve success in our preclinical testing, we, or
our collaborators, must provide the FDA and foreign regulatory authorities with clinical data that demonstrate the safety and efficacy of our product candidates in humans before they can be approved for commercial sale. Failure to obtain regulatory
approval will prevent commercialization of our product candidates.



The pharmaceutical industry is subject to stringent regulation by a wide range of authorities. We cannot predict whether regulatory clearance will be obtained for any product candidate that we are developing or hope to develop. A
pharmaceutical product cannot be marketed in the United States until it has completed rigorous preclinical testing and clinical trials and an extensive regulatory clearance process implemented by the FDA. Satisfaction of regulatory requirements
typically takes many years and depends on the type, complexity and novelty of the product and requires the expenditure of substantial resources. Of particular significance are the requirements covering research and development, testing,
manufacturing, quality control, labeling and promotion of drugs for human use.



Before commencing clinical trials in humans, we, or our collaborators, must submit and receive approval from the FDA of an IND application. We must comply with FDA Good Laboratory Practices regulations in
our preclinical studies. Clinical trials are subject to oversight by institutional review boards of participating clinical sites and the FDA and:



| |  | must be conducted in conformance with the FDA regulations;
| | - | ----------------------------------------------------------



| |  | must meet requirements for institutional review board approval;
| | - | ---------------------------------------------------------------



| |  | must meet requirements for informed consent;
| | - | --------------------------------------------



| |  | must meet requirements for Good Clinical Practices;
| | - | ---------------------------------------------------



| |  | may require large numbers of participants; and
| | - | ----------------------------------------------



| |  | may be suspended by us, our collaborators or the FDA at any time if it is believed that the subjects participating in these trials are being exposed to unacceptable health risks or
if the FDA finds deficiencies in the IND application or the conduct of these trials.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Before receiving FDA clearance to market a product, we or our collaborators must demonstrate that the product candidate is safe and effective in the
patient population that will be treated. Negative or



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inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to be repeated, a program to be terminated and could
delay approval. We typically rely on third-party clinical investigators to conduct our clinical trials and other third party organizations to perform data collection and analysis and, as a result, we may face additional delaying factors outside our
control. In addition, we may encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy or interpretation during the period of product development, clinical
trials and FDA regulatory review. Failure to comply with applicable FDA or other applicable regulatory requirements may result in criminal prosecution, civil penalties, recall or seizure of products, total or partial suspension of production or
injunction, as well as other regulatory action. We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval.



If regulatory clearance of a product is granted, this clearance will be limited to those disease states and conditions for
which the product is demonstrated through clinical trials to be safe and efficacious, which could limit our market opportunity. Furthermore, product approvals, once granted, may be withdrawn if problems occur after initial marketing. We cannot
ensure that any compound developed by us, alone or with others, will prove to be safe and efficacious in clinical trials and will meet all of the applicable regulatory requirements needed to receive marketing clearance.



Outside the United States, the ability to market a product depends on
receiving a marketing authorization from the appropriate regulatory authorities. This foreign regulatory approval process typically includes all of the risks associated with FDA clearance described above and may include additional risks.



As our product programs advance, we will need to hire additional scientific and
management personnel. Our research and development efforts will be seriously jeopardized if we are unable to attract and retain key personnel.



Our success depends in part on the continued contributions of our principal management and scientific personnel and on our ability to develop and maintain
important relationships with leading academic institutions, scientists and companies in the face of intense competition for such personnel. As we plan for and commence additional advanced clinical trials, including Phase 2 and Phase 3, we will also
need to expand our clinical development personnel. In addition, our research programs depend on our ability to attract and retain highly skilled chemists and other scientists. None of our key employees have indicated to Telik that they have plans to
retire or leave Telik in the near future. However, of our key employees, Dr. Michael M. Wick, Cynthia M. Butitta and Dr. Gail L. Brown, Telik has an employment agreement in place only with Dr. Wick. If we lose the services of Dr. Wick or any of our
other key personnel, our research and development efforts could be seriously and adversely affected. We have generally entered into consulting or other agreements with our scientific and clinical collaborators and advisors. We do not carry key
person insurance that covers Dr. Wick or any of our other key employees. There is currently a shortage of skilled executives and employees with technical expertise in the biotechnology industry, and this shortage is likely to continue. As a result,
competition among numerous companies, academic and other research institutions for skilled personnel and experienced scientists is intense and turnover rates are high. The cost of living in the San Francisco Bay Area is very high compared to other
parts of the country, which we expect will adversely affect our ability to compete for qualified personnel and will increase costs. Because of this competitive environment, we have encountered and may continue to encounter increasing difficulty in
attracting qualified personnel as our operations expand and the demand for these professionals increases, and this difficulty could significantly impede the achievement of our research and development objectives.



If physicians and patients do not accept products that we may develop, our ability to
generate product revenue in the future will be adversely affected.



Products that we may develop may not gain market acceptance among physicians, healthcare payors, patients and the medical community. Market acceptance of and demand for any products that we may develop will depend on many factors, including
the following:



| |  | our ability to provide acceptable evidence of safety and efficacy;
| | - | ------------------------------------------------------------------



| |  | convenience and ease of administration;
| | - | ---------------------------------------



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| |  | cost effectiveness;
| | - | -------------------



| |  | the effectiveness of our marketing strategy and the pricing of any products that we may develop;
| | - | ------------------------------------------------------------------------------------------------



| |  | our ability to obtain third-party coverage or reimbursement; and
| | - | ----------------------------------------------------------------



| |  | the prevalence and severity of adverse side effects.
| | - | ----------------------------------------------------



Physicians may elect not to recommend products that we may develop even if we meet the above criteria. If any product that we may develop fails to achieve
market acceptance, we may not be able to successfully market and sell the product, which would limit our ability to generate revenue and adversely affect our operations.



If we or our licensees cannot obtain and defend our respective intellectual property rights, or if our product candidates, technologies
or any products that we may develop are found to infringe patents of third parties, we could become involved in lengthy and costly legal proceedings that could adversely affect our business.



Our success will depend in a large part on our own and our licensees
ability to obtain and defend patents for each partys respective technologies and the compounds and other products, if any, resulting from the application of these technologies. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. As a result, the degree of future protection for our proprietary rights is uncertain, and we cannot assure you that:



| |  | we were the first to make the inventions covered by each of our pending patent applications;
| | - | --------------------------------------------------------------------------------------------



| |  | we were the first to file patent applications for these inventions;
| | - | -------------------------------------------------------------------



| |  | others will not independently develop similar or alternative technologies or duplicate any of our technologies;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | any of our pending patent applications will result in issued patents;
| | - | ---------------------------------------------------------------------



| |  | any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages or will not be challenged by
third parties;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | any of our issued patents will be valid or enforceable; or
| | - | ----------------------------------------------------------



| |  | we will develop additional proprietary technologies that are patentable.
| | - | ------------------------------------------------------------------------



Accordingly, we cannot predict the breadth of claims allowed in our or other companies patents.



For TRAP, we hold patents in the United States and internationally, including
a pending foreign application. These patents, and any patent that may issue on the pending application, will expire between 2013 and 2015. For TELCYTA, we hold compound patents in the United States and internationally, including a pending foreign
application. These patents, and any patent that may issue on the pending application, will expire in 2013 and 2014. For TELINTRA, we hold compound patents in the United States and internationally, including a pending foreign application. These
patents, and any patent that may issue on the pending application, will expire in 2014. For TLK19781, we hold a compound patent in the United States and have applications internationally. The issued patent, and any patents that may issue on the
pending applications, will expire in 2020. We can generally apply for patent term extensions on the patents for TELCYTA, TELINTRA and TLK19781 when and if marketing approvals for these compounds are obtained in the relevant countries.



Our success will also depend, in part, on our ability to operate without
infringing the intellectual property rights of others. We cannot assure you that our activities will not infringe patents owned by others. As of the date of this prospectus, Telik has not received any communications with the owners of related
patents alleging that Teliks activities infringe their patents. However, if our product candidates, technologies or any products that we may develop are found to infringe patents issued to third parties, the manufacture, use and sale of any
products that we may develop could be enjoined, and we could be required to pay substantial damages. In addition, we may be required to obtain licenses to patents or other proprietary rights of third parties. We cannot assure you that any licenses
required under any such patents or proprietary rights would be made available on terms acceptable to us, if at all. Failure to obtain such licenses could negatively affect our business.



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Others may have filed and in the future may file patent applications covering small molecules or
therapeutic products that are similar to ours. We cannot assure you that our patent applications will have priority over patent applications filed by others. Any legal action against us or our collaborators claiming damages and seeking to enjoin
commercial activities relating to the affected products and processes could, in addition to subjecting us to potential liability for damages, require us or our collaborators to obtain a license to continue to manufacture or market the affected
products and processes. We cannot predict whether we, or our collaborators, would prevail in any of these actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. We believe
that there may be significant litigation in the industry regarding patent and other intellectual property rights. If we become involved in litigation, it could consume a substantial portion of our managerial and financial resources, and we may not
be successful in any such litigation.



In addition, we could
incur substantial costs and use of our key employees time and efforts in litigation if we are required to defend against patent suits brought by third parties or if we initiate these suits, and we cannot predict whether we would be able to
prevail in any of these suits.



Furthermore, some of our
patents and intellectual property rights are owned jointly by us and our collaborators. While there are legal and contractual restraints on the rights of these joint owners, they may use these patents and other intellectual property in ways that may
harm our business. We may not be able to prevent this type of use.



We also rely on trade secrets to protect technology, including aspects of our TRAP technology, where we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees,
academic collaborators and consultants to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information in the event of any unauthorized use or disclosure or the lawful development
by others of such information. If the identity of specific proteins or other elements of our TRAP technology become known, our competitive advantage in drug discovery could be reduced.



Many of our collaborators and scientific advisors have publication and other rights to certain information and data gained
from their collaboration and research with us. Any publication or other use could limit our ability to secure intellectual property rights or impair any competitive advantage that we may possess or realize by maintaining the confidentiality of the
information or data.



We will depend on collaborative arrangements to
complete the development and commercialization of some of our product candidates. These collaborative arrangements may place the development of our product candidates outside of our control, may require us to relinquish important rights or may
otherwise not be on terms favorable to us.



We expect to
enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our product candidates, particularly outside North America, or in disease areas requiring
larger and longer clinical trials, such as diabetes. Dependence on collaborative arrangements will subject us to a number of risks. We may not be able to control the amount and timing of resources our collaborative partners may devote to the product
candidates. Our collaborative partners may experience financial difficulties. Should a collaborative partner fail to develop or commercialize a compound or product candidate to which it has rights from us, we may not receive any future milestone
payments and will not receive any royalties for this compound or product candidate. Business combinations or significant changes in a collaborative partners business strategy may also adversely affect a partners willingness or ability to
complete its obligations under the arrangement. If we fail to enter into additional collaborative agreements on favorable terms, our business, financial condition and results of operations could be materially adversely affected.



Under our existing collaboration agreements, we are entitled to payments upon
future product sales or the achievement of milestones. For example, under our arrangement with Sanwa, we may be entitled to payments of up to $10.0 million. However, we cannot assure you that any product will be successfully developed and
commercialized under these collaborations or that we will receive any of these payments.



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Some of our collaborations are for early stage programs and allow partners significant discretion in
electing whether to pursue any of the planned activities. We do not anticipate significant revenues to result from these relationships until the collaborator has advanced product candidates into clinical trials, which will not occur for several
years, if at all. These arrangements are subject to numerous risks, including the right of the collaboration partner to control the timing of the research and development efforts, the advancement of lead product candidates to clinical trials and the
commercialization of product candidates. In addition, a collaborative partner could independently move forward with a competing lead candidate developed either independently or in collaboration with others, including our competitors.



If we are unable to contract with third parties to manufacture our product candidates or
any products that we may develop in sufficient quantities and at an acceptable cost, clinical development of product candidates could be delayed and we may be unable to meet demand for any products that we may develop and lose potential revenue.



We do not currently operate manufacturing facilities for
clinical or commercial production of our product candidates. We expect to continue to rely on third parties for the manufacture of our product candidates and any products that we may develop. We currently lack the resources and capability to
manufacture any of our product candidates on a clinical scale or any products that we may develop on a commercial scale. As a result, we will be dependent on corporate partners, licensees or other third parties for the manufacturing of clinical and
commercial scale quantities of our product candidates and any products that we may develop. Our product candidates and any products that we may develop may be in competition with other product candidates and products for access to these facilities.
For this and other reasons, our collaborators or third parties may not be able to manufacture these product candidates and products in a cost effective or timely manner. While we currently possess a large inventory of TELCYTA and TELINTRA and an
additional substantial quantity of the active ingredient in TELCYTA that are stored in multiple locations, if these inventories are lost or damaged, the clinical development of our product candidates or their submission for regulatory approval could
be delayed, and our ability to deliver any products that we may develop on a timely basis could be impaired or precluded.



We are currently dependent on two affiliated entities to supply clinical quantities of the active ingredients in TELCYTA, Organichem Corporation (for all
clinical trials) and Albany Molecular Research Inc. (for phase 1 and 2 clinical trials). We presently depend on a single source of supply for clinical quantities of the active ingredient in TELINTRA, Bachem Corporation, and a single source of supply
for a key excipient used in the formulation of TELINTRA, Lipoid GmbH. Cardinal Health PTS, Inc. is our sole present formulator of TELCYTA and TELINTRA. While these suppliers and formulator currently meet our preclinical and clinical trial
requirements, we currently do not have supply agreements with any of these entities, other than with Cardinal Health. While we are presently evaluating potential alternative sources of these materials or formulation services, we currently do not
have any such alternative sources that are immediately available. If formulation is not performed in a timely manner, if our suppliers fail to perform or if our relationships with our suppliers or formulator should terminate, our clinical trials and
commercialization of TELCYTA and TELINTRA could be delayed. We may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, if at all. Our current dependence upon others for the manufacture of our product
candidates and our anticipated dependence upon others for the manufacture of any products that we may develop may adversely affect our future profit margins and our ability to commercialize any products that we may develop on a timely and
competitive basis.



If we are unable to create sales, marketing and
distribution capabilities or enter into agreements with third parties to perform these functions, we will not be able to commercialize any products that we may develop.



We currently have no sales, marketing or distribution capabilities. In order to commercialize any products that we may
develop, we must internally develop sales, marketing and distribution capabilities or establish collaborations or other arrangements with third parties to perform these services. We intend to market some products that we may develop directly in
North America and rely on relationships with one or more pharmaceutical companies with established distribution systems and direct sales forces to market



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other products that we may develop and address other markets. We may not be able to establish in-house sales and distribution capabilities or relationships
with third parties. To the extent that we enter into co-promotion or other licensing arrangements, any product revenues are likely to be lower than if we directly marketed and sold any products that we may develop, and any revenues we receive will
depend upon the efforts of third parties, whose efforts may not be successful.



Budget constraints may force us to delay our efforts to develop certain product candidates in favor of developing others, which may prevent us from commercializing all product candidates as quickly as possible.



Because we are an emerging company with limited resources, and because
research and development is an expensive process, we must regularly assess the most efficient allocation of our research and development budget. As a result, we may have to prioritize development candidates and may not be able to fully realize the
value of some of our product candidates in a timely manner, as they will be delayed in reaching the market, if at all.



If product liability lawsuits are successfully brought against us, we may incur substantial liabilities and may be required to limit commercialization of our product
candidates and any products that we may develop.



The
testing and marketing of medical products entail an inherent risk of product liability. Although we are not aware of any historical or anticipated product liability claims or specific causes for concern, if we cannot successfully defend ourselves
against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates and any products that we may develop. In addition, product liability claims may also result in withdrawal of
clinical trial volunteers, injury to our reputation and decreased demand for any products that we may commercialize. We currently carry product liability insurance that covers our clinical trials up to a $10 million annual aggregate limit. We will
need to increase the amount of coverage if and when we have a product that is commercially available. If we are unable to obtain sufficient product liability insurance at an acceptable cost, potential product liability claims could prevent or
inhibit the commercialization of any products that we may develop, alone or with corporate collaborators.



If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages.



Our research and development activities involve the controlled use of potentially harmful biological materials, hazardous materials, chemicals and various
radioactive compounds, and are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. While to our knowledge we have not been in violation of any
environmental laws, nor have we been the subject of any investigation for violations of environmental laws in the past, we cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of
these materials. We currently have $275,000 in insurance coverage, which we believe is a reasonably adequate amount to insulate us from damage claims arising from our use of hazardous materials. However, in the event of contamination or injury, we
could be held liable for damages that result, and any liability could exceed our resources.



We have implemented anti-takeover provisions which could discourage or prevent a takeover, even if an acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or
remove our current management.



Provisions of our amended
and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing
the



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members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
These provisions include:



| |  | establishing a classified board of directors requiring that members of the board be elected in different years, which lengthens the time needed to elect a new majority of the board;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | authorizing the issuance of blank check preferred stock that could be issued by our board of directors to increase the number of outstanding shares or change the balance
of voting control and thwart a takeover attempt;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | limiting the ability of stockholders to call special meetings of the stockholders;
| | - | ----------------------------------------------------------------------------------



| |  | prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | establishing 90 to 120 day advance notice requirements for nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at
stockholder meetings.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We adopted a stockholder rights plan
that may discourage, delay or prevent a merger or acquisition that is beneficial to our stockholders.



In November 2001, our board of directors adopted a stockholder rights plan that may have the effect of discouraging, delaying or preventing a merger or
acquisition that is beneficial to our stockholders by diluting the ability of a potential acquiror to acquire us. Pursuant to the terms of our plan, when a person or group, except under certain circumstances, acquires 20% or more of our outstanding
common stock or 10 business days after commencement or announcement of a tender or exchange offer for 20% or more of our outstanding common stock, the rights (except those rights held by the person or group who has acquired or announced an offer to
acquire 20% or more of our outstanding common stock) would generally become exercisable for shares of our common stock at a discount. Because the potential acquirors rights would not become exercisable for our shares of common stock at a
discount, the potential acquiror would suffer substantial dilution and may lose its ability to acquire us. In addition, the existence of the plan itself may deter a potential acquiror from acquiring us. As a result, either by operation of the plan
or by its potential deterrent effect, mergers and acquisitions of us that our stockholders may consider in their best interests may not occur.



Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.



Additional equity financings or other share issuances by us, including
shares issued in connection with strategic alliances, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional
sales could occur could cause the market price of our common stock to drop. As of September 30, 2003, we had 35,936,428 shares of our common stock outstanding, of which 33,290,874 were freely tradable and 2,645,554 were transferable in accordance
with certain volume and manner of sale restrictions under Rule 144. The holder of approximately 2.5 million shares of our common stock is entitled to registration rights with respect to 1.5 million shares. If we propose to register any of our
securities under the Securities Act, the holder of these shares is entitled to notice of the registration and is entitled to include, at our expense, its shares of common stock in the registration and any related underwriting. However, among other
conditions, the underwriters may limit the number of shares to be included in the registration. In addition, the holder of these shares may require us, at our expense, on not more than two occasions and subject to certain limitations, to file a
registration statement under the Securities Act with respect to its shares of common stock, and we will be required to use our best efforts to effect the registration.



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If we do not progress in our programs as anticipated, our stock price could decrease.



For planning purposes, we estimate the timing of a variety of clinical,
regulatory and other milestones, such as when a certain product candidate will enter clinical development, when a clinical trial will be completed or when an application for regulatory approval will be filed. Some of our estimates are included in
this prospectus supplement. Our estimates are based on present facts and a variety of assumptions. Many of the underlying assumptions are outside of our control. If milestones are not achieved when we expect them to be, investors could be
disappointed, and our stock price may decrease.



Our stock price may be
volatile, and you may not be able to resell your shares at or above your purchase price.



Our stock prices and the market prices for securities of biotechnology companies in general have been highly volatile, with recent significant price and volume fluctuations, and may continue to be highly volatile in
the future. During 2002, our common stock traded between $16.13 and $8.01. During the nine months ended September 30, 2003, our common stock traded between $23.31 and $10.02. You may not be able to sell your shares quickly or at the market price if
trading in our stock is not active or the volume is low. The following factors, in addition to other risk factors described in this section, may have a significant impact on the market price of our common stock, some of which are beyond our control:



| |  | developments regarding, or the results of, our clinical trials, including TELCYTA clinical trials;
| | - | --------------------------------------------------------------------------------------------------



| |  | announcements of technological innovations or new commercial products by our competitors or us;
| | - | -----------------------------------------------------------------------------------------------



| |  | developments concerning proprietary rights, including patents;
| | - | --------------------------------------------------------------



| |  | developments concerning our collaborations; publicity regarding actual or potential medical results relating to products under development by our competitors or us;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | regulatory developments in the United States and foreign countries;
| | - | -------------------------------------------------------------------



| |  | litigation;
| | - | -----------



| |  | economic and other external factors or other disaster or crisis; or
| | - | -------------------------------------------------------------------



| |  | period-to-period fluctuations in our financial results.
| | - | -------------------------------------------------------



Item 3. Quantitative and Qualitative Disclosures About Market Risk.



The following discussion about our market risk exposure involves forward-looking statements. We are exposed to market risk related mainly to changes in
interest rates and we believe our exposure to market risk is immaterial. We do not use or hold derivative financial instruments.



The fair value of our investments in marketable securities at September 30, 2003 was $69.1 million, with a weighted-average maturity of 131 days and a
weighted-average interest rate of 1.42%. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio to assist us in funding our research and
development activities. Our marketable securities portfolio is primarily invested in corporate debt securities with an average maturity of under one year and a minimum investment grade rating of A or A-1 or better to minimize credit risk. Although
changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold prior to maturity. Through our money
managers, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis.



We have operated primarily in the United States and all funding activities with our collaborators to date have been made in
U.S. dollars. Accordingly, we do not have any exposure to foreign currency rate fluctuations.



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Item 4. Controls and Procedures.



Evaluation of disclosure controls and procedures. Based on their evaluation as of September 30, 2003, our principal executive officer and principal financial officer have concluded that Teliks disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, were sufficiently effective to ensure that information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commissions rules on Form 10-Q.



Changes in internal controls. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2003
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Limitations on the effectiveness of controls. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been
detected.



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PART II. OTHER INFORMATION



ITEM 6.
Exhibits and Reports on Form 8-K



| | (a) | Exhibits
| | --- | --------



3.1

Amended and Restated Certificate of Incorporation. (1)3.2

Amended and Restated Bylaws. (1)4.1

Specimen Stock Certificate. (1)4.2

Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I,
Series J and Series K preferred stock. (1)4.3

Right Agreement dated November 2. 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., as Rights Agent. (2)4.4

Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)31.1

Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2

Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1

Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).(1)

Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on April 4, 2000, as amended (File No. 333-33868).(2)

Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001 filed on November 5, 2002.




| | (b) | Reports on Form 8-K
| | --- | -------------------



We furnished a report on Form 8-K, dated July 30, 2003, announcing second quarter 2003 financial results for the quarter ended June 30, 2003.



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SIGNATURES



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



TELIK, INC/s/    CYNTHIA M. BUTITTA.Cynthia M. Butitta Chief Operating Officer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)




Date: November 12, 2003



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EXHIBIT INDEX



Exhibits3.1


Amended and Restated Certificate of Incorporation. (1)3.2


Amended and Restated Bylaws. (1)4.1


Specimen Stock Certificate. (1)4.2


Amended and Restated Registration Rights Agreement, dated March 31, 2000, between Telik and holders of Teliks Series B, Series E, Series F, Series G, Series H, Series I,
Series J and Series K preferred stock. (1)4.3


Right Agreement dated November 2. 2001, by and between Telik and Wells Fargo Bank Minnesota, N.A., as Rights Agent. (2)4.4


Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)31.1


Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2


Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1


Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).(1
)

Incorporated by reference to exhibits to our Registration Statement on Form S-1 filed on April 4, 2000, as amended (File No. 333-33868).(2
)

Incorporated by reference to exhibits to our Current Report on Form 8-K dated November 2, 2001 filed on November 5, 2002.




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