##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



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FORM 10-Q



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



FOR THE PERIOD ENDED September 30, 2004



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)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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 29, 2004: 43,770,857 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, 2004 and December 31, 2003                                   |  | 3   
|           |  |                                                                                                          
|           |  | Condensed Statements of Operations for the three months and nine months ended September 30, 2004 and 2003 |  | 4   
|           |  |                                                                                                          
|           |  | Condensed Statements of Cash Flows for the nine months ended September 30, 2004 and 2003                  |  | 5   
|           |  |                                                                                                          
|           |  | Notes to Condensed Financial Statements                                                                   |  | 6   
|           |  |                                                                                                          
|Item 2:    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |  | 11  
|           |  |                                                                                                          
|Item 3:    |  | Quantitative and Qualitative Disclosures About Market Risk                                                |  | 29  
|           |  |                                                                                                          
|Item 4:    |  | Controls and Procedures                                                                                   |  | 29  
|           |  |                                                                                                          
|PART II.   |  | OTHER INFORMATION                                                                                         |  |     
|           |  |                                                                                                          
|Item 6:    |  | Exhibits                                                                                                  |  | 31  
|           | 
|SIGNATURES |  | 32                                                                                                       



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements (Unaudited)



TELIK, INC.

CONDENSED BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                  |  | September 30,2004 |          |   | December 31,2003 |  
|                                                                                                                                                                  |  | (Unaudited)       |          |   | (Note 1)         |  
|Assets                                                                                                                                                            |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                   |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                         |  | $                 | 73,745   |   |                  | $ | 76,851   |  
|Short-term investments                                                                                                                                            |  |                   | 60,644   |   |                  |   | 105,802  |  
|Other receivables                                                                                                                                                 |  |                   | 642      |   |                  |   | 354      |  
|Prepaids and other current assets                                                                                                                                 |  |                   | 1,796    |   |                  |   | 1,417    |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                              |  |                   | 136,827  |   |                  |   | 184,424  |  
|                                                                                                                                                                  |  |                  
|Property and equipment, net                                                                                                                                       |  |                   | 5,370    |   |                  |   | 5,388    |  
|Long-term investments                                                                                                                                             |  |                   | 18,772   |   |                  |   | 16,639   |  
|Restricted investments                                                                                                                                            |  |                   | 1,796    |   |                  |   | 1,796    |  
|Other assets                                                                                                                                                      |  |                   | 60       |   |                  |   | 60       |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                      |  | $                 | 162,825  |   |                  | $ | 208,307  |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity                                                                                                                              |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                  |  | $                 | 2,987    |   |                  | $ | 2,623    |  
|Accrued clinical trials                                                                                                                                           |  |                   | 6,100    |   |                  |   | 4,174    |  
|Accrued compensation                                                                                                                                              |  |                   | 2,447    |   |                  |   | 3,232    |  
|Accrued liabilities                                                                                                                                               |  |                   | 667      |   |                  |   | 836      |  
|Deferred revenue                                                                                                                                                  |  |                   | 63       |   |                  |   | 25       |  
|Current portion of capital leases and equipment loans                                                                                                             |  |                   | 1,314    |   |                  |   | 907      |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                         |  |                   | 13,578   |   |                  |   | 11,797   |  
|                                                                                                                                                                  |  |                  
|Non-current portion of capital leases and equipment loans                                                                                                         |  |                   | 1,372    |   |                  |   | 1,493    |  
|Other liabilities                                                                                                                                                 |  |                   | 1,009    |   |                  |   | 715      |  
|                                                                                                                                                                  |  |                  
|Commitments                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Preferred stock, $0.01 par value: 5,000,000 shares authorized; none issued or outstanding                                                                         |  |                   |         |   |                  |   |         |  
|Common stock, $0.01 par value, 100,000,000 shares authorized; shares issued and outstanding: 43,761,773 at September 30, 2004 and 43,583,457
at December 31, 2003 |  |                   | 438      |   |                  |   | 436      |  
|Additional paid-in capital                                                                                                                                        |  |                   | 363,521  |   |                  |   | 361,840  |  
|Deferred stock compensation, net                                                                                                                                  |  |                   |         |   |                  |   | (93      | )
|Accumulated other comprehensive income                                                                                                                            |  |                   | (107     | ) |                  |   | 50       |  
|Accumulated deficit                                                                                                                                               |  |                   | (216,986 | ) |                  |   | (167,931 | )
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                        |  |                   | 146,866  |   |                  |   | 194,302  |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                        |  | $                 | 162,825  |   |                  | $ | 208,307  |  
|                                                                                                                                                                  |  |                   |          |   |                  |   |          |  



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, |  
|                                                                     |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|Contract revenue from collaborations:                                |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|With related parties                                                 |  | $                               |        |   |                                | $ |        |      |  | $ |        |   |  | $ | 417     |  
|Other                                                                |  |                                 | 44      |   |                                |   | 6       |      |  |   | 119     |   |  |   | 12      |  
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                                       |  |                                 | 44      |   |                                |   | 6       |      |  |   | 119     |   |  |   | 429     |  
|Operating costs and expenses:                                        |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                             |  |                                 | 14,250  |   |                                |   | 10,671  |      |  |   | 43,063  |   |  |   | 30,651  |  
|General and administrative                                           |  |                                 | 2,551   |   |                                |   | 2,628   |      |  |   | 7,904   |   |  |   | 6,713   |  
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating costs and expenses                                   |  |                                 | 16,801  |   |                                |   | 13,299  |      |  |   | 50,967  |   |  |   | 37,364  |  
|                                                                     |  |                                 |         |  
|Loss from operations                                                 |  |                                 | (16,757 | ) |                                |   | (13,293 | )    |  |   | (50,848 | ) |  |   | (36,935 | )
|                                                                     |  |                                 |         |  
|Interest income and other                                            |  |                                 | 746     |   |                                |   | 241     |      |  |   | 1,946   |   |  |   | 926     |  
|Interest expense                                                     |  |                                 | (51     | ) |                                |   | (51     | )    |  |   | (153    | ) |  |   | (103    | )
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                             |  | $                               | (16,062 | ) |                                | $ | (13,103 | )    |  | $ | (49,055 | ) |  | $ | (36,112 | )
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share                          |  | $                               | (0.37   | ) |                                | $ | (0.37   | )    |  | $ | (1.12   | ) |  | $ | (1.01   | )
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Shares used to calculate basic and diluted net loss per common share |  |                                 | 43,714  |   |                                |   | 35,895  |      |  |   | 43,675  |   |  |   | 35,798  |  
|                                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



See accompanying Notes
to Condensed Financial Statements.



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TELIK, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                                |          |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                            |  | Nine Months EndedSeptember 30, |         
|                                                                            |  | 2004                           |          |   | 2003 |  
|Cash flows from operating activities:                                       |  |                                |          |   |      |   |         |  
|Net loss                                                                    |  | $                              | (49,055  | ) |      | $ | (36,112 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                |          |   |      |   |         |  
|Depreciation and amortization                                               |  |                                | 1,018    |   |      |   | 688     |  
|Amortization of deferred stock compensation                                 |  |                                | 93       |   |      |   | 327     |  
|Stock options granted to non-employees                                      |  |                                | 197      |   |      |   | 203     |  
|Changes in assets and liabilities:                                          |  |                                |          |   |      |   |         |  
|Other receivables                                                           |  |                                | (288     | ) |      |   | 1,711   |  
|Prepaid expenses and other current assets                                   |  |                                | (379     | ) |      |   | (718    | )
|Other assets                                                                |  |                                |         |   |      |   | 50      |  
|Accounts payable                                                            |  |                                | 364      |   |      |   | (3,527  | )
|Accrued clinical trials, compensation and other liabilities                 |  |                                | 1,266    |   |      |   | 2,827   |  
|Deferred revenue                                                            |  |                                | 38       |   |      |   | (380    | )
|                                                                            |  |                                |          |   |      |   |         |  
|Net cash used in operating activities                                       |  |                                | (46,746  | ) |      |   | (34,931 | )
|                                                                            |  |                                |          |   |      |   |         |  
|Cash flows from investing activities:                                       |  |                                |          |   |      |   |         |  
|Purchases of investments                                                    |  |                                | (109,782 | ) |      |   | (75,375 | )
|Sales of investments                                                        |  |                                | 122,435  |   |      |   | 77,530  |  
|Maturities of investments                                                   |  |                                | 30,215   |   |      |   | 18,220  |  
|Change in restricted investments                                            |  |                                |         |   |      |   | 2,000   |  
|Purchases of property and equipment                                         |  |                                | (1,000   | ) |      |   | (3,729  | )
|                                                                            |  |                                |          |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                                | 41,868   |   |      |   | 18,646  |  
|                                                                            |  |                                |          |   |      |   |         |  
|Cash flows from financing activities:                                       |  |                                |          |   |      |   |         |  
|Proceeds from equipment loans                                               |  |                                | 1,091    |   |      |   | 1,688   |  
|Principal payments under capital leases and equipment loans                 |  |                                | (805     | ) |      |   | (332    | )
|Proceeds from issuance of common stock                                      |  |                                | 1,486    |   |      |   | 2,132   |  
|                                                                            |  |                                |          |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                                | 1,772    |   |      |   | 3,488   |  
|                                                                            |  |                                |          |   |      |   |         |  
|Net decrease in cash and cash equivalents                                   |  |                                | (3,106   | ) |      |   | (12,797 | )
|Cash and cash equivalents at beginning of period                            |  |                                | 76,851   |   |      |   | 34,688  |  
|                                                                            |  |                                |          |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                              | 73,745   |   |      | $ | 21,891  |  
|                                                                            |  |                                |          |   |      |   |         |  
|Supplementary information:                                                  |  |                                |          |   |      |   |         |  
|Interest paid                                                               |  | $                              | 153      |   |      | $ | 103     |  
|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 accounting principles generally accepted in the United States, or GAAP, 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 GAAP 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, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004 or any other period. The balance sheet at December 31, 2003 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, 2003, which are included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 5, 2004.



Use of estimates



The preparation of financial statements in conformity with GAAP 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.



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, or SFAS, No. 123, Accounting for Stock Based Compensation, as amended by SFAS No. 148 (in thousands):



|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                         |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                         |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|Net loss  as reported                                                                                   |  | $                               | (16,062 | ) |                                | $ | (13,103 | )    |  | $ | (49,055 | ) |  | $ | (36,112 | )
|Add: Stock-based employee compensation included in reported net loss                                     |  |                                 |        |   |                                |   | 99      |      |  |   | 93      |   |  |   | 327     |  
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Deduct: Total stock-based employee compensation expense under the fair value based method for all awards |  |                                 | (3,441  | ) |                                |   | (2,459  | )    |  |   | (11,182 | ) |  |   | (5,945  | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net loss  pro forma                                                                                     |  | $                               | (19,503 | ) |                                | $ | (15,463 | )    |  | $ | (60,144 | ) |  | $ | (41,730 | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share  as reported                                                |  | $                               | (0.37   | ) |                                | $ | (0.37   | )    |  | $ | (1.12   | ) |  | $ | (1.01   | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per common share  pro forma                                                  |  | $                               | (0.45   | ) |                                | $ | (0.43   | )    |  | $ | (1.38   | ) |  | $ | (1.17   | )
|                                                                                                         |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



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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              |   |  | Stock Purchase Plan             |  
|                                |  | Three Months EndedSeptember 30, |   |  | Three Months EndedSeptember 30, |  
|                                |  | 2004                            |   |  | 2003                            |   |  | 2004 |   |  | 2003 |  
|Expected stock price volatility |  | 70.3                            | % |  | 75.1                            | % |  | 78.5 | % |  | 79.6 | %
|Risk-free interest rate         |  | 3.50                            | % |  | 3.13                            | % |  | 1.51 | % |  | 1.32 | %
|Expected life (in years)        |  | 5.02                            |   |  | 5.09                            |   |  | 1.58 |   |  | 1.22 |  
|Expected dividend yield         |  |                                |   |  |                                |   |  |     |   |  |     |  
|                                |  |                                
|                                |  | Stock Option Plans              |   |  | Stock Purchase Plan             |  
|                                |  | Nine Months EndedSeptember 30,  |   |  | Nine Months Ended September 30, |  
|                                |  | 2004                            |   |  | 2003                            |   |  | 2004 |   |  | 2003 |  
|Expected stock price volatility |  | 71.6                            | % |  | 77.7                            | % |  | 78.9 | % |  | 86.8 | %
|Risk-free interest rate         |  | 3.09                            | % |  | 2.94                            | % |  | 1.34 | % |  | 2.09 | %
|Expected life (in years)        |  | 5.07                            |   |  | 5.03                            |   |  | 1.33 |   |  | 1.36 |  
|Expected dividend yield         |  |                                |   |  |                                |   |  |     |   |  |     |  



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.



On March 31, 2004, the FASB issued an Exposure
Draft, Share-Based Payment - An Amendment of FASB Statements No. 123 and 95 (proposed FAS 123R), which currently is expected to be effective for public companies in periods beginning after June 15, 2005. We would be required to implement
the proposed standard no later than the quarter that begins July 1, 2005. The cumulative effect of adoption, if any, applied on a modified prospective basis, would be measured and recognized on July 1, 2005. The proposed FAS 123R addresses the
accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be
settled by the issuance of such equity instruments. The proposed FAS 123R would eliminate the ability to account for share-based compensation transactions using APB 25, and generally would require instead that such transactions be accounted for
using a fair-value based method. As proposed,



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companies would be required to recognize an expense for compensation cost related to share-based payment arrangements
including stock options and employee stock purchase plans. The FASB expects to issue a final standard by December 31, 2004. We are currently evaluating option valuation methodologies and assumptions in light of the proposed FAS 123R related to
employee stock options. Current estimates of option values using the Black-Scholes method (as shown above) may not be indicative of results from valuation methodologies ultimately adopted in the final rules.



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, 2004 and 2003 were as follows (in thousands):



|                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                    |  | 2004                            |         |   | 2003                           |   |         | 2004 |  |   | 2003    |  
|Net loss                                            |  | $                               | (16,062 | ) |                                | $ | (13,103 | )    |  | $ | (49,055 | ) |  | $ | (36,112 | )
|Changes in unrealized gains (losses) on investments |  |                                 | 74      |   |                                |   | (22     | )    |  |   | (157    | ) |  |   |        |  
|                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                  |  | $                               | (15,988 | ) |                                | $ | (13,125 | )    |  | $ | (49,212 | ) |  | $ | (36,112 | )
|                                                    |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



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.



Outstanding options to purchase an aggregate of 6,397,285 and 5,055,416 shares of our common stock for the nine months ending September 30, 2004 and 2003 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.



4. Cash, cash equivalents, investments and restricted investments



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



|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|--------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                            |  | September 30, 2004
|                            |  | AmortizedCosts     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Certificate of deposit      |  | $                  | 1,796   |                      | $ |                      |  | $ |                    |   |  | $ | 1,796  
|Corporate notes             |  |                    | 36,970  |                      |   |                      |  |   | (24                 | ) |  |   | 36,946 
|Commercial paper            |  |                    | 68,748  |                      |   |                      |  |   | (5                  | ) |  |   | 68,743 
|Government agencies         |  |                    | 43,729  |                      |   | 15                    |  |   | (93                 | ) |  |   | 43,651 
|Cash and money market funds |  |                    | 3,821   |                      |   |                      |  |   |                    |   |  |   | 3,821  
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  | $                  | 155,064 |                      | $ | 15                    |  | $ | (122                | ) |  | $ | 154,957
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Reported as:                |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Cash and cash equivalents   |  |                    |         |                      |   |                       |  |   |                     |   |  | $ | 73,745 
|Short-term investments      |  |                    |         |                      |   |                       |  |   |                     |   |  |   | 60,644 
|Long-term investments       |  |                    |         |                      |   |                       |  |   |                     |   |  |   | 18,772 
|Restricted investments      |  |                    |         |                      |   |                       |  |   |                     |   |  |   | 1,796  
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  |                    |         |                      |   |                       |  |   |                     |   |  | $ | 154,957
|                            |  |                    |         |                      |   |                       |  |   |                     |   |  |   |        



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|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|--------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                            |  | December 31, 2003
|                            |  | AmortizedCosts    |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|Certificate of deposits     |  | $                 | 1,796   |                      | $ |                      |  | $ |                    |   |  | $ | 1,796  
|Corporate notes             |  |                   | 80,860  |                      |   | 26                    |  |   | (7                  | ) |  |   | 80,879 
|Commercial paper            |  |                   | 99,413  |                      |   | 9                     |  |   |                    |   |  |   | 99,422 
|Government notes            |  |                   | 10,606  |                      |   | 33                    |  |   | (11                 | ) |  |   | 10,628 
|Cash and money market funds |  |                   | 8,363   |                      |   |                      |  |   |                    |   |  |   | 8,363  
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  | $                 | 201,038 |                      | $ | 68                    |  | $ | (18                 | ) |  | $ | 201,088
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Reported as:                |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Cash and cash equivalents   |  |                   |         |                      |   |                       |  |   |                     |   |  | $ | 76,851 
|Short-term investments      |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 105,802
|Long-term investments       |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 16,639 
|Restricted investments      |  |                   |         |                      |   |                       |  |   |                     |   |  |   | 1,796  
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        
|Total                       |  |                   |         |                      |   |                       |  |   |                     |   |  | $ | 201,088
|                            |  |                   |         |                      |   |                       |  |   |                     |   |  |   |        



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, 2004 and December 31, 2003, the weighted-average
maturities of our available-for-sale securities were 110 days and 78 days, respectively.



5. Property and equipment, net



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



|                                               |  |                   |        |   |                  |   |        |  
|---------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                               |  | September 30,2004 |        |   | December 31,2003 |  
|Computer and lab equipment                     |  | $                 | 6,247  |   |                  | $ | 5,450  |  
|Office furniture and fixtures                  |  |                   | 331    |   |                  |   | 178    |  
|Leasehold improvements                         |  |                   | 3,196  |   |                  |   | 3,196  |  
|                                               |  |                   |        |   |                  |   |        |  
|                                               |  |                   | 9,774  |   |                  |   | 8,824  |  
|Less accumulated depreciation and amortization |  |                   | (4,404 | ) |                  |   | (3,436 | )
|                                               |  |                   |        |   |                  |   |        |  
|Property and equipment, net                    |  | $                 | 5,370  |   |                  | $ | 5,388  |  
|                                               |  |                   |        |   |                  |   |        |  



6. Capital leases and equipment
loans



At September 30, 2004, there were no draws
available under our Master Lease and Master Security credit facilities of approximately $2.5 million. The lease and credit facilities, secured by equipment and tenant improvements and bearing interest rates between 4.3% and 11.5%, were fully
utilized by the end of 2003. 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. At September 30, 2004, we were
in compliance with the financial covenants.



At September 30,
2004, draws under our Loan and Security Agreement credit facility totaled approximately $1.5 million, bearing interest rates between 5.91% and 6.98%. The credit facility was fully utilized as of July 2004. 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. At September 30, 2004, we were in compliance with this financial requirement.



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As of September 30, 2004, future payments under capital leases and loans were as follows (in thousands):



|                                  |  |                |     |       |   |       |  |   |      
|--------------------------------- |  | -------------- | --- | ----- | - | ----- |  | - | -----
|                                  |  | Capital Leases |     | Loans |   | Total
|2004                              |  | $              | 75  |       | $ | 293   |  | $ | 368  
|2005                              |  |                | 318 |       |   | 1,151 |  |   | 1,469
|2006                              |  |                | 246 |       |   | 673   |  |   | 919  
|2007                              |  |                |    |       |   | 148   |  |   | 148  
|                                  |  |                |     |       |   |       |  |   |      
|Total                             |  | $              | 639 |       | $ | 2,265 |  | $ | 2,904
|                                  |  |                |     |       |   |       |  |   |      
|Less amount representing interest |  |                |     |       |   |       |  |   | 218  
|                                  |  |                |     |       |   |       |  |   |      
|Present value of future payments  |  |                |     |       |   |       |  | $ | 2,686
|Reported as current portion       |  |                |     |       |   |       |  | $ | 1,314
|                                  |  |                |     |       |   |       |  |   |      
|Non-current portion               |  |                |     |       |   |       |  | $ | 1,372
|                                  |  |                |     |       |   |       |  |   |      



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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 Investigational New Drug applications, or INDs, with the Food and Drug Administration or 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, 2003 filed with the Securities and Exchange Commission on March 5, 2004.



Telik, the Telik logo, TRAP, TELCYTA and TELINTRA are trademarks of Telik, Inc. All other brand names or trademarks appearing in this
Quarterly Report on Form 10-Q are the property of their respective holders.



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, 2004, we had an accumulated deficit of $217.0 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 product candidates to later stages of development and our research programs may require significant additional research and development expenditures, including preclinical testing and clinical
trials, as well as for manufacturing development efforts and obtaining regulatory approval. We outsource our clinical trials and our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. To
date, we have funded our operations primarily through the sale of equity securities and, to a lesser extent, non-equity payments from collaborative partners.



We are subject to risks common to biopharmaceutical companies, including risks inherent in our research, development and commercialization efforts,
preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, enforcement of patent and proprietary rights, the need for future capital, potential competition, use of hazardous materials and retention of key employees. In
order for a product to be



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commercialized, it will be necessary for us to conduct preclinical tests and clinical trials, demonstrate efficacy and
safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, obtain market acceptance and, in many cases, obtain adequate reimbursement
from government and private insurers. We have not obtained regulatory approval for the commercial sale of any products, and we have not received any revenues from the commercial sale of products. We cannot provide assurance that we will generate
revenues, or achieve and sustain profitability, in the future.



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.



Clinical Status



TELCYTA, our lead product candidate, is a small molecule tumor-activated cancer drug product candidate that we are evaluating initially to treat cancers
that are resistant to standard chemotherapy drugs. We initiated a Phase 3 registration trial of TELCYTA for the treatment of ovarian cancer in 2003 and a Phase 3 registration trial of TELCYTA in non-small cell lung cancer in March 2004. We have
completed a Special Protocol Assessment review by the FDA and have received Fast Track designation for both trials. In addition, we initiated two Phase 2 clinical trials of TELCYTA evaluated in combination with cisplatin and in combination with
carboplatin and paclitaxel in the front-line treatment of Stage IIIb or IV non-small cell lung cancer in 2004.



TELINTRA, our second product candidate, is a small molecule bone marrow stimulant that we are developing for the treatment of blood disorders associated
with low blood cell levels, such as neutropenia or anemia. Our Phase 1/2 clinical trial in MDS, a form of pre-leukemia, was initiated in April 2002 to establish the safety, dose limiting toxicities and maximum tolerated dose of TELINTRA. We have
successfully completed the Phase 1 portion of the study and are enrolling patients in Phase 2.



We discovered all of our product candidates using our proprietary technology, Target-Related Affinity Profiling, or TRAP, which enables the rapid and efficient discovery of small molecule product candidates. We expect
to enter into collaborative arrangements with third parties for clinical trials, development, manufacturing, regulatory approvals or commercialization of some of our products, particularly outside North America, or in disease areas requiring larger
and longer clinical trials than cancer.



We have recently
announced the following:



| |  | Additional positive data from Phase 2 clinical trials of TELCYTA administered in combination with carboplatin and Doxil® in platinum refractory or resistant ovarian cancer. The data were reported at the Tenth
Biennial International Gynecologic Cancer Society (IGCS) meeting in Edinburgh, Scotland.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The publication of a study in which our proprietary TRAP drug discovery technology was used to identify novel small lead compounds using the affinity fingerprints of
approved drugs with known activity against a selected biological target. The study resulted in the identification of biologically active molecules that were structurally distinct from the known compounds, providing an advantage over methods that
rely on chemical structure alone for modeling bioactivity. The study was published in the Journal of Medicinal Chemistry (J. Med. Chem. 2004, 47, 4875-4880).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical accounting policies and significant judgments and estimates



Our managements discussion and analysis of our financial condition and results of operations are based on our
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the



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disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues
and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments related to revenue recognition and clinical development costs. We base our estimates on historical experience and on various other factors that
we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.



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



Research and development expenses



Our research and development expenses include salaries and benefits costs, fees for contractors, consultants and third party contract research
organizations, 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 product 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 and development expenses. We have a history of contracting with third parties that
perform various clinical trial activities on our behalf in the ongoing development of our product candidates. The financial terms of these contracts are subject to negotiation and may vary from contract to contract and may result in uneven payment
flows. We accrue and expense costs for clinical trial activities performed by third parties based upon estimates of the services and percentage of work completed to date on an individual study in accordance to agreements established with contract
research organizations and clinical trial sites. We determine our estimates through discussion with internal clinical personnel and schedules provided by outside service providers as to the progress or stage of completion of trials and the agreed
upon fees to be paid for such services. 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.



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. Actual results may differ from these estimates.



Results of operations



Revenues



|                                   |  |                                 |    |          |   |   |                                |     |          |  |   |     |  |   |     |  |     |   
|---------------------------------- |  | ------------------------------- | -- | -------- | - | - | ------------------------------ | --- | -------- |  | - | --- |  | - | --- |  | --- | --
|                                   |  | Three months endedSeptember 30, |    | % Change |   |   | Nine months endedSeptember 30, |     | % Change | 
|(in thousands, except percentages) |  | 2004                            |    | 2003     |   |   | 2004                           |     | 2003     | 
|Revenues                           |  | $                               | 44 |          | $ | 6 |                                | 633 | %        |  | $ | 119 |  | $ | 429 |  | (72 | )%



Revenues in the three
and nine months ended September 30, 2004 resulted primarily from our collaborative agreement with Roche, while revenues in the same periods in 2003 resulted primarily from our collaborative agreement with Sanwa and, to a lesser extent, up-front fees
from Roche. The increase in revenues of $38,000, or 633%, for the three months ended September 30, 2004 resulted from milestones achieved in 2004 relating to the Roche agreement. The decrease in revenues of $310,000, or 72%, for the nine months
ended September 30, 2004, was primarily due to the completion of our remaining collaboration with Sanwa in May 2003.



13



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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 received relating to such agreements.



Research and development expenses



Research and development expenses for the three months ended September 30, 2004 and 2003 were $14.3 million and $10.7 million. Research and development expenses for the nine months ended September 30, 2004 and 2003
were $43.1 million and $30.7 million. Our research and development activities consist primarily of drug development, clinical supply manufacturing, clinical activities, discovery research, screening and identification of product 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 approximated the following:



|                                   |  |                                 |        |          |   |        |                                |    |          |  |   |        |  |   |        |  |    |  
|---------------------------------- |  | ------------------------------- | ------ | -------- | - | ------ | ------------------------------ | -- | -------- |  | - | ------ |  | - | ------ |  | -- | -
|                                   |  | Three Months EndedSeptember 30, |        | % Change |   |        | Nine Months EndedSeptember 30, |    | % Change | 
|(In thousands, except percentages) |  | 2004                            |        | 2003     |   |        | 2004                           |    | 2003     | 
|Research and preclinical           |  | $                               | 3,913  |          | $ | 3,851  |                                | 2  | %        |  | $ | 12,071 |  | $ | 11,825 |  | 2  | %
|Clinical development               |  |                                 | 10,337 |          |   | 6,820  |                                | 52 | %        |  |   | 30,992 |  |   | 18,826 |  | 65 | %
|                                   |  |                                 |        |          |   |        |                                |    |          |  |   |        |  |   |        |  |    |  
|Total research and development     |  | $                               | 14,250 |          | $ | 10,671 |                                | 34 | %        |  | $ | 43,063 |  | $ | 30,651 |  | 40 | %
|                                   |  |                                 |        |          |   |        |                                |    |          |  |   |        |  |   |        |  |    |  



The increase of 34% or
$3.6 million in research and development expenses for the three months ended September 30, 2004 compared to the same period in 2003 was principally due to increased costs for the following:



| |  | TELCYTA
| | - | -------

| |  |                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |      approximately $3.6 million in costs associated with our Phase 3 registration trials in ovarian cancer
and non-small cell lung cancer and our Phase 2 clinical trials in ovarian and lung cancer in combination with standard chemotherapy drugs, offset by a decrease in drug supply manufacturing costs of approximately $1.2 million;
and



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

| |  |                                                                                                                         
| |  | ------------------------------------------------------------------------------------------------------------------------
| |  |      approximately $1.0 million associated with headcount growth and increased expenses to support clinical
activities.



The increase of 40%,
or $12.4 million, in research and development expenses for the nine months ended September 30, 2004 compared to the same period in 2003 was principally due to increased costs for the following:



| |  | TELCYTA
| | - | -------

| |  |                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |      costs associated with our Phase 3 registration trials in ovarian cancer and non-small cell lung cancer
of approximately $12.0 million offset by a decrease in drug supply manufacturing costs of approximately $3.5 million;



| |  | TELINTRA
| | - | --------

| |  |                                                                                  
| |  | ---------------------------------------------------------------------------------
| |  |      clinical drug supply manufacturing costs of approximately $0.8 million; and



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



| |  | approximately $3.1 million associated with headcount growth and increased expenses to support clinical activities.
| | - | ------------------------------------------------------------------------------------------------------------------



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 and TELINTRA clinical development programs. 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, including related expansion of our research and development organization, regulatory requirements, advancement of our preclinical programs and product manufacturing costs.



The following table summarizes our principal product
development programs, 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 and TELINTRA 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 enter into or maintain existing contracts 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 in the discussion of
Additional Factors That May Affect Future Results below. For further information on our product candidates refer to our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on
March 5, 2004.



|                                       |  |                                |  |                     |  |                             |  |                                                   |        |  |   |       
|-------------------------------------- |  | ------------------------------ |  | ------------------- |  | --------------------------- |  | ------------------------------------------------- | ------ |  | - | ------
|Product Candidates                     |  | Description                    |  | Phase ofDevelopment |  | EstimatedCompletionof Phase |  | Related R&D ExpenseNine Months EndedSeptember 30,
|                                       |  |                                |  | 2004                |  | 2003                       
|                                       |  |                                |  |                     |  |                             |  | (in thousands)                                   
|TELCYTA                                |  |                                |  |                     |  |                             |  | $                                                 | 29,967 |  | $ | 18,679
|                                       |  | Ovarian                        |  | Phase 3             |  | 2005                        |  |                                                   |        |  |   |       
|                                       |  | Lung                           |  | Phase 3             |  | 2005                        |  |                                                   |        |  |   |       
|                                       |  | Colorectal                     |  | Phase 2             |  | 2003                        |  |                                                   |        |  |   |       
|                                       |  | Ovarian                        |  | Phase 2             |  | 2004                        |  |                                                   |        |  |   |       
|                                       |  | Lung                           |  | Phase 2             |  | 2004                        |  |                                                   |        |  |   |       
|                                       |  | Breast                         |  | Phase 2             |  | 2004                        |  |                                                   |        |  |   |       
|                                       |  | Combination (with other drugs) |  | Phase 2             |  | 2004                        |  |                                                   |        |  |   |       
|                                       |  |                                |  |                     | 
|TELINTRA                               |  | Myelodysplastic syndrome       |  | Phase 1/2           |  | 2005                        |  |                                                   | 2,799  |  |   | 2,012 
|Other (1)                              |  |                                |  |                     |  |                             |  |                                                   | 10,297 |  |   | 9,960 
|                                       |  |                                |  |                     |  |                             |  |                                                   |        |  |   |       
|Total research and development expense |  |                                |  |                     |  |                             |  | $                                                 | 43,063 |  | $ | 30,651
|                                       |  |                                |  |                     |  |                             |  |                                                   |        |  |   |       

---

|(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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 candidate pipeline. The process of conducting 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 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



|                                   |  |                                 |       |          |   |       |                                |    |          |  |   |       |  |   |       |  |    |  
|---------------------------------- |  | ------------------------------- | ----- | -------- | - | ----- | ------------------------------ | -- | -------- |  | - | ----- |  | - | ----- |  | -- | -
|                                   |  | Three Months EndedSeptember 30, |       | % Change |   |       | Nine Months EndedSeptember 30, |    | % Change | 
|(In thousands, except percentages) |  | 2004                            |       | 2003     |   |       | 2004                           |    | 2003     | 
|General and administrative         |  | $                               | 2,551 |          | $ | 2,628 |                                | (3 | )%       |  | $ | 7,904 |  | $ | 6,713 |  | 18 | %



The decrease in
general and administrative expenses was 3%, or $77,000, in the three months ended September 30, 2004. The increase in general and administrative expenses of 18%, or $1.2 million, in the nine months ended September 30, 2004 was due primarily to
increased costs for the following:



| |  | approximately $0.6 million in costs associated with headcount growth and increased expenses necessary to manage the growth of our operations; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | marketing expenses due to increased marketing program activities for TELCYTA of approximately $1.2 million;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | offset by decreased outside legal fees of approximately $0.6 million.
| | - | ---------------------------------------------------------------------



We expect future general and administrative expenses to increase in support of expanded business activities, including costs associated with our marketing
efforts to support our commercialization strategy for TELCYTA.



Interest
income and interest expense



|                                   |  |                                 |     |   |          |   |     |                                |      |     |          |      |   |       |   |  |   |      |   |  |     |  
|---------------------------------- |  | ------------------------------- | --- | - | -------- | - | --- | ------------------------------ | ---- | --- | -------- | ---- | - | ----- | - |  | - | ---- | - |  | --- | -
|                                   |  | Three Months EndedSeptember 30, |     |   | % Change |   |     | Nine Months EndedSeptember 30, |      |     | % Change |     
|(In thousands, except percentages) |  | 2004                            |     |   | 2003     |   |     |                                | 2004 |     |          | 2003 |   |      
|Interest income                    |  | $                               | 746 |   |          | $ | 241 |                                |      | 210 | %        |      | $ | 1,946 |   |  | $ | 926  |   |  | 110 | %
|Interest expense                   |  |                                 | (51 | ) |          |   | (51 | )                              |      | 0   | %        |      |   | (153  | ) |  |   | (103 | ) |  | 49  | %



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Interest income resulted primarily from earnings on investments. Interest income increased by $505,000,
or 210%, for the three months ended September 30, 2004 and approximately $1.0 million, or 110%, for the nine months ended September 30, 2004 compared to the same periods in 2003. The increases in the three-month and nine-month periods ended
September 30, 2004 were due to the higher principal balance of our investments as a result of $142.8 million in net proceeds obtained from our follow-on offering in November 2003.



Interest expense remained the same for the three months ended September 30, 2004 and increased by $50,000, or 49%, for the
nine months ended September 30, 2004 compared to the same periods in 2003. The increase in interest expense reflected our utilization of our equipment loan facility.



Liquidity and capital resources



|                                                              |  |      |          |   |      |   |         |  
|------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|(In millions, except ratio)                                   |  | 2004 |          |   | 2003 |  
|September 30:                                                 |  |      |          |   |      |   |         |  
|Cash, cash equivalents, investments and restricted cash       |  | $    | 155.0    |   |      | $ | 69.1    |  
|Working capital                                               |  | $    | 123.2    |   |      | $ | 47.0    |  
|Current ratio                                                 |  |      | 10.1 : 1 |   |      |   | 6.5 : 1 |  
|                                                              |  |     
|Nine months ended September 30:                               |  |      |          |   |      |   |         |  
|Cash provided by (used in):                                   |  |      |          |   |      |   |         |  
|Operating activities                                          |  | $    | (46.7    | ) |      | $ | (34.9   | )
|Investing activities                                          |  | $    | 41.9     |   |      | $ | 18.6    |  
|Financing activities                                          |  | $    | 1.8      |   |      | $ | 3.5     |  
|Capital expenditures (included in investing activities above) |  | $    | (1.0     | ) |      | $ | (3.7    | )



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, 2004, we
had available cash, cash equivalents, investments and restricted investments of $155.0 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 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, 2004 was $46.7 million compared with $34.9 million for the same period in 2003. Net loss of $49.1 million in 2004 included non-cash charges of $1.0 million for
depreciation and amortization, $93,000 for the amortization of deferred stock compensation and $197,000 related to non-cash stock based compensation to non employees. Cash used in operations was further impacted by a decrease of $785,000 in accrued
compensation due to bonus payouts at the beginning of the year, $288,000 in interest and other receivable and $379,000 in prepaid expenses related to annual insurance premiums. Cash usage was offset by an increase of approximately $1.6 million in
accounts payable and accrued liabilities primarily due to Phase 3 and Phase 2 clinical trials activities. Operating cash outflows for the same period in 2003 resulted primarily from our net loss of $36.1 million. Other than non-cash charges of $1.2
million primarily related to depreciation and amortization expenses, cash used in operations was impacted by a decrease in accounts payable of $3.5 million due to operating activities and clinical drug supplies, offset by $1.7 million received from
our landlord to fund leasehold improvements and an increase of $2.8 million in accrued liabilities related to a higher level of research and development activities.



Cash Flows from Investing Activities. Cash provided by investing activities for the nine months ended September 30,
2004 was $41.9 million compared with $18.6 million cash provided for the same period in



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2003. Investing activities in 2004 were primarily related to the $42.9 million provided by net purchases, sales and
maturities of investments and $1.0 million for equipment purchases. Cash provided in the same period in 2003 was related to $20.4 million in net proceeds from net sales, maturities and purchases of investments, $2.0 million reduction in restricted
cash for a security deposit that was no longer required on our Palo Alto facility, offset by $3.7 million in leasehold improvements and laboratory equipment purchases.



Cash Flows from Financing Activities. Cash provided by financing activities for the nine months ended September 30,
2004 was approximately $1.8 million compared with a $3.5 million for the same period in 2003. Financing activities in 2004 included approximately $1.1 million in proceeds obtained through equipment loans and $1.5 million in proceeds from stock
option exercises and our employee stock purchase plan, offset in part by $805,000 in payments under capital leases and equipment loan. Financing activities for the same period in 2003 were primarily due to $1.7 million in proceeds obtained through
equipment loans, $2.1 million from stock option exercises and our employee stock purchase plan offset by $332,000 from payments under capital leases and equipment loans.



Working Capital. Working capital decreased to $123.2 million at September 30, 2004 from $172.6 million at December
31, 2003. The decrease in working capital was due to our use of cash in operations primarily due to the expansion of our TELCYTA development program and costs associated with headcount growth.



In July 2004, we drew down a total of $465,000 for equipment purchases from
our existing equipment loan facility at an interest rate of 6.98% payable over 36 months. At September 30, 2004, draws under this credit facility totaled approximately $1.5 million, and the credit facility was fully utilized as of July 2004.



We believe our existing cash and investment securities will be
sufficient to support our current operating plan at least until the end of 2005. We expect clinical development expenses 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 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.
| | - | -------------------------------------------------------------------------------------------------------------------



We currently have no commitments for any additional financings. If we need to
raise additional money to fund our operations, funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to market our products as planned or continue development of
our products, or we could be required to delay, scale back or eliminate some or all of our research and



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development programs. 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 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.



Our future contractual obligations at September 30, 2004 were as follows (in thousands):



|                                   |  |       |        |      |   |           |  |           |        |            |   |       |  |   |       
|---------------------------------- |  | ----- | ------ | ---- | - | --------- |  | --------- | ------ | ---------- | - | ----- |  | - | ------
|                                   |  | Total |        | 2004 |   | 2005-2006 |  | 2007-2008 |        | After 2008
|Capital lease obligations          |  | $     | 639    |      | $ | 75        |  | $         | 564    |            | $ |      |  | $ |      
|Equipment loan                     |  |       | 2,265  |      |   | 293       |  |           | 1,824  |            |   | 148   |  |   |      
|Operating leases                   |  |       | 36,503 |      |   | 1,037     |  |           | 8,498  |            |   | 6,875 |  |   | 20,093
|                                   |  |       |        |      |   |           |  |           |        |            |   |       |  |   |       
|Total contractual cash obligations |  | $     | 39,407 |      | $ | 1,405     |  | $         | 10,886 |            | $ | 7,023 |  | $ | 20,093
|                                   |  |       |        |      |   |           |  |           |        |            |   |       |  |   |       



ADDITIONAL 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, 2004, we had an accumulated deficit of $217.0 million. 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
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 or TELINTRA 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 a Phase 3 registration trial of TELCYTA in non small cell lung cancer in March 2004. These
trials 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.



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We are currently in a Phase 1/2 clinical trial of TELINTRA in MDS, a form of pre-leukemia, to evaluate
safety, pharmacokinetics, pharmacodynamics and efficacy. Our success depends, in part, on our ability to complete clinical development of TELINTRA 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 contract research organizations, or
CROs, to facilitate the administration of our Phase 3 trials of TELCYTA. Dependence on a CRO subjects 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 a couple of 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.



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.



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 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 will be sufficient to support our current operating plan at least until the end of 2005.
Changes in our research and development



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plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources
as well. In any event, we will require substantial additional financing to fund our operations in the future. 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, 2004, our accumulated deficit was $217.0 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 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.



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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 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



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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. 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;
| | - | ---------------------------------------



| |  | 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.
| | - | ------------------------------------------------------------------------



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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. We can generally apply for patent term extensions on the patents for TELCYTA and TELINTRA 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 Quarterly Report on Form
10-Q, we have not received any communications with the owners of related patents alleging that our 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.



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.



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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.



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 enter into or maintain existing contracts 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 sufficient inventory of TELCYTA and TELINTRA that are stored in
multiple locations and an additional, substantial quantity of the active ingredient in TELCYTA, 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.



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Since our two sources for supply of the active ingredient in TELCYTA, Organichem Corporation and Albany
Molecular Research, Inc., merged during 2003, we are currently dependent on a single source of supply of the active ingredient. We recently entered into an agreement with a second source for the supply of active ingredient. While we are working to
qualify this additional supplier, there is no certainty that this will occur. We are currently dependent upon two sources for the drug product manufacture of TELCYTA.



We presently depend upon a single source of supply for clinical quantities of the active ingredient in TELINTRA, Bachem
Corporation, and are working to qualify additional sources. We also depend upon a single source of supply for a key excipient used in the manufacture of TELINTRA, Lipoid GmbH. While we are evaluating potential alternative sources of these materials,
we have no such alternative sources that are immediately available. Cardinal Health, Inc. is currently our sole drug product manufacturer of TELINTRA. While we have entered into an agreement with a second drug product manufacturer and are working to
qualify this additional manufacturing source, there is no certainty this will occur.



If manufacturing is not performed in a timely manner, if our suppliers fail to perform or if our relationships with our suppliers or manufacturers should terminate, our clinical trials and commercialization of TELCYTA
and TELINTRA could be delayed. We may not be able to enter into or maintain 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 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



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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 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



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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, 2004, we had 43,761,773 shares of our common stock outstanding, of which 43,506,289 shares were freely tradable and 255,484 shares were transferable in
accordance with certain volume and manner of sale restrictions under Rule 144.



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 Quarterly Report on Form 10-Q. 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 2003, our common stock traded between $23.31
and $10.02, and during the first nine months of 2004, our common stock traded between $29.67 and $15.08. 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.
| | - | -------------------------------------------------------



New and Potential New Accounting Pronouncements May Impact Our Future Financial Position and Results of Operations



There may be potential new accounting pronouncements or regulatory rulings,
which may have an impact on our future financial position and results of operations. In particular, the accounting for employee stock options and employee stock purchase plans as an expense. On March 31, 2004, the FASB issued an Exposure



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Draft, Share-Based Payment - An Amendment of FASB Statements No. 123 and 95 (proposed FAS 123R), which
currently is expected to be effective for public companies in periods beginning after June 15, 2005. We would be required to implement the proposed standard no later than the quarter that begins July 1, 2005. The cumulative effect of adoption, if
any, applied on a modified prospective basis, would be measured and recognized on July 1, 2005. FAS 123R would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and would instead require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and employee stock
purchase plans. The FASB expects to issue a final standard by December 31, 2004. The adoption of FAS 123R and other potential changes could materially impact our results of operations.



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.



Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment
portfolio. To minimize the exposure due to adverse shifts in interest rates we maintain investments of shorter maturities. Our marketable securities portfolio is primarily invested in corporate debt securities and commercial papers 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.



The table below presents the principal amounts
and weighted-average interest rates by year of maturity for our investment portfolio (dollars in thousands).



|                              |  |      |         |   |      |   |        |       |  |   |                                |   |  |   |        
|----------------------------- |  | ---- | ------- | - | ---- | - | ------ | ----- |  | - | ------------------------------ | - |  | - | -------
|                              |  | 2004 |         |   | 2005 |   |        | Total |  |   | Fair value atSeptember 30,2004
|Available-for-sale securities |  | $    | 122,132 |   |      | $ | 27,315 |       |  | $ | 149,447                        |   |  | $ | 149,340
|Average interest rate         |  |      | 1.90    | % |      |   | 1.91   | %     |  |   | 1.90                           | % |  |   |        



Item 4. Controls and Procedures.



Evaluation of disclosure controls and procedures. Based on our managements evaluation (with the participation of our chief executive officer and chief financial officer), our chief executive officer and chief financial officer
have concluded that, subject to limitations described below, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended), were effective as of September 30, 2004 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 and forms.



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



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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. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set
forth above, our chief executive officer and chief financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were sufficiently effective to provide
reasonable assurance that the objectives of our disclosure control system were met.



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PART II. OTHER INFORMATION



Item 6. 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., replaced by EquiServe Trust Company, N.A., as Rights Agent. (2)                                                   
|       | 
|4.4    |  | Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                        
|       | 
|10.23* |  | Manufacturing Supply Agreement dated July 1, 2004, by and between Telik and Organichem Corporation.                                                                                                                  
|       | 
|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).                                                                   

---

|* | Confidential treatment requested with respect to portions of this Exhibit
|- | -------------------------------------------------------------------------

|(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, 2001.
|--- | -------------------------------------------------------------------------------------------------------------------------



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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. BUTITTACynthia M. ButittaChief Operating Officer and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)




Date: November 8, 2004



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EXHIBIT INDEX



|       |  |                                                                                                                                                                                                                      
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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., replaced by EquiServe Trust Company, N.A., as Rights Agent. (2)                                                   
|       | 
|4.4    |  | Registrants Certificate of Designation of Series A Junior Participating Preferred Stock. (2)                                                                                                                        
|       | 
|10.23* |  | Manufacturing Supply Agreement dated July 1, 2004, by and between Telik and Organichem Corporation.                                                                                                                  
|       | 
|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).                                                                   

---

|* | Confidential treatment requested with respect to portions of this Exhibit
|- | -------------------------------------------------------------------------

|(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, 2001.
|--- | -------------------------------------------------------------------------------------------------------------------------



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