##### Table of Contents



UNITED
STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549



---



FORM 10-Q



---



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



FOR THE PERIOD ENDED MARCH 31, 2003



OR



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES
EXCHANGE ACT OF 1934



FOR THE TRANSITION
PERIOD FROM ____________ TO ____________.



COMMISSION FILE NUMBER: 0-31265



---



TELIK, INC.

---

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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



3165
PORTER DRIVE, PALO ALTO, CA 94304

---

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



REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 244-9303



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)



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 April 30, 2003:    35,828,120 shares



---

##### Table of Contents



TELIK, INC.



INDEX



|PART I.        |  | FINANCIAL INFORMATION                                                                 |  |   
|-------------- |  | ------------------------------------------------------------------------------------- |  | --
|              
|Item 1:        |  | Financial Statements (Unaudited)                                                      |  |   
|              
|               |  | Balance Sheets as of March 31, 2003 and December 31, 2002                             |  | 3 
|              
|               |  | Statements of Operations for the three months ended March 31, 2003 and 2002           |  | 4 
|              
|               |  | Statements of Cash Flows for the three months ended March 31, 2003 and 2002           |  | 5 
|              
|               |  | Notes to Condensed Financial Statements                                               |  | 6 
|              
|Item 2:        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10
|              
|Item 3:        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 24
|              
|Item 4:        |  | Controls and Procedures                                                               |  | 24
|              
|PART II.       |  | OTHER INFORMATION                                                                     |  |   
|              
|Item 6:        |  | Exhibits and Reports on Form 8-K                                                      |  | 25
|              
|SIGNATURES     |  | 26                                                                                   
|              
|CERTIFICATIONS |  | 27                                                                                   



2



---

##### Table of Contents



TELIK, INC.

BALANCE SHEETS

(In thousands, except share and per share data)



|                                                                                                                               |  | March 31, 2003 |          |   | December 31, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | -------- | - | ----------------- | -
|                                                                                                                               |  | (Unaudited)    |          |   | (Note 1)          |  
|Assets                                                                                                                         |  |                |          |   |                   |  
|Current assets:                                                                                                                |  |                |          |   |                   |  
|Cash and cash equivalents                                                                                                      |  | $              | 19,345   |   |                   | $
|Short-term investments                                                                                                         |  |                | 64,194   |   |                   |  
|Other receivables                                                                                                              |  |                | 163      |   |                   |  
|Prepaids and other current assets                                                                                              |  |                | 1,084    |   |                   |  
|                                                                                                                               |  |                |          |   |                   |  
|Total current assets                                                                                                           |  |                | 84,786   |   |                   |  
|Property and equipment, net                                                                                                    |  |                | 4,895    |   |                   |  
|Long-term investments                                                                                                          |  |                | 6,574    |   |                   |  
|Restricted investments                                                                                                         |  |                | 2,272    |   |                   |  
|Other assets                                                                                                                   |  |                | 111      |   |                   |  
|                                                                                                                               |  |                |          |   |                   |  
|Total assets                                                                                                                   |  | $              | 98,638   |   |                   | $
|                                                                                                                               |  |                |          |   |                   |  
|                                                                                                                              
|Liabilities and Stockholders Equity                                                                                           |  |                |          |   |                   |  
|Current liabilities:                                                                                                           |  |                |          |   |                   |  
|Accounts payable                                                                                                               |  | $              | 3,700    |   |                   | $
|Accrued clinical trials                                                                                                        |  |                | 2,026    |   |                   |  
|Accrued compensation                                                                                                           |  |                | 730      |   |                   |  
|Accrued liabilities                                                                                                            |  |                | 307      |   |                   |  
|Deferred revenue                                                                                                               |  |                | 167      |   |                   |  
|Current portion of capital leases and equipment loan                                                                           |  |                | 484      |   |                   |  
|                                                                                                                               |  |                |          |   |                   |  
|Total current liabilities                                                                                                      |  |                | 7,414    |   |                   |  
|Non-current portion of capital leases, loan and other liabilities                                                              |  |                | 1,421    |   |                   |  
|                                                                                                                              
|Commitments                                                                                                                    |  |                |          |   |                   |  
|                                                                                                                              
|Stockholders equity:                                                                                                          |  |                |          |   |                   |  
|Preferred stock, $0.01 par value:                                                                                              |  |                |          |   |                   |  
|5,000,000 shares authorized; none issued or outstanding                                                                        |  |                |         |   |                   |  
|Common stock, $0.01 par value, and additional paid-in capital:                                                                 |  |                |          |   |                   |  
|100,000,000 shares authorized; shares issued and outstanding: 35,821,442 at March 31,
2003 and 35,567,081 at December 31, 2002 |  |                | 218,547  |   |                   |  
|Deferred stock compensation, net                                                                                               |  |                | (396     | ) |                   |  
|Accumulated other comprehensive income                                                                                         |  |                | 52       |   |                   |  
|Accumulated deficit                                                                                                            |  |                | (128,400 | ) |                   |  
|                                                                                                                               |  |                |          |   |                   |  
|Total stockholders equity                                                                                                     |  |                | 89,803   |   |                   |  
|                                                                                                                               |  |                |          |   |                   |  
|Total liabilities and stockholders equity                                                                                     |  | $              | 98,638   |   |                   | $
|                                                                                                                               |  |                |          |   |                   |  



See
accompanying Notes to Financial Statements.



3



---

##### Table of Contents



TELIK, INC.

STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                     |  | Three Months Ended March 31, |        
|-------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                     |  | 2003                         |        
|Contract revenue from collaborations with related parties            |  | $                            | 250    
|Other revenue                                                        |  |                              |       
|                                                                     |  |                              |        
|Total revenues                                                       |  |                              | 250    
|                                                                    
|Operating costs and expenses:                                        |  |                              |        
|Research and development                                             |  |                              | 9,718  
|General and administrative                                           |  |                              | 2,005  
|                                                                     |  |                              |        
|Total operating costs and expenses                                   |  |                              | 11,723 
|                                                                     |  |                              |        
|Loss from operations                                                 |  |                              | (11,473
|Interest income, net                                                 |  |                              | 362    
|                                                                     |  |                              |        
|Net loss                                                             |  | $                            | (11,111
|                                                                     |  |                              |        
|Basic and diluted net loss per common share                          |  | $                            | (0.31  
|                                                                     |  |                              |        
|Shares used to calculate basic and diluted net loss per common share |  |                              | 35,657 
|                                                                     |  |                              |        



See
accompanying Notes to Financial Statements.



4



---

##### Table of Contents



TELIK, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  | Three Months Ended March 31, |        
|--------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                            |  | 2003                         |        
|Cash flows from operating activities:                                       |  |                              |        
|Net loss                                                                    |  | $                            | (11,111
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                              |        
|Depreciation and amortization                                               |  |                              | 152    
|Amortization of deferred stock compensation                                 |  |                              | 123    
|Stock options granted to non-employees                                      |  |                              | 58     
|Changes in assets and liabilities:                                          |  |                              |        
|Other receivable                                                            |  |                              | 1,742  
|Prepaid expenses, current and other assets                                  |  |                              | (88    
|Accounts payable                                                            |  |                              | (2,522 
|Accrued liabilities                                                         |  |                              | 550    
|Deferred revenue                                                            |  |                              | (250   
|                                                                            |  |                              |        
|Net cash used in operating activities                                       |  |                              | (11,346
|                                                                            |  |                              |        
|Cash flows from investing activities:                                       |  |                              |        
|Purchases of investments                                                    |  |                              | (19,848
|Sales of investments                                                        |  |                              | 9,000  
|Maturities of investments                                                   |  |                              | 5,900  
|Restricted investments                                                      |  |                              | 1,524  
|Purchases of property and equipment                                         |  |                              | (3,368 
|                                                                            |  |                              |        
|Net cash (used in) provided by investing activities                         |  |                              | (6,792 
|                                                                            |  |                              |        
|Cash flows from financing activities:                                       |  |                              |        
|Proceeds from equipment loan                                                |  |                              | 1,321  
|Principal payments under capital leases and loan                            |  |                              | (32    
|Net proceeds from issuance of common stock                                  |  |                              | 1,506  
|                                                                            |  |                              |        
|Net cash provided by financing activities                                   |  |                              | 2,795  
|                                                                            |  |                              |        
|Net change in cash and cash equivalents                                     |  |                              | (15,343
|Cash and cash equivalents at beginning of period                            |  |                              | 34,688 
|                                                                            |  |                              |        
|Cash and cash equivalents at end of period                                  |  | $                            | 19,345 
|                                                                            |  |                              |        
|Supplementary information:                                                  |  |                              |        
|Interest paid                                                               |  | $                            | 12     
|                                                                           
|Non-cash financing activities:                                              |  |                              |        
|Equipment acquired under capital leases                                     |  | $                            |       



See
accompanying Notes to Financial Statements.



5



---

##### Table of Contents



TELIK, INC.

Notes to Condensed Financial Statements

(Unaudited)



1.    Basis of presentation and summary of significant accounting policies



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



Revenue recognition



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



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



Reclassification



Certain prior period amounts have been reclassified to
conform to the current period presentation. In the first quarter of 2003, we made a reclassification change pertaining to intellectual property related legal fees. These fees, presented in prior periods as research and development expenses, are now
reflected in general and administrative expenses.



2.    Comprehensive income (loss)



Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes changes in unrealized gains (losses) on investments.
Comprehensive income (loss) for the three months ended March 31, 2003 and 2002 are as follows (in thousands):



|                                                |  | Three Months Ended March 31, |        
|----------------------------------------------- |  | ---------------------------- | -------
|                                                |  | 2003                         |        
|Net loss                                        |  | $                            | (11,111
|Change in unrealized gain/(loss) on investments |  |                              | 22     
|                                                |  |                              |        
|Comprehensive loss                              |  | $                            | (11,089
|                                                |  |                              |        



6



---

##### Table of Contents



3.    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 Employeesand 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 loss per share if we had accounted for our stock option and stock purchase plans under the fair value method of accounting under SFAS 123, as amended by SFAS 148 (in thousands):



|                                                                                                         |  | Three Months Ended March 31, |        
|-------------------------------------------------------------------------------------------------------- |  | ---------------------------- | -------
|                                                                                                         |  | 2003                         |        
|Net lossas reported                                                                                     |  | $                            | (11,111
|Add: Stock-based employee compensation expense included in reported net
loss                             |  |                              | 123    
|Deduct: Total stock-based employee compensation expense under the fair value based
method for all awards |  |                              | (1,317 
|                                                                                                         |  |                              |        
|Net losspro forma                                                                                       |  | $                            | (12,305
|                                                                                                         |  |                              |        
|Basic and diluted net loss per common shareas reported                                                  |  | $                            | (0.31  
|                                                                                                         |  |                              |        
|Basic and diluted net loss per common sharepro forma                                                    |  | $                            | (0.35  
|                                                                                                         |  |                              |        



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



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



|                                |  | Stock Option Plans           |   |  | Stock Purchase Plan          |  
|------------------------------- |  | ---------------------------- | - |  | ---------------------------- | -
|                                |  | Three Months Ended March 31, |   |  | Three Months Ended March 31, |  
|                                |  | 2003                         |   |  | 2002                         |  
|Expected stock price volatility |  | 79.1                         | % |  | 81.5                         | %
|Risk-free interest rate         |  | 3.00                         | % |  | 3.54                         | %
|Expected life (in years)        |  | 5.0                          |   |  | 5.0                          |  
|Expected dividend yield         |  |                             |   |  |                             |  



7



---

##### Table of Contents



4.    Basic and diluted net loss per share



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



|                                                                               |  | Three Months Ended March 31, |        
|------------------------------------------------------------------------------ |  | ---------------------------- | -------
|                                                                               |  | 2003                         |        
|Net loss                                                                       |  | $                            | (11,111
|                                                                               |  |                              |        
|Weighted-average shares of common stock outstanding                            |  |                              | 35,657 
|Less: weighted-average share subject to repurchase                             |  |                              |       
|                                                                               |  |                              |        
|Weighted-average shares used in computing basic and diluted net loss per share |  |                              | 35,657 
|                                                                               |  |                              |        
|Basic and diluted net loss per share                                           |  | $                            | (0.31  
|                                                                               |  |                              |        



Outstanding options to purchase, in the aggregate, 4,814,981 and 3,882,723 shares of common stock at March 31, 2003 and 2002 were excluded from diluted earnings calculations because inclusion of such options would have an
anti-dilutive effect on losses in these periods.



5.    Cash equivalents, investments and restricted investments



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



|                            |  | March 31, 2003 
|--------------------------- |  | ---------------
|                            |  | Amortized Costs
|Certificate of deposit      |  | $              
|Corporate notes             |  |                
|Commercial paper            |  |                
|Government agencies         |  |                
|Cash and money market funds |  |                
|                            |  |                
|Total                       |  | $              
|                            |  |                
|Reported as:                |  |                
|Cash and cash equivalents   |  |                
|Short-term investments      |  |                
|Long-term investments       |  |                
|Restricted investments      |  |                
|                            |  |                
|Total                       |  |                
|                            |  |                



8



---

##### Table of Contents



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



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



6.    Property and equipment



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



|                                               |  | March 31, 2003 |        |   | December 31, 2002 |  
|---------------------------------------------- |  | -------------- | ------ | - | ----------------- | -
|Laboratory equipment                           |  | $              | 6,134  |   |                   | $
|Office furniture and equipment                 |  |                | 670    |   |                   |  
|Leasehold improvements                         |  |                | 3,528  |   |                   |  
|                                               |  |                |        |   |                   |  
|                                               |  |                | 10,332 |   |                   |  
|Less accumulated depreciation and amortization |  |                | (5,437 | ) |                   |  
|                                               |  |                |        |   |                   |  
|Property and equipment, net                    |  | $              | 4,895  |   |                   | $
|                                               |  |                |        |   |                   |  



7.    Capital leases and loan



In August 2002, we entered into a Master Lease Agreement, as amended, relating to an equipment lease facility and a related Master Security Agreement, as amended, relating to a line of credit secured by equipment and tenant
improvements. Collectively, these credit facilities provide for a line of credit of up to approximately $2.5 million. Both credit facilities have a drawdown period of one year. Draws on the Master Lease Agreement have a payment term of 42 months
with an early buyout option at 36 months. Draws on the Master Security Agreement have a payment term of 36 months. Draws under both agreements will bear interest at a rate to be fixed at the time of drawdown, calculated as 675 basis points above the
current four-year Treasury Constant Maturities rate. In March 2003, we drew down $1.3 million under the Master Security Agreement and at March 31, 2003, draws under both credit facilities totaled approximately $1.7 million, bearing interest rates
between 10.9% and 11.5%. Approximately $800,000 remains available for future draws through August 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.



9



---

##### Table of Contents



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 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, which is discussed below), the potential of such product candidates to lead
to the development of safer or more effective therapies, our ability to develop the technology derived from our collaborations, our anticipated timing for filing additional INDs (Investigational New Drug applications) with the Food and Drug
Administration (FDA) or for the initiation or completion of Phase 1, Phase 2 or Phase 3 testing for any of our product candidates, our future operating expenses, our future losses, our future expenditures for research and development and the
sufficiency of our cash resources. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by us and described in the section of this Item 2 titled Additional Factors That May Affect Future Results and elsewhere in this Quarterly Report on
Form 10-Q.



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



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 March 31, 2003, we had an
accumulated deficit of $128.4 million.



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



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



10



---

##### Table of Contents



During the
first quarter of 2003 we accomplished the following:



| |  |  | The initiation of a Phase 3 registration trial of TLK286 in ovarian cancer patients whose disease has progressed following platinum-based chemotherapy and one
second-line treatment. The multinational trial, designated the ASSIST-1(ASsessment of Survival In Solid Tumors-1), is designed to evaluate whether TLK286 treatment reduces the risk of death, leading
to an increase in survival, as compared to the control group treatments.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The publication of new preclinical data that supports the ongoing clinical development of TLK286. This data elaborates on the proposed mechanism of activation and
activity of TLK286, and describes studies that support the use of TLK286 in combination with standard chemotherapeutic drugs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The announcement of positive interim results from the ongoing Phase 1-2a clinical trial of TLK199 in patients with myelodysplastic syndrome (MDS), a form of
pre-leukemia. The abstract for the study was published in the March 2003 Proceedings of the Annual Meeting of the American Association for Cancer Research (AACR).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The formation of a collaboration with Roche to utilize our proprietary small molecule drug discovery technology, TRAP, to identify drug candidates active against a
pharmaceutical target selected by Roche.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical accounting policies



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



Revenue recognition



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



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



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



Research and development expenses



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



11



---

##### Table of Contents



Deferred stock compensation



In connection with the grant of stock
options to employees, we recorded deferred stock compensation totaling $2.6 million and $0.3 million in the years ended December 31, 2000 and 1999. Deferred stock compensation for options granted to employees has been determined as the difference
between the deemed fair value of our common stock for financial reporting purposes on the date such options were granted and the applicable exercise prices. Such amount is included as a reduction of stockholders equity and is being amortized
using straight-line vesting. We recorded amortization of deferred stock compensation of $123,000 and $133,000 for the three months ended March 31, 2003 and 2002. At March 31, 2003, we had a total of $396,000 to be amortized over the remaining
vesting periods of the stock options.



Use of estimates



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



Results of operations



Three Months Ended March 31, 2003 and 2002



Revenues



Revenues for the three months ended March 31, 2003 and 2002 were $250,000 and $422,000. Revenues in 2003 resulted from our collaborative
agreements with Sanwa, while revenues in 2002 also included funded research related to grants received from the National Institutes of Health. The decrease in revenues of 41% or $172,000 was the result of the longer term of the contractual
obligations of the Sanwa agreements and the completion of the National Institutes of Health research grant in the second quarter of 2002.



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



Research and development expenses



Research and development expenses for the three months ended March 31, 2003 and 2002 were $9.7 million and $4.3 million, representing an increase of 124% or $5.4 million. Research and development expenses of $4.3 million for the
period ending March 31, 2002 reflect the reclassification of intellectual property related legal fees of $434,000 to general and administrative expenses to conform with our presentation in 2003. We previously reported expenses of $4.8 million
in 2002. Our research and development activities consist primarily of drug and product development, clinical supply manufacturing, clinical activities, discovery research, screening and identification of drug candidates, and preclinical studies. We
group these activities into two major categories: research and preclinical and clinical development. Research and preclinical costs primarily represent our new drug discovery efforts and preclinical work for our selected
clinical candidates. Costs associated with clinical development represent the advancement of our existing product candidates through clinical trials. Because of the ability to utilize resources across several projects, the majority of our research
and development costs are not tied to any individual project and are allocated among multiple projects. Accordingly, we do not maintain actual costs incurred information for our projects on a project-by-project basis.



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



|                               |  | Three Months Ended March 31,
|------------------------------ |  | ----------------------------
|                               |  | 2003                        
|Research and preclinical       |  | $                           
|Clinical development           |  |                             
|                               |  |                             
|Total research and development |  | $                           
|                               |  |                             



12



---

##### Table of Contents



The increase
in research and development expenses in the three months ended March 31, 2003 compared to the same period in 2002 was principally due to increased costs for the following:



| |  |  | TLK286
| | - |  | ------



| | - |  | costs associated with Phase 2 clinical trials in breast, ovarian and lung cancer,
| | - |  | ---------------------------------------------------------------------------------



| | - |  | clinical drug supply manufacturing costs of approximately $3.3 million in 2003 compared to $787,000 in 2002,
| | - |  | ------------------------------------------------------------------------------------------------------------



| | - |  | start-up costs associated with the initiation of our Phase 3 registration trial in ovarian cancer,
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | TLK199
| | - |  | ------



| | - |  | costs associated with the Phase 1-2a clinical trial in MDS, and
| | - |  | ---------------------------------------------------------------



| |  |  | costs associated with headcount growth 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 TLK286 and TLK199 product development. The timing and the amount of these expenditures will depend upon the outcome of our ongoing clinical trials, the costs associated with the
Phase 3 clinical trials of TLK286, including related expansion of our clinical development organization, regulatory requirements, advancement of our preclinical programs and product manufacturing costs.



General and administrative expenses



General and administrative expenses for the three months
ended March 31, 2003 and 2002 were $2.0 million and $1.6 million, representing an increase of 25% or $396,000. General and administrative expense of $1.6 million for the period ended March 31, 2002 includes the reclassification of intellectual
property related legal fees of $434,000 from research and development expense to conform with our presentation in 2003. The increase in 2003 was due primarily to increased costs for the following:



| |  |  | costs associated with headcount growth,
| | - |  | ---------------------------------------



| |  |  | rent and related costs associated with our new Palo Alto facility effective January 10, 2003, and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | increased expenses necessary to manage growth of our operations.
| | - |  | ----------------------------------------------------------------



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



Net interest income



Net interest income of $362,000 and $272,000 for the three
months ended March 31, 2003 and 2002 resulted primarily from earnings on investments. The increase in net interest income was due to higher principal balance of our investments as a result of proceeds obtained from our follow-on offering in October
2002, offset in part by lower average interest rates in 2003.



Liquidity and capital resources



Sources and Use of Cash.    Since inception we have funded our operations through sales of equity, collaborative arrangements with corporate partners, interest earned on investments and equipment lease
financings. At March 31, 2003, we had available cash, cash equivalents, investments and restricted investments of $92.4 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 return. Wherever possible, we seek to minimize the potential
effects of concentration and degrees of risk.



13



---

##### Table of Contents



Cash Flows
from Operating Activities.    Cash used in operations for the three months ended March 31, 2003 was $11.3 million compared with $6.2 million for the same period in 2002. Net loss of $11.1 million for 2003 was affected by
non-cash charges of $152,000 for depreciation and amortization, $123,000 for the amortization of deferred stock compensation and $58,000 related to non-cash stock compensation. Cash outflows in the first three months of 2003 were primarily for
operating activities. Cash usage was offset by changes in other receivables and an increase in accrued liabilities related to a higher level of research and development activities. Operating cash outflows for the same period in 2002 resulted
primarily from our operating loss offset by increases in prepaid expenses, deferred revenue and the effect of non-cash charges for stock compensation expense and depreciation.



Cash Flows from Investing Activities.    Cash used in investing activities for the
three months ended March 31, 2003 was $6.8 million compared with $11.0 million cash provided in the same period in 2002. Investing activities for the first three months in 2003 are primarily related to the purchases, sales and maturities of
investments. We reduced restricted investments by $1.5 million for the portion of tenant improvements completed on the Palo Alto facility that no longer requires a security deposit. Purchases of property and equipment of $3.4 million were primarily
due to leasehold improvements of $2.4 million on our new Palo Alto facility and laboratory equipment expenditures. Cash provided in the same period in 2002 was related to purchases and maturities of investments offset in part by laboratory equipment
purchases.



Cash Flows from Financing
Activities.    Cash provided by financing activities was approximately $2.8 million in the three months ended March 31, 2003 compared to $322,000 for the same period in 2002. Financing activities in the first three months of
2003 represent approximately $1.3 million obtained through a capital loan and $1.5 million from our stock option exercises and stock purchase plan, offset in part by $32,000 in payments under capital leases and loan. Financing activities for the
same period in 2002 resulted primarily from approximately $323,000 from stock option exercises and our employee stock purchase plan.



Working Capital.    Working capital decreased to $77.4 million at March 31, 2003 from $89.7 million at December
31, 2002. The decrease in working capital was due to our use of cash in operations primarily due to the expansion of our TLK286 development program and costs associated with headcount growth.



In March 2003, we drew down $1.3 million from our existing
credit facilities at an interest rate of 10.9% payable over 36 months. At March 31, 2003, draws under our credit facilities totaled approximately $1.7 million and approximately $800,000 remains available for future draws through August 2003.



We believe our existing cash resources will be
sufficient to satisfy our anticipated cash requirements through 2004. We expect the increase in clinical development expenses as a result of Phase 3 clinical trials to consume a large portion of our existing cash resources. Changes in our research
and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. In any event, we will need to raise substantial additional capital to fund our operations in the future.
We expect to finance our future cash needs through the sale of equity securities, strategic collaborations and possibly debt financing or through other sources that may be dilutive to existing stockholders. In 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;
| | - |  | ----------------------------------------------------------------------------------------------



14



---

##### Table of Contents



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



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



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



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



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



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



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



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



Our future contractual obligations are as follows (in
thousands):



|                                   |  | Total |        | 2003 |   | 2004-2005 |  | 2006-2007 |       | After 2007
|---------------------------------- |  | ----- | ------ | ---- | - | --------- |  | --------- | ----- | ----------
|Capital lease obligations          |  | $     | 165    |      | $ | 47        |  | $         | 107   |           
|Equipment loan                     |  |       | 1,895  |      |   | 468       |  |           | 1,254 |           
|Operating leases                   |  |       | 42,115 |      |   | 3,241     |  |           | 8,610 |           
|                                   |  |       |        |      |   |           |  |           |       |           
|Total contractual cash obligations |  | $     | 44,175 |      | $ | 3,756     |  | $         | 9,971 |           
|                                   |  |       |        |      |   |           |  |           |       |           



ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS



Our business is subject to various risks, including those described below. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial
condition. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, not presently known to us, or that we currently see as immaterial, may also harm our business.



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 generated operating losses since we were incorporated in 1988. As of March 31, 2003, we had an accumulated deficit of $128.4 million. We expect to incur losses
for at least the next several years and expect that these losses will actually increase as we expand our research and development activities and incur significant clinical testing costs. These losses, among other things, may cause our
stockholders equity and working capital to decrease in the future. 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. We
cannot assure you when, if ever, we will receive product revenue, if any, sufficient to become profitable.



All of our product candidates are in research and development. If clinical trials of TLK286, TLK199 and TLK19781 are delayed or unsuccessful or if we are unable to complete the preclinical
development of our diabetes or other preclinical product candidates, our business may be adversely affected.



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



15



---

##### Table of Contents

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.



In July 2002, we selected TLK19781, one of a family of orally active small molecule insulin receptor activators that we are developing for
potential treatment of diabetes, for advancement into IND-stage development. In April 2002, we initiated a Phase 1-2a clinical trial for TLK199. Our success depends, in part, on our ability to complete preclinical development of our diabetes or
other preclinical product candidates, and take them through early clinical trials.



TLK286 has to date been evaluated in Phase 1 and Phase 2 clinical trials. We initiated a Phase 3 registration trial of TLK286 in ovarian cancer in the first quarter of 2003 and expect to initiate a
Phase 3 registration trial of TLK286 in non-small cell lung cancer towards the latter part of 2003. These trials would test TLK286 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 TLK286 against a different control arm prior to filing a New Drug Application for marketing approval.



Any clinical trial may fail to produce results satisfactory to
the FDA. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or prevent regulatory approval. Negative or inconclusive results or adverse medical events during a clinical trial could cause a clinical trial to
be repeated or a program to be terminated. We typically rely on third-party clinical investigators to conduct our clinical trials and, as a result, we may face additional delays outside our control. We have engaged a contract research organization,
or CRO, to facilitate the administration of our Phase 3 trials of TLK286. Dependence on a CRO will subject us to a number of risks. Delays in identifying and engaging a CRO may result in delays in the initiation of our Phase 3 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 TLK286 will be delayed.



We do not know whether planned clinical trials will begin on
time or whether any of our ongoing clinical trials will be completed on schedule, or 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 products will reach the market for at least several years.



Significant delays in clinical testing could materially impact our product development costs. We do not know whether planned clinical
trials will begin on time, will need to be revamped or will be completed on schedule, or 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 or 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.



16



---

##### Table of Contents



We believe that our ability
to compete depends, in part, on our ability to use our proprietary TRAP technology to discover, develop and commercialize new pharmaceutical products. We may not be competitive if we are unable to utilize our TRAP technology or if the technology
proves ineffective.



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



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



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



The process of carrying out the development of our own
unpartnered products 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. As a result, we will require additional financing to fund our operations. We have obtained a credit line to finance some of our equipment and leasehold improvements, if any, under which we may borrow up to
approximately $2.5 million. At March 31, 2003, draws under the credit line totaled approximately $1.7 million and approximately $800,000 remains available for future draws. 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. We have expended substantial amounts of cash to date and expect capital outlays and operating expenditures to increase over the next several years as we expand
our clinical, research and development activities.



We may seek to raise any necessary additional funds through equity or debt financings, collaborative arrangements with corporate partners or other sources which 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.



If our
competitors develop and market products that are more effective than ours, 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, for example TLK199, will have to compete with existing therapies. In addition, a 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. 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 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 we, or our collaborators. We
cannot assure you that drugs resulting from our research and development efforts, or from our joint efforts with our existing or future collaborative partners, will be able to compete successfully with our competitors existing



17



---

##### Table of Contents



products or products under
development or that they will 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 products in humans before they can be approved for commercial sale. Failure
to obtain regulatory approval will prevent commercialization of our products.



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 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, is dependent upon 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 and the FDA and:



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



| |  |  | 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 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, delays or rejections
may be encountered 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. 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.



18



---

##### Table of Contents



Outside the
United States, the ability to market a product is contingent upon 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 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 progress to advanced clinical trials, including Phase 2 and Phase 3, we will also need to expand our clinical development personnel. In addition, our research programs depend on our ability to attract and retain highly skilled chemists and
other scientists. We do not have employment contracts with our key employees. If we lose the services of Dr. Michael Wick or any of our other key personnel, our research and development efforts could be seriously and adversely affected. 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. In recent years, the cost of living in the San Francisco Bay Area has increased significantly, which we expect will adversely affect our ability to compete for
qualified personnel and will increase costs. Because of this competitive environment, we may 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 our products, our ability to generate product revenue in the future will be adversely affected.



Our product candidates may not gain market acceptance among
physicians, patients and the medical community. We believe that market acceptance will depend on our ability to provide acceptable evidence of safety, efficacy, convenience and ease of administration and cost effectiveness. In addition, we believe
market acceptance will depend on the effectiveness of our marketing strategy and the pricing of our products. Physicians may elect not to recommend our products even if we meet the above criteria. If any of our product candidates 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 products or
technologies are found to infringe patents of third parties, we could become involved in lengthy and costly legal proceedings that could adversely affect our business.



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



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



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



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



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



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



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



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



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



19



---

##### Table of Contents



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. If our products or technologies are found to
infringe patents issued to third parties, the manufacture, use and sale of our products 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. No assurance can be given 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 any patent application filed by someone else will not have priority over patent applications filed by us. 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 such suit.



Furthermore, some of our patents and intellectual property rights are owned jointly by us and our collaborators. We cannot assure you that
these joint owners will not use these patents and other intellectual property in ways that may negatively affect our business. We will not be able to prevent such use.



We also rely on trade secrets to protect technology, including 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 technology become known, our
competitive advantage in drug discovery could be reduced.



We
will be dependent upon 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 products, 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 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. Business combinations



20



---

##### Table of Contents

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 collaboration agreement(s) with Sanwa, we may be entitled to payments of up to $10.0 million. However, there can be no assurance that any product will be
successful 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 products into clinical trials, which will not occur for several years, if at all. Such arrangements are subject to numerous risks, including the right of the collaboration
partner to control the timing of the research and development efforts, and discretion to advance lead candidates to clinical trials and commercialization of the product. In addition, a collaborative partner could independently move forward with a
competing lead candidate developed either independently or in collaboration with others, including our competitors.



If we are unable to contract with third parties to manufacture our products in sufficient quantities and at an acceptable cost, we may be unable to
meet demand for our products and lose potential revenue.



We do not currently operate manufacturing facilities for clinical or commercial production of our products under development. We expect to continue to rely on third parties for the manufacture of our products. We currently lack the
resources and capability to manufacture any of our products on a clinical or 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 products. Our products may be in competition with other products for access to these facilities. For this and other reasons, our collaborators or third parties may not be able to manufacture these products in a cost effective or
timely manner. If manufacturing is not performed in a timely manner, the clinical development of our product candidates or their submission for regulatory approval could be delayed, and our ability to deliver products on a timely basis could be
impaired or precluded. We are currently dependent upon two sources of supply for clinical quantities of TLK286 and a sole source of supply for clinical quantities of TLK199. If our suppliers fail to perform, our clinical trials or commercialization
of TLK286 and TLK199 would be delayed. We may not be able to enter into any necessary third-party manufacturing arrangements on acceptable terms, if at all. Our current dependence upon others for the manufacture of our products may adversely affect
our future profit margins and our ability to commercialize products 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 products.



We currently have no sales, marketing or
distribution capabilities. In order to commercialize any products, 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 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 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, our product revenues are likely to be lower than if we directly
marketed and sold our products, and any revenues we receive will depend upon the efforts of third parties, whose efforts may not be successful.



21



---

##### Table of Contents



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



The testing and marketing of medical products entail an inherent risk of product liability. If we cannot successfully defend ourselves
against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our products. 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 pharmaceutical products we 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. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. 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.



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. These provisions include:



| |  |  | establishing a classified Board of Directors requiring that members of the Board be elected in different years lengthening 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 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition,
in November 2001, we adopted a stockholder rights plan that may discourage, delay or prevent a merger that a stockholder may consider favorable.



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.



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



For planning purposes, we estimate the timing of a variety of clinical, regulatory and other milestones, such as when a certain product
candidate will enter clinical development, when a clinical trial will be completed or when an application for regulatory approval will be filed. Some of our estimates are included in this prospectus supplement. Our estimates are based on present
facts and a variety of assumptions. Many



22



---

##### Table of Contents

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. 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 TLK286 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.
| | - |  | -------------------------------------------------------



If materials distributed at an investor conference were determined by a court to have been distributed in connection with an offering of our common
stock completed in October 2002 and in violation of securities laws, purchasers in that offering would have the right to seek refunds or damages.



In September 2002, certain materials about us were distributed in connection with an investor conference sponsored by a broker dealer.
This broker dealer regularly publishes reports, opinions and recommendations regarding our common stock and was proposed to be an underwriter in an offering of our common stock completed in October 2002. The materials distributed included a one-page
fact sheet containing publicly available information about us and a compilation of interviews relating to conference participants, including an interview of a financial analyst employed by the broker dealer. In this interview, the analyst focused on
three companies, including us, summarized TLK286 and made some forward-looking statements about us. An abbreviated version of this interview was issued as a press release. We have been advised that the materials were prepared in connection with the
conference and not in anticipation of or in connection with the offering. This broker dealer did not participate in the offering as an underwriter or selling group member.



We urged all investors to read, and base their investment decision only on, the information contained in the
prospectus. If one or more of these materials were deemed attributable to us or to an underwriter participating in the offering, and deemed to constitute a prospectus that does not meet the requirements of the Securities Act of 1933, persons who
purchased our common stock in the offering may have the right, for a period of one year from the date of the violation, to obtain recovery of the consideration paid in connection with their purchase of our common stock or, if they had already sold
the stock, to recover any losses resulting from their purchase of common stock.



23



---

##### Table of Contents



Item 3.    Quantitative and Qualitative Disclosures About Market Risk.



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



The fair value of our investments in marketable securities at March 31, 2003 was $70.8 million, with a weighted-average maturity of 60
days and a weighted-average interest rate of 1.5%. Our investment policy is to manage our marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio. Our marketable securities
portfolio is primarily invested in corporate debt securities with an average maturity of under one year and a minimum investment grade rating of A or A-1 or better to minimize credit risk. Although changes in interest rates may affect the fair value
of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments were sold prior to maturity. Through our money managers, we maintain risk management control systems to
monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. A hypothetical 1% adverse move in interest rates along the entire interest yield curve would cause approximately $708,000 and
$1.0 million decline in the fair value of our financial instruments at March 31, 2003 and December 31, 2002.



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.



Item 4.    Controls and Procedures.



Evaluation of disclosure controls and procedures.    Based on their evaluation as of a date within 45 days of the filing date of this report, our principal executive officer
and principal financial officer have concluded that Teliks disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the Exchange Act), required to be
disclosed by Telik in the reports that we file under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness.



Changes in internal controls.    There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of the evaluation referred to above.



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



24



---

##### Table of Contents



PART
II.    OTHER INFORMATION



Item 6.    Exhibits and Reports on Form 8-K



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



| | 10.23 |  | Change of Control Severance Benefit Plan and Form of Related Participation Agreement adopted by the Board of Directors on February 21, 2003.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------



| | 99.1 |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- |  | ------------------------------------------------------------------------



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



| | (1) |  | We filed a report on Form 8-K, dated February 14, 2003, announcing fourth quarter and year-end 2002 financial results, key accomplishments during 2002 and early 2003
and the expansion of our management team. In addition, we announced a lower net loss per share for the fiscal year ended December 31, 2001 due to a recalculation of its weighted number of shares outstanding.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | We filed a report on Form 8-K, dated March 27, 2003, announcing the initiation of a randomized, controlled Phase 3 registration trial of TLK286 administered as a
single agent in ovarian cancer patients whose disease has progressed following platinum-based chemotherapy and one second-line treatment.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



---

##### Table of Contents



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. Butitta Chief Operating Officer and Chief Financial Officer (Duly Authorized Officer and Principal Financial
Officer)




Date: May 7, 2003



26



---

##### Table of Contents



CERTIFICATIONS



I,
Michael M. Wick, M.D., Ph.D., certify that:



1.    I have reviewed this quarterly report on Form 10-Q of Telik, Inc.;



2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3.    Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;



4.    The
registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a)    designed such
disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly
report is being prepared;



b)    evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.    The registrants other
certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a)    all significant
deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and



b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6.    The registrants other
certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: May 7, 2003

/s/    MICHAEL M. WICKMichael M. Wick, M.D., Ph.D. Chairman and Chief Executive Officer




27



---

##### Table of Contents



CERTIFICATIONS



I, Cynthia
M. Butitta, certify that:



1.    I have reviewed this quarterly report on Form 10-Q of Telik, Inc.;



2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3.    Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;



4.    The
registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a)    designed such
disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly
report is being prepared;



b)    evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.    The registrants other
certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a)    all significant
deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and



b)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6.    The registrants other
certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: May 7, 2003

/s/    CYNTHIA M. BUTITTACynthia M. Butitta Chief Operating Officer and Chief Financial Officer




28