##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549




---

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR
15(d)


OF THE SECURITIES EXCHANGE ACT OF
1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the year ended December 31,
    2003                                                    
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 0-50440

CancerVax Corporation


(Exact name of registrant as specified in its
charter)


|                                                                               |  |                                         
|------------------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                                       |  | 52-2243564                              
|(State or other jurisdiction of
    incorporation or organization)             |  | (I.R.S. Employer
    Identification No.)
|                                                                              
|2110 Rutherford Road, Carlsbad, CA(Address of principal executive
    offices) |  | 92008(Zip Code)                         

(760) 494-4200

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | None                                     



Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $0.00004 per
share


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 þ         No o

Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.    þ

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

As
of March 10, 2004, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $207.9 million, based on the
closing price of the registrants common stock on the
Nasdaq National Market on March 10, 2004 of $11.98 per
share. The registrants common stock was not publicly
traded as of the last business day of its most recently
completed second quarter.

The
number of outstanding shares of the registrants common
stock, par value $0.00004 per share, as of March 10,
2004 was 26,737,555.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the registrants definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days
after registrants fiscal year end December 31, 2003
are incorporated by reference into Part III of this report.



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CANCERVAX CORPORATION

FORM 10-K  ANNUAL REPORT

For the Year Ended December 31,
2003


Table of Contents

|              |  |                                                                                                        |    |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|              |  |                                                                                                        |    | Page
|              |  |                                                                                                        |    |     
|PART I       
|Item 1        |  | Business                                                                                               |    |      | 2  | 
|Item 2        |  | Properties                                                                                             |    |      | 44 | 
|Item 3        |  | Legal Proceedings                                                                                      |    |      | 44 | 
|Item 4        |  | Submission of Matters to a
    Vote of Security Holders                                                |    |      | 44 | 
|PART II      
|Item 5        |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |    |      | 45 | 
|Item 6        |  | Selected Consolidated
    Financial Data                                                               |    |      | 47 | 
|Item 7        |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |    |      | 49 | 
|Item 7A       |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |    |      | 57 | 
|Item 8        |  | Financial Statements and
    Supplementary Data                                                        |    |      | 58 | 
|Item 9        |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure               |    |      | 58 | 
|Item 9A       |  | Controls and Procedures                                                                                |    |      | 58 | 
|PART III     
|Item 10       |  | Directors and Executive
    Officers of the Registrant                                                 |    |      | 59 | 
|Item 11       |  | Executive Compensation                                                                                 |    |      | 59 | 
|Item 12       |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |    |      | 59 | 
|Item 13       |  | Certain Relationships and
    Related Transactions                                                     |    |      | 59 | 
|Item 14       |  | Principal Accounting Fees
    and Services                                                             |    |      | 59 | 
|PART IV      
|Item 15       |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |    |      | 60 | 
|Signatures    |  |                                                                                                        | 64 |     
|EXHIBIT 10.08
|EXHIBIT 21.01
|EXHIBIT 23.01
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32   



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PART I

Forward-Looking Statements

Any statements in this report and the information
incorporated herein by reference about our expectations,
beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and are forward-looking
statements. You can identify these forward-looking statements by
the use of words or phrases such as believe,
may, could, will,
estimate, continue,
anticipate, intend, seek,
plan, expect, should, or
would. Among the factors that could cause actual
results to differ materially from those indicated in the
forward-looking statements are risks and uncertainties inherent
in our business including, without limitation, statements about
the progress and timing of our clinical trials; difficulties or
delays in development, testing, obtaining regulatory approvals,
producing and marketing our products; unexpected adverse side
effects or inadequate therapeutic efficacy of our products that
could delay or prevent product development or commercialization,
or that could result in product recalls or product liability
claims; the scope and validity of patent protection for our
products; competition from other pharmaceutical or biotechnology
companies; our ability to obtain additional financing to support
our operations; and other risks detailed below under the caption
Business  Risk Factors.

Although we believe that the expectations
reflected in our forward-looking statements are reasonable, we
cannot guarantee future results, events, levels of activity,
performance or achievement. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise, unless required by law.

Corporate Information

Unless the context requires otherwise, in this
report the terms we, us and
our refer to CancerVax Corporation and
Cell-Matrix, Inc., a wholly owned subsidiary of CancerVax
Corporation, and their predecessors.

We have registered the CancerVax® trademark
and also use CanvaxinTM and our logo as trademarks in
the United States and other countries. All other brand names or
trademarks appearing in this report are the property of their
respective holders. Use or display by us of other parties
trademarks, trade dress or products is not intended to and does
not imply a relationship with, or endorsements or sponsorship
of, us by the trademark or trade dress owners.






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a biotechnology company focused on the
research, development and commercialization of novel biological
products for the treatment and control of cancer. We were
incorporated in Delaware in June 1998. Our lead product
candidate, Canvaxin, is one of a new class of products being
developed in the area of specific active immunotherapy, also
known as therapeutic cancer vaccines. Canvaxin is currently
being studied in two Phase 3 clinical trials at
80 sites worldwide for the treatment of advanced-stage
melanoma, the deadliest form of skin cancer.

In retrospective analyses of Phase 2
clinical trials in patients with melanoma, Canvaxin demonstrated:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a statistically significant improvement in
    survival in a matched pair analysis of 739 patients who
    received Canvaxin at JWCI for Stage III melanoma versus 739
    historical control patients with Stage III melanoma who
    were treated at JWCI but did not receive Canvaxin. These results
    were published in the October 2002 issue of the Annals of
    Surgery;              
|
| |  | a statistically significant improvement in
    survival in a matched pair analysis of 107 patients who
    received Canvaxin at JWCI for Stage IV melanoma versus 107
    historical control patients with Stage IV melanoma who were
    treated at JWCI but did not receive Canvaxin. These results were
    published in the December 2002 issue of the Journal of
    Clinical Oncology; and

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | a favorable safety and side effect profile when
    compared to existing therapies.

Based on the positive results of the Phase 1
and Phase 2 clinical trials, two Phase 3 randomized,
double-blind, placebo-controlled clinical trials were initiated
for the treatment of patients with advanced-stage melanoma
following the surgical removal of their tumors and any
clinically detectable metastases. Canvaxin has received fast
track designation from the FDA for the treatment of
advanced-stage melanoma and orphan drug designation from the FDA
for the treatment of invasive melanoma. In February 2004, the
independent Data and Safety Monitoring Board, or DSMB, with
oversight responsibility for the Phase 3 clinical trials on
Canvaxin completed its planned, second interim analysis of our
clinical trial of Canvaxin in Stage III melanoma. The DSMB
recommended that we continue the trial as planned. We anticipate
that in 2004 we will complete enrollment in our Phase 3
clinical trial in Stage III melanoma and complete the
second interim analysis of data from our Phase 3 clinical
trial in Stage IV melanoma. If the FDA and foreign
regulatory authorities accept a positive result in a single
Phase 3 clinical trial as sufficient for approval, and if
we obtain approval, we anticipate launching Canvaxin as a
five-year course of therapy in the United States and Europe in
2006.

Canvaxin is based on our proprietary specific
active immunotherapy technology platform that uses human tumor
cell lines that express a broad array of tumor-related antigens.
Canvaxin has been studied in a Phase 1/2 clinical trial for
advanced-stage colorectal cancer, and we are finalizing the
design of a Phase 2 clinical trial for patients with
Stage III colon cancer.

We are targeting large disease markets with
significant unmet medical needs. Melanoma is the sixth most
common cancer in the United States, and colorectal cancer is one
of the four most common cancers worldwide. In both indications,
existing therapeutic alternatives are not highly effective and
involve serious toxicity. We have retained worldwide
commercialization rights to Canvaxin and intend to market it
through our own sales force or co-promote it in the United
States and establish strategic collaborations abroad. We
manufacture Canvaxin at our biologics manufacturing facility. In
2004 and 2005, we plan to expand our production capabilities in
this facility, which we believe, following the planned
expansion, will have the capacity to satisfy commercial demand
for several years after the initial launch.

In addition to Canvaxin, we plan to identify and
develop new product candidates based on our proprietary specific
active immunotherapy, anti-angiogenesis and T-oligonucleotide,
or telomere homolog oligonucleotide, technology platforms, as
well as on our human monoclonal antibody technology.

Industry Background

Cancer

The World Health Organization estimates that in
the year 2000 more than 10 million people were diagnosed
with cancer worldwide and that this number will increase to
15 million by 2020. In addition, the World Health
Organization estimates that 6 million people died from the
disease in 2000. The American Cancer Society estimates that over
1.3 million people in the United States will be diagnosed
with cancer in 2004 and over 500,000 people will die from the
disease. Because cancer is a progressive disease, the total
number of people living with cancer significantly exceeds the
number of patients diagnosed with cancer in a given year.

Corresponding with an expected growth in cancer
incidence, it is estimated that revenues from cancer drugs will
increase in the United States, from $7 billion in 2001 to
$11 billion in 2006, a 9% compounded annual growth rate. On
a world-wide basis, revenues from cancer drugs are estimated to
grow from $15 billion in 2001 to $25 billion in 2006,
a 11% compounded annual growth rate.



| |         
| | --------
| | Melanoma

According to the American Cancer Society,
melanoma is the deadliest type of skin cancer and is the sixth
most commonly diagnosed cancer in the United States. As reported
by the World Health Organization, the worldwide incidence, or
number of newly diagnosed cases, of melanoma in 2000 was
132,600, with 37,000 people dying of the disease. The
American Cancer Society estimates that in the

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United States, approximately 55,000 people
will be diagnosed with melanoma and 7,900 will die as a result
of the disease in 2004. Furthermore, according to the National
Cancer Institute, since 1997 the incidence of new melanoma cases
in the United States has increased at an average rate of more
than 5% per year, one of the highest growth rates for any
type of cancer. In 2000, over 510,000 patients in the
United States were alive who had been diagnosed with melanoma.


Melanoma is classified into four stages, which
are based on well-defined criteria, including characteristics of
the primary tumors, regional lymph nodes and metastases. When
melanoma is discovered and treated in the early stages, where
the cancer is confined to a local area, patients have a
relatively high rate of survival. For example, according to an
August 2001 study in the Journal of Clinical Oncology,
Stage I patients have a five-year survival rate of over
90%. Once melanoma has advanced to Stage III, where the
cancer has spread to the regional lymph nodes, or Stage IV,
where the cancer has spread to distant organs, the prognosis for
patients is much worse. The August 2001 study found five-year
survival rates for patients with Stage IV melanoma are
between 7% and 19%. In 2001, the American Joint Committee on
Cancer estimated that approximately 15% of patients with
melanoma were initially diagnosed with advanced-stage melanoma,
which consists of Stage III and IV melanoma. However,
recent scientific articles suggest that increased use of
improved diagnostic techniques may increase this percentage. In
a February 2003 study in the Journal of American College of
Surgeons, approximately 38% of 175 patients originally
diagnosed with Stage I or Stage II melanoma should
have been categorized as having Stage III melanoma.

Surgery is widely-accepted as the standard of
care for patients with Stage III melanoma. For patients
with Stage IV melanoma, surgery is generally of limited
benefit because, in many patients, not all tumors can be
removed. Although interferon alpha-2b is approved for patients
with metastatic melanoma, its use has been limited due to
significant toxicity and inconsistent efficacy results in
clinical trials.



| |                  
| | -----------------
| | Colorectal Cancer

According to the World Health Organization,
colorectal cancer is the third most commonly diagnosed cancer
worldwide, with approximately 945,000 new cases recorded
worldwide in 2000 and an estimated 492,000 deaths in the
same year. The American Cancer Society estimates that in 2004,
approximately 147,000 people in the United States would be
initially diagnosed with colorectal cancer and approximately
57,000 people will die as a result of the disease.
According to the National Cancer Institute, in 2000, there were
approximately 940,000 patients in the United States who
were alive with colorectal cancer. The American Cancer Society
also estimates that colon cancer represents approximately 73% of
the total number of cases of colorectal cancer in the United
States.

Colorectal cancer is classified into four stages,
which are based on well-defined criteria, including
characteristics of the primary tumor, regional lymph nodes and
metastases. If detected early, patients with colorectal cancer
have a relatively high rate of survival, with the National
Cancer Institute reporting five-year survival approaching 90%.
However, for patients with advanced-stage colorectal cancer, the
prognosis is much worse. Five-year survival rates in
Stage IV colorectal cancer are as low as 9%, as reported by
the National Cancer Institute. According to the National Cancer
Institute, approximately 40% of patients with colorectal cancer
are initially diagnosed with Stage III disease.

The most widely-prescribed therapies for
treatment of patients with advanced-stage colorectal cancer
include surgery and the combination of two chemotherapeutic
agents. These agents have been associated with substantial
toxicity, including treatment-related deaths. In 2002, the FDA
approved an additional chemotherapeutic agent, which has similar
side effects to other chemotherapeutic agents. In February 2004,
the FDA approved Imclone Systems, Inc.s
ErbituxTM, a monoclonal antibody directed at the
epidermal growth factor receptor, for use in combination with
Pfizer, Inc.s Camptosar® (irinotecan) for the
treatment of colorectal cancer. In the same month, the FDA also
approved Genentech Inc.s AvastinTM, a
therapeutic antibody designed to inhibit vascular endothelial
growth factor, for use in combination with the IFL chemotherapy
regimen (5-FU/Leucovorin/ irinotecan) for the treatment of
colorectal cancer.

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| |                                              
| | ---------------------------------------------
| | Immunotherapy for the Treatment of
    Cancer

The bodys immune system is a natural
defense mechanism tasked with recognizing and combating cancer
cells, viruses, bacteria and other disease-causing organisms.
This defense is carried out mainly by white blood cells in the
immune system. Specific subsets of these white blood cells,
known as T-cells and B-cells, are responsible for carrying out
two types of immune responses in the body, the cell-mediated
immune response, and the humoral, or antibody-based, immune
response, respectively.

Cancer cells produce molecules known as
tumor-associated antigens, which are present in normal cells but
may be over-produced in cancer cells. The T-cells and B-cells
have receptors on their surfaces that may enable them to
recognize the tumor-associated antigens. For instance, once a
B-cell recognizes a tumor-associated antigen, it may trigger the
production of antibodies that kill the tumor cells. T-cells play
more diverse roles, including the identification and destruction
of tumor cells.

While cancer cells may naturally trigger a
T-cell-based immune response during the initial appearance of
the disease, the immune system response may not be sufficiently
robust to eradicate the cancer. The human body has developed
numerous immune suppression mechanisms to prevent the immune
system from destroying the bodys normal tissues. Cancer
cells have been shown to utilize these mechanisms to suppress
the bodys immune response against cancer cells. Even with
an activated immune system, the number and size of tumors can
overwhelm the immune system.

Since the first use of the smallpox vaccine in
the late 1700s, products have been developed to activate the
immune system to prevent various infectious diseases. Recently,
there has been a significant increase in research focused on the
activation of the immune system in the treatment of cancer.
Unlike traditional chemotherapeutic or radiotherapeutic
approaches to cancer treatment that are designed to kill cancer
cells directly, immunotherapy approaches to cancer are intended
to activate and stimulate the bodys immune system to fight
the cancer.

Immunotherapy approaches for treating cancer
generally fall into three categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Passive immunotherapygenerally relies on the direct
    administration of monoclonal antibodies designed to target a
    specific receptor on the surface of a cell or a secreted
    protein. Administering the antibodies to patients interferes
    with the functioning of cancer cells or triggers immune
    responses that may help destroy the cancer.                                                                                                              
|
| |  | Non-specific active immunotherapyelicits a general immune system
    response to cancer and includes the use of stimulatory proteins,
    known as cytokines, such as interferons and interleukins.
    Because this type of therapy is not targeted exclusively at
    cancer cells, it frequently generates significant side effects.
    Non-specific active immunotherapy also includes other
    stimulatory agents such as bacillus Calmette-Guérin, known
    as BCG.
|
| |  | Specific active
    immunotherapy,such as Canvaxin,
    generates targeted cell-mediated and antibody immune responses
    focused on specific antigens expressed by cancer cells. Specific
    active immunotherapy is an emerging immunotherapeutic approach
    to the treatment of cancer that includes the use of whole cells,
    peptides, antigens, cell fragments and oncolytic viruses.                                                                           



| |                                                  
| | -------------------------------------------------
| | Anti-Angiogenesis for the Treatment of
    Cancer

In a process known as angiogenesis, cancer cells
stimulate the formation of new blood vessels in order to bring
oxygen and nutrients to rapidly-growing tumor tissue. The onset
of angiogenesis is caused mainly by tumor cell production of
growth factors that activate the cells that line the blood
vessels. These activated cells begin to divide and form new
blood vessels. During this process of tumor cell growth and
activation of blood vessel cells, the extracellular matrix,
which is a dense protein network that provides support and
growth signals for blood vessels and tumors, is remodeled. In
addition, these activated cells migrate on the remodeled
extracellular matrix and form new blood vessels to support the
growth of an existing tumor. Newly-formed blood vessels create a
potential conduit for the tumor to metastasize. By

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inhibiting the angiogenesis process, it may be
possible to restrict blood supply to a tumor, limiting its
ability to grow and metastasize.


T-Oligonucleotides
for the Treatment of Cancer

Genetic information communicated through DNA is
organized into strands called chromosomes, which are capped with
a looped nucleotide chain called a telomere. In normal cells,
disruption of the telomere loop caused by cell division or DNA
damage exposes a region of the DNA that triggers DNA repair
responses and normal cell growth, maturation and cell death. In
cancer cells, this normal control of cell growth and maturation
is lost and the cells continue to proliferate and grow.

Telomere homolog oligonucleotides, or
T-oligonucleotides, are short chains of two or more nucleotides
that resemble the telomere. Research has demonstrated that
T-oligonucleotide treatment of cells from multiple tumor types,
including breast, ovarian, pancreatic, fibrosarcoma and
melanoma, mimics the effect of telomere disruption in normal
cells and causes arrest of cell growth and death through
apoptosis, or programmed cell death. Administration of
T-oligonucleotides has also been shown to inhibit tumor growth
in several in vivotumor models by enabling innate growth
regulation and repair mechanisms in cancerous cells, leading to
the cessation of cancer cell growth and death through normal
mechanisms. As a result of this activity, the T-oligonucleotide
technology may have therapeutic potential for the treatment of
cancer and, potentially, for the prevention of cancerous
conditions.

Our Pipeline

The table below lists our principal product
candidates:

|                                |  |                                   |  |                 |  |                         
|------------------------------- |  | --------------------------------- |  | --------------- |  | ------------------------
|                               
|                               
|Product Candidates              |  | Targeted Disease                  |  | Status          |  | Commercialization Rights
|                               
|                               
|Specific Active Immunotherapy   |  |                                   |  |                 |  |                         
|Canvaxin                        |  | Stage III melanoma                |  | Phase 3         |  | CancerVax               
|                                |  | Stage IV melanoma                 |  | Phase 3         |  | CancerVax               
|                                |  | Stage III colon cancer            |  | Planned Phase 2 |  | CancerVax               
|                               
|Canvaxin with GM-CSF            |  | Stages II, III and IV melanoma    |  | Phase 1/2       |  | CancerVax               
|                               
|Lung cancer candidate           |  | Lung cancer                       |  | Research        |  | CancerVax               
|                               
|Anti-Angiogenesis               |  |                                   |  |                 |  |                         
|Humanized monoclonal antibodies |  | Solid tumors                      |  | Preclinical     |  | CancerVax               
|                                |  | Ophthalmic diseases               |  | Preclinical     |  | Eyetech Pharmaceuticals 
|                               
|Various peptides                |  | Solid tumors, ophthalmic diseases |  | Research        |  | CancerVax               
|                               
|Human Monoclonal Antibodies     |  |                                   |  |                 |  |                         
|Three human antibodies          |  | Solid tumors                      |  | Preclinical     |  | CancerVax               
|                               
|T-oligonucleotides              |  | Cancer                            |  | Research        |  | CancerVax               
|                               

Canvaxin and Other Specific Active
Immunotherapy Programs

Canvaxin, initially developed by our founder,
Donald L. Morton, M.D., is composed of three carefully
selected human tumor cell lines that contain a broad array of
tumor-related antigens and invoke a strong immune response in
most melanoma patients. Since 1984, over 2,600 patients
have been treated with Canvaxin in various Phase 1 and
Phase 2 clinical trials primarily supported by the National
Institutes of Health through peer-reviewed grants. Results from
these clinical trials demonstrate that Canvaxin has a favorable
safety and side effect profile relative to existing therapies
for the treatment of patients with advanced-stage melanoma.

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Advantages
of Our Specific Active Immunotherapy Platform

Our specific active immunotherapy technology, on
which Canvaxin is based, is a proprietary platform that can
potentially be applied to treat a number of solid tumor cancers.
We believe our technology may be more effective than other
immunotherapeutic approaches because of the following
characteristics:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Use of Whole Cells.This technology uses whole cells, which may stimulate a stronger
    immune response than other immunotherapy approaches that use
    cell fragments, peptides or antigens alone. These whole cancer
    cells are irradiated during the manufacturing process to prevent
    replication when administered to patients, but they continue to
    produce antigens and stimulate the immune system for a period of
    days to weeks after they have been injected into a patient. In
    contrast, we believe that cell fragments, peptides and antigens
    are more likely to rapidly degrade in the body, which minimizes
    their ability to stimulate the immune system.                                                                                                                                                                                                                                                                                             
|
| |  | Polyvalence.Administering a polyvalent technology exposes the patients
    immune system to multiple antigens that are associated with a
    wide range of solid tumors. These antigens appear in
    unpredictable patterns and concentrations among different people
    and within an individual as their cancer evolves over time. We
    believe the presentation of numerous antigens, termed
    polyvalence, is an important element in eliciting a therapeutic
    immune response in most patients and reducing a tumor
    cells ability to escape the immune response. For example,
    Canvaxin contains at least 38 antigens that may be
    associated with tumors and may induce an immune response. Other
    approaches based upon a single tumor-associated antigen or a few
    tumor-associated antigens may not demonstrate therapeutic value
    if they do not stimulate a sufficiently broad immune response,
    particularly as the tumor changes over time.      
|
| |  | Allogeneity.This
    technology employs non-patient-specific, or allogeneic, tumor
    cell lines selected for their ability to elicit an immune
    response and their expression of a large number of
    tumor-associated antigens. This is distinct from the autologous,
    or patient-specific, approach in which a specific active
    immunotherapy product is created from cells extracted from a
    patients own tumor. We believe there are numerous
    potential advantages to our allogeneic approach, including a
    standardized manufacturing procedure, reduced costs, simplified
    distribution and improved quality control. Additionally, since
    allogeneic specific active immunotherapeutics contain a
    different profile of antigens than the profile to which a
    recipient has previously been exposed, we believe that these
    allogeneic immunotherapeutics may induce a stronger anti-tumor
    immune response than autologous immunotherapeutics.

Canvaxin
for the Treatment of Patients with Melanoma



| |                                                                 
| | ----------------------------------------------------------------
| | On-Going Phase 3 Clinical Trials for
    Advanced-Stage Melanoma

Canvaxin is in two Phase 3 clinical trials
for Stage III and Stage IV melanoma at 80 sites
worldwide, including many of the leading melanoma treatment
centers in the United States, Europe and Australia. The
Phase 3 clinical trials are randomized, double-blind,
placebo-controlled studies designed to detect an increase in
median overall survival in patients treated with Canvaxin plus
BCG, an adjuvant, compared to those treated with a placebo plus
BCG. An adjuvant is a substance that is administered with
another therapy, such as Canvaxin, to enhance the immune
response. In the protocols for both clinical trials, patients
are required to have their primary tumor and all clinically
detectable metastases surgically removed prior to randomization.
The treatment protocols call for a total of 33 doses of
Canvaxin over a five-year course of therapy, with 15 doses
administered in the first year, six in the second year and four
doses in each of the third, fourth and fifth years of treatment.
In these clinical trials, we administer Canvaxin along with BCG
with the first two doses of therapy.

Both Phase 3 clinical trials were designed
with three interim analyses. At each interim analysis, an
independent DSMB will review unblinded data from one of the
clinical trials, primarily to determine whether the clinical
trial should continue as originally designed, should be changed,
or should be closed early based on these data. The DSMB consists
of experts in medical and surgical oncology, statistics and

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medical ethics who are not participating in our
clinical trials, whose primary responsibility is to oversee the
studies and safeguard the interests of current and future
patients in the trials. If the DSMB recommends that a study be
closed to further enrollment early due to demonstration of
efficacy at an interim analysis, the FDA must be consulted
before a decision is made to do so, since consideration may
still need to be given to the regulatory and scientific
implications of that decision, such as the adequacy of data with
regard to safety, duration of benefit, outcomes in important
subgroups, and secondary endpoints. Strict confidentiality must
be maintained during these discussions and, pending FDA
consultation and review, it is likely that the DSMB would
recommend continuation of the clinical trial. In the event that
statistical significance in the efficacy of Canvaxin is
observed, and if the FDA agrees that we should stop enrollment
in the clinical trials, we would discuss filing a biologics
license application, or BLA, with the FDA based on the clinical
data accumulated at that time. It is possible that in connection
with any of the interim analyses or at any other stage of the
trials, the DSMB may determine that there are safety risks
associated with Canvaxin or that it is not sufficiently
efficacious to continue the trials.


In February 2004, the independent DSMB completed
its planned, second interim analysis of our Phase 3
clinical trial of Canvaxin in Stage III melanoma. The
interim analysis was conducted on data from 842 patients
enrolled in the trial. The DSMB recommended that we continue the
trial as planned. As of March 15, 2004, we had enrolled 891
out of a planned total of 1,118 patients in the
Stage III melanoma clinical trial and 354 out of a planned
total of 670 patients in the Stage IV melanoma
clinical trial. We anticipate that in 2004 we will complete
enrollment in our Phase 3 clinical trial in Stage III
melanoma, and that the DSMB will complete the second interim
analysis of data from our Phase 3 clinical trial in
Stage IV melanoma. If the FDA and foreign regulatory
authorities accept a positive result in a single Phase 3
clinical trial as sufficient for approval, and if we obtain
approval, we anticipate launching Canvaxin for the treatment of
patients with advanced-stage melanoma in the United States and
Europe in 2006.



| |                
| | ---------------
| | Phase 2 Results

Canvaxin has been studied in over
2,600 patients in Phase 1 and Phase 2 clinical
trials at JWCI and UCLA, primarily in patients with
advanced-stage melanoma and also in a small number of patients
with advanced-stage colorectal cancer. A database has been
compiled by JWCI of approximately 11,000 patients with
melanoma treated at JWCI and UCLA, including over
2,600 patients who received Canvaxin. Using this database,
clinicians and statisticians at JWCI and other institutions
performed a number of analyses comparing the difference in
survival of patients who received Canvaxin to patients who did
not receive Canvaxin. Several analyses were recently published
in the Annals of Surgeryand the Journal of Clinical
Oncology. The following chart depicts the results from the
principal retrospective survival analyses:

8



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##### Table of Contents



Patients Treated with Canvaxin vs. Patients
Not Treated with Canvaxin

|                     |  |                    |  |                    |  |                  |                       |              |  |                    |  |                
|-------------------- |  | ------------------ |  | ------------------ |  | ---------------- | --------------------- | ------------ |  | ------------------ |  | ---------------
|                     |  |                    |  |                   
|                     |  |                    |  |                   
|                     |  |                    |  |                    |  | Median           |                       | Five-Year   
|                     |  | Number of Patients |  | Patient Population |  | Overall Survival |                       | Survival    
|Disease Stage        |  |                    |  |                    |  |                  |                       | (p-vales)(1) |  |                   
|                    
|                    
|Melanoma  Stage III |  | Canvaxin           |  | 935                |  |                  | All patients(2)       |              |  | 56.4 vs. 31.9 mos. |  | 49% vs. 37%    
|                     |  | Non-Canvaxin       |  | 1,667              |  |                  |                       |              |  | (p-value = 0.0001) |  |                
|                     |  |                    |  |                    |  |                  |                       |              |  |                    |  |                
|                     |  | Total              |  | 2,602              |  |                  |                       |              |  |                    |  |                
|                    
|Melanoma  Stage III |  | Canvaxin           |  | 739                |  |                  | All patients matched  |              |  | 55.3 vs. 31.6 mos. |  | 48.8% vs. 36.8%
|                     |  | Non-Canvaxin       |  | 739                |  |                  | according to key      |              |  | (p-value = 0.0001) |  |                
|                     |  |                    |  |                    |  |                  |                       |              |  |                    |  |                
|                     |  | Total              |  | 1,478              |  |                  | prognostic factors(2) |              |  |                    |  |                
|                    
|Melanoma  Stage IV  |  | Canvaxin           |  | 150                |  |                  | All patients(3)       |              |  | 36 vs. 18 mos.     |  | 39% vs. 19%    
|                     |  | Non-Canvaxin       |  | 113                |  |                  |                       |              |  | (p-value = 0.0001) |  |                
|                     |  |                    |  |                    |  |                  |                       |              |  |                    |  |                
|                     |  | Total              |  | 263                |  |                  |                       |              |  |                    |  |                
|                    
|Melanoma  Stage IV  |  | Canvaxin           |  | 107                |  |                  | All patients matched  |              |  | 38 vs. 19 mos.     |  | 39% vs. 20%    
|                     |  | Non-Canvaxin       |  | 107                |  |                  | according to key      |              |  | (p-value = 0.0009) |  |                
|                     |  |                    |  |                    |  |                  |                       |              |  |                    |  |                
|                     |  | Total              |  | 214                |  |                  | prognostic factors(3) |              |  |                    |  |                



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | P-values indicate the likelihood that the
    results were due to random statistical fluctuations rather than
    a true cause and effect. The lower the p-value, the more likely
    there is a true cause and effect relationship. Therefore,
    P-values provide a sense of the reliability of the results of
    the study in question. Typically, the FDA requires a P-value of
    less than 0.05 to establish the statistical significance of a
    clinical trial.
|   
|(2) | All patients with Stage III melanoma who
    were included in the JWCI database and had their primary tumor
    and regional lymph nodes resected, or removed, between 1971 and
    1998 were included in the analysis. Patients in the
    Canvaxin-treated group received the product candidate between
    1984 and 1998. The 1,478 patients that were matched
    according to key prognostic factors are a subset of the 2,602
    total patient population.          
|   
|(3) | All patients with Stage IV melanoma who were
    included in the JWCI database and had their primary tumor and
    all known metastases resected between 1971 and 1997 are included
    in the analysis. Patients in the Canvaxin-treated group received
    the product candidate between 1984 and 1998. The
    214 patients that were matched according to key prognostic
    factors are a subset of the 263 total patient
    population.                             

Results from these clinical trials demonstrate
that Canvaxin has a favorable safety and side effect profile
relative to existing therapies for the treatment of patients
with advanced-stage melanoma. Canvaxin is generally well
tolerated by patients and the most common adverse event is
injection site reaction which is more severe with the first two
injections that are administered with BCG. Other common side
effects include fatigue, chills, myalgia and headaches, but
these are usually mild.

Despite these results, retrospective analyses are
not generally deemed sufficient by the FDA and most foreign
regulatory authorities as a basis for approval to market a
product because they may be subject to potential selection
biases that may be minimized in prospective, randomized,
double-blinded, placebo-controlled clinical trials.

Stage III
Melanoma.A series of retrospective
analyses was published in the Annals of Surgeryin
October 2002 comparing the survival of post-surgical patients
with Stage III melanoma who received Canvaxin with those
patients who did not receive Canvaxin.

One analysis evaluated survival in patients with
Stage III melanoma who underwent surgery to completely
remove their primary tumors and regional lymph nodes at UCLA and
JWCI between 1971 and 1998. In this analysis, 935 patients
received Canvaxin and 1,667 patients did not receive
Canvaxin. The median overall survival was 56.4 months for
patients who received Canvaxin compared to 31.9 months for
patients who did not receive Canvaxin. This increase in median
overall survival of 24.5 months for patients who received
Canvaxin is statistically significant, with a p-value of 0.0001.

The survival benefit conferred by Canvaxin in the
treatment of patients with Stage III melanoma was also
assessed in a matched-pair analysis, where patients who received
Canvaxin were matched on a one-to-one basis by a computer
program with patients who did not receive Canvaxin. Patients
were matched

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according to the following key prognostic
factors: the number and degree of palpability of lymph node
metastases, patient age and gender. We believe that melanoma is
particularly well suited for retrospective matched-pair analyses
because the key prognostic factors have been thoroughly studied
and documented by the American Joint Committee on Cancer based
on analyses of over 17,000 patients published in the
Journal of Clinical Oncology in August, 2001. In this
matched-pair analysis using the JWCI database, patients were
evaluated after surgical removal of their primary tumors and
regional lymph nodes. Results comparing 739 patients who
received Canvaxin to the same number of patients who did not
receive Canvaxin indicated an increase in median overall
survival of 23.7 months, with a p-value of 0.0001. The
median overall survival for the Canvaxin-treated group was
55.3 months compared to 31.6 months for the group of
patients who had not received Canvaxin. In addition, the
five-year survival rate in the Canvaxin-treated group was 48.8%
compared to 36.8% in patients who had not received Canvaxin. In
these analyses, survival was measured from the time of surgery.
The following chart depicts the overall survival rate for the
patients studied in the matched-pair analysis:


Stage III Melanoma Matched Pair Survival
Analysis

(STAGE III MELANOMA CHART)

Additionally, a regression analysis was used to
calculate the relative impact of various factors on a
patients risk of dying, which is known as a hazard ratio.
Patients receiving Canvaxin in Phase 2 clinical trials had
a hazard ratio of 0.64 relative to patients who did not receive
Canvaxin, which means that patients who did not receive Canvaxin
had a 56% increased risk of death compared to patients that did
receive Canvaxin. These results were statistically significant,
with a p-value of 0.0001.

Stage IV Melanoma.Similar retrospective analyses for patients with Stage IV
melanoma who received Canvaxin in Phase 2 clinical trials
were presented in the Journal of Clinical Oncologyin
December 2002. In an analysis of 263 patients from the JWCI
database with Stage IV melanoma who had their tumors removed
between 1971 and 1997, those patients who received Canvaxin
demonstrated approximately a doubling in median overall survival
versus those patients who did not receive Canvaxin,
36 months for Canvaxin-treated patients compared to
18 months for non-treated patients. These results were
statistically significant, with a p-value of 0.0001.

A further survival analysis was performed on this
group of 263 patients by matching patients according to
three prognostic factors: gender, site of initial distant
metastases and number of involved sites. Using a computerized
program, 107 pairs of patients were matched according to
these prognostic factors. Results of this retrospective
matched-pair analysis comparing 107 patients with Stage IV
melanoma who received Canvaxin in Phase 2 clinical trials
to the same number of patients from the JWCI database who did
not receive Canvaxin indicated that those patients who received
Canvaxin experienced an approximate

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doubling in median overall survival when compared
to similar patients who did not receive Canvaxin. The median
overall survival for the Canvaxin-treated group was
38 months compared to 19 months for the patients who
did not receive Canvaxin. The results were statistically
significant, with a p-value of 0.0009. The five-year survival
rate in the Canvaxin-treated group was 39% compared to 20% in
the patient group that did not receive Canvaxin. In these
analyses, survival of the Canvaxin-treated group was measured
from the time of the first administration of Canvaxin following
surgery, while survival of the non-Canvaxin-treated group was
measured from the time of surgery. The following chart depicts
the overall survival rate for the patients studied in the
matched-pair analysis:


Stage IV Melanoma Matched Pair Survival
Analysis

(STAGE IV MELANOMA CHART)

Tumor Response Data.Canvaxins ability to produce an immune response that
causes melanoma tumors to regress was demonstrated in patients
with in-transitmelanoma who received Canvaxin in
Phase 2 clinical trials. In-transitmelanoma is a
rare condition in which multiple metastases are clearly visible
on the skin. As a result, tumor responses in these patients can
be readily assessed.

As reported in the May 1999 edition of
Cancer, 54 patients with in-transit melanoma
were treated at JWCI with Canvaxin between 1985 and 1997. In
this patient population, 41% of patients treated with Canvaxin
experienced stabilization of their disease or an improvement in
their disease status, including 13% who demonstrated a complete
response, with a median duration of complete response greater
than 22 months.

Immune Response
Data.In the September 1998 Journal
of Clinical Oncology, it was reported that approximately 85%
of patients generated an immune response to Canvaxin that
correlated with improved overall survival. This study
demonstrated that patients who generated both cellular and
humoral immune responses to Canvaxin had a longer survival rate
than patients who did not generate an immune response. In
addition, patients who had only a cellular or a humoral immune
response demonstrated a decreased overall survival rate when
compared with patients who demonstrated both. Patients who did
not generate an immune response to Canvaxin experienced the
shortest overall survival rate of the three groups.

High-Dose Interferon
Data.Based on the consistency of our
results in Phase 2 clinical trials, a multicenter,
randomized Phase 3 clinical trial of Canvaxin was initiated
in the treatment of patients with Stage III melanoma
compared to patients who received high-dose interferon. As a
result of the substantial toxicity of high-dose interferon, many
patients who received high-dose interferon dropped out of the
clinical trial. In agreement with the National Cancer Institute
and the FDA, enrollment in the clinical trial was discontinued
and the design was modified to the current Phase 3 clinical
trial design. Prior to the

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change in the protocol, 43 patients were
enrolled at six clinical trial sites, and we continue to collect
data on these patients. The survival data for patients who
received Canvaxin in this clinical trial were consistent with
the survival trends observed for patients who received Canvaxin
in a retrospective matched-pair analysis of JWCI data from
Phase 2 clinical trials in Stage III melanoma,
described above.


Canvaxin with
GM-CSF.In association with JWCI, we
are studying the clinical effect of administering GM-CSF to
patients who receive Canvaxin and BCG in a Phase 1/2
clinical trial for patients with Stage II, III or IV
melanoma who are not eligible for our ongoing Phase 3
clinical trials. In this clinical trial, patients were
randomized to receive either Canvaxin and BCG or Canvaxin, BCG
and GM-CSF. BCG is administered to all patients during the first
two doses of therapy. GM-CSF, a stimulatory protein, is
administered in addition to Canvaxin and BCG during the first
four months to patients randomized to that arm of the study.

The purpose of this clinical trial is to
determine whether administering GM-CSF with Canvaxin and BCG
will stimulate an enhanced immune response relative to patients
who receive only Canvaxin plus BCG. We have completed the
treatment of all 120 patients enrolled in this clinical
trial. This clinical trial is being supported in part by a grant
to JWCI from the National Cancer Institute. We plan to initiate
studies to evaluate Canvaxin in conjunction with other adjuvants
and co-stimulatory molecules to determine whether these
approaches may further enhance the efficacy of Canvaxin.

Stage II
Melanoma.At the 2003 meeting of the
American Society of Clinical Oncologists, Dr. Morton
presented data from a retrospective matched-pair analysis of
153 patients with Stage II melanoma who received
Canvaxin following surgical removal of their tumors compared to
those who did not. In a preliminary analysis of this data,
overall survival was higher in patients who received Canvaxin.
At the time the presentation was given, the median overall
survival could not yet be calculated.

Non-Resectable Stage IV
Melanoma.At the same American Society
of Clinical Oncologists meeting, Dr. Morton also presented
data from a retrospective matched-pair analysis comparing
203 patients with Stage IV melanoma whose disease was
not fully surgically resectable. Patients were matched in the
analysis by gender, specific site of metastasis and number of
tumor-involved organ sites. Even in this challenging patient
population, median overall survival was significantly higher in
patients who received Canvaxin compared to those who did not
receive Canvaxin. The median overall survival rates for the
Canvaxin-treated population was 11 months versus
7 months for the patient group who did not receive
Canvaxin. The one-year, two-year and three-year overall survival
rates in the Canvaxin-treated group were 45%, 20% and 12%,
respectively, compared to survival rates in the patient group
who did not receive Canvaxin, which were 29%, 13% and 9%,
respectively. The results were statistically significant, with a
p-value of 0.006.



| |                                                             
| | ------------------------------------------------------------
| | Canvaxin for the Treatment of Patients with
    Colon Cancer



| |                                                               
| | --------------------------------------------------------------
| | Proposed Phase 2 Clinical Trial for
    Stage III Colon Cancer

We are developing the final design for a
Phase 2 clinical trial with Canvaxin in patients with
Stage III colon cancer who have had surgical resection of
their primary tumors and lymph node metastases.



| |                                                                   
| | ------------------------------------------------------------------
| | Phase 1/2 Results for Patients with Stage
    IV Colorectal Cancer

Based on the number of shared antigens between
colorectal cancer and Canvaxin, a Phase 1/2 clinical trial
was conducted to evaluate immune responses to Canvaxin in
patients with Stage IV colorectal cancer. Results of this
study were published in the May 2001 Annals of Surgical
Oncology. The study demonstrated that Canvaxin induced both
a cell-mediated and antibody response in many patients. While a
preliminary analysis of data from this 27-patient study
indicated that patients who had a clearly defined immune
response also experienced a statistically significant
improvement in overall survival from 13 months to
31 months, a later analysis of the results showed that
while patients who demonstrated an immune response had greater
survival, the difference was no longer statistically
significant. Although the

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group of patients in this clinical trial is too
small to be predictive of survival, we believe that the immune
response elicited by Canvaxin may result in an improved
prognosis in patients with colon cancer.




| |                                                                         
| | ------------------------------------------------------------------------
| | Additional Programs Using Our Specific Active
    Immunotherapy Platform



| |                              
| | -----------------------------
| | Lung Cancer Product Candidate

We have identified many cross-reactive antigens
between Canvaxin and lung cancer and are currently screening
lung cancer cell lines for additional immunogenic antigens. Our
intent is to identify one or more cell lines that contain a
large number of lung cancer-associated antigens to create a
specific active immunotherapy product for the treatment of this
disease. We plan to select one or more lung cancer cell lines to
add to Canvaxin, complete preclinical studies and submit an
Investigational New Drug, or IND, application to begin a
Phase 1/2 study in lung cancer.



| |                  
| | -----------------
| | Other Indications

In addition to our current research, preclinical
and clinical development programs for melanoma, colon cancer and
lung cancer, we plan to assess the efficacy of product
candidates developed with our proprietary specific active
immunotherapy development platform in other cancers that express
antigens that are expressed by the cells in Canvaxin. We also
have established a research program to screen, test and
incorporate additional tumor cell lines into our specific active
immunotherapy development platform, as we develop new product
candidates for other solid tumor cancers that share fewer
antigens with the cell lines used for Canvaxin. Potential
indications for products developed from our platform include
renal, prostate, breast, pancreatic and brain cancers.



| |                                           
| | ------------------------------------------
| | EGF Product Candidates for Lung
    Cancer

We have signed non-binding letters of intent with
CIMAB, S.A., a Cuban company, and
YM Biosciences, Inc., a Canadian company, relating to
the license of a specific active immunotherapeutic agent that
targets epidermal growth factor, or EGF, receptors and, in
particular, the HER-1 receptor. These letters of intent also
cover the license of two molecules that bind to this receptor,
including the EGF molecule and the tumor growth factor
alpha, or TGF-α, molecule. Any definitive agreements for
the license of this technology are subject to United States
governmental approval. We have submitted a license application
seeking approval to enter into such agreements to the United
States Department of Treasurys Office of Foreign Assets
Control. Our license application is currently being reviewed,
however, there can be no assurance that such a license will be
granted.

EGF is one of several molecules that bind to EGF
receptors and may be responsible for activating a series of
intracellular processes that impact cell growth and cell death.
While many cells in the human body express EGF receptors, a
number of solid tumor cancer cells express EGF receptors in
excessive quantities. In addition, a number of solid tumor
cancers are also associated with increased production of EGF and
TGF-α molecules. Non-small-cell lung cancer is one of the
solid tumor cancers that over-express EGF receptors and is also
associated with increased production of TGF-α. Other solid
tumors that are associated with over-expression of EGF receptors
and/or increased production of TGF-α include: brain,
breast, colorectal, esophageal, head and neck, ovarian,
pancreatic and prostate cancers.

The EGF specific active immunotherapeutic product
candidate has been studied in Phase 1 and Phase 2
clinical trials conducted in Canada, the United Kingdom and
Cuba. An article in the Annals of Oncology(Volume 14, 2003) described pooled results of two
clinical trials involving 40 patients with advance-stage
non-small cell lung cancer who were treated with this EGF
specific active immunotherapeutic. Of these 40 patients,
19 patients, or 47.5%, were determined to be high
responders to the EGF specific active immunotherapeutic, while
21 patients, or 52.5%, were determined to be low
responders. The high responders, in aggregate, had a median
survival of 9.1 months, versus 4.5 months for the low
responders, with a p-value of less than 0.05.

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Anti-Angiogenesis Programs

Through our January 2002 acquisition of
Cell-Matrix, Inc., we acquired unique therapeutic and
diagnostic anti-angiogenesis technology and several product
candidates. To complement this technology, in June 2003, we
licensed from New York University the rights to several
peptides that may also inhibit angiogenesis. We believe that
this platform of complementary technologies, which have a
mechanism of action that is distinct from anti-angiogenesis
products currently in development by other companies, will
provide us with an opportunity to develop products that target
various solid tumors.



| |                                                 
| | ------------------------------------------------
| | Advantages of Our Anti-Angiogenesis
    Platform

Our antibodies and peptides bind to new sites
exposed on proteins, such as collagen, during the remodeling of
the extracellular matrix. Because our antibodies bind
preferentially to collagen that has been remodeled rather than
to normal collagen, we believe our monoclonal antibodies may be
more specific and cause fewer side effects than other therapies
that interact with targets that have broad biologic activity.
Additionally, collagen may provide a better long-term target
than binding sites found directly on tumor cells because it is a
stable structure that may be less likely to mutate than tumor
cells.



| |                                     
| | ------------------------------------
| | Anti-Angiogenesis Product Candidates

Several of our anti-angiogenesis product
candidates are in preclinical development, and we are currently
selecting a lead antibody to be evaluated in clinical trials.
Two of our humanized monoclonal antibodies have demonstrated the
ability to inhibit angiogenesis and tumor growth in animal
models of melanoma and breast cancer. Specifically, our
humanized antibody QH2B was injected into two groups of
immune-suppressed mice, one implanted with breast cancer tumor
cells and the other implanted with melanoma cells. In the breast
cancer study, mice that received the QH2B antibody
experienced 61% less tumor growth than the mice that did not
receive the antibody. Similarly, the QH2B antibody inhibited
melanoma tumor growth in mice by 54%. A second anti-angiogenesis
humanized antibody, 2D4, has been shown to inhibit melanoma
tumor growth in a mouse model by 71%. We also have several
peptides that are directed at various binding sites on the
extracellular matrix. We have sublicensed our rights to
ophthalmic indications for our lead monoclonal antibodies and
the underlying technology to Eyetech Pharmaceuticals, Inc.

Human Monoclonal Antibodies

In October 2002, we licensed the exclusive
worldwide commercialization rights from M-Tech
Therapeutics, Inc. to three human monoclonal antibodies.
These monoclonal antibodies have been tested in preclinical
models and appear to target tumor-associated antigens that are
expressed in a variety of solid tumor cancers. We are conducting
further preclinical evaluations of these human monoclonal
antibodies.

T-Oligonucleotide Technology

In March 2004, we sublicensed the exclusive
worldwide commercialization rights from SemaCo, Inc., to
certain T-oligonucleotide technology to develop product
candidates for the prevention, treatment, control, prognosis and
diagnosis of cancer. An article in the March 1, 2004 issue
of the Proceedings of the National Academy of Sciences,
described preclinical studies in murine models of several types
of cancers that suggest that these T-oligonucleotides may
activate defense mechanisms used by healthy cells to stop tumor
cell growth and replication, and cause cancer cell death.

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Our Strategy

Our objective is to establish our position as a
leader in the development and marketing of specific active
immunotherapy and other biological products for the treatment
and control of cancer. Key aspects of our corporate strategy
include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Obtain Regulatory Approval of Canvaxin for the
    Treatment of Patients with Advanced-Stage
    Melanoma.We are working to complete
    our Phase 3 clinical trials for the treatment of patients
    with advanced-stage melanoma and launch Canvaxin as promptly as
    practicable. We plan to file a biologics license application, or
    BLA, with the FDA at the conclusion of one or both of our
    Phase 3 clinical trials. If the FDA and foreign regulatory
    authorities accept a positive result in a single Phase 3
    clinical trial as sufficient for approval, and if we obtain
    approval, we anticipate launching Canvaxin for advanced-stage
    melanoma in the United States and Europe in 2006.
|
| |  | Directly Market or Co-Promote Canvaxin in the
    United States and Establish Strategic Collaborations to Market
    Canvaxin Abroad.We plan to build a
    focused sales force to market Canvaxin to the relatively
    concentrated group of oncologists in the United States who
    specialize in the treatment of patients with advanced-stage
    melanoma. We intend to establish strategic collaborations to
    market Canvaxin in Europe, Australia and elsewhere, and we may
    enter into an agreement to co-promote Canvaxin in the United
    States.                                                                                                                                                         
|
| |  | Expand the Indications for
    Canvaxin.We are currently developing
    the final design of our Phase 2 clinical trial for the
    treatment of patients with Stage III colon cancer. We also
    are planning to evaluate whether Canvaxin can be used to treat
    other solid tumor cancers, either alone or in combination with
    additional therapeutic products.                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Leverage Our In-House Manufacturing
    Capabilities to Support the Commercialization of Canvaxin and
    Our Other Product Candidates.We have
    built our own biologics manufacturing facility and are
    developing a standardized manufacturing process for Canvaxin to
    further our ability to commercialize Canvaxin. In addition, we
    intend to leverage the experience that we have gained from
    developing the manufacturing process for Canvaxin to our
    additional biological product candidates.                                                                                                                                                                                                   
|
| |  | Create Additional Product Candidates Using Our
    Proprietary Specific Active Immunotherapy Technology
    Platform.We are currently conducting
    research on lung cancer cell lines and anticipate completing
    preclinical studies and filing an IND to begin a Phase 1/2
    study in lung cancer. We plan to evaluate the applicability of
    our proprietary specific active immunotherapy technology
    platform to a number of other solid tumor cancers, such as
    renal, prostate, breast, pancreatic and brain cancers.                                                                                                                                                                                   
|
| |  | Advance the Development of Our Preclinical
    Product Candidates.We plan to
    continue to advance our preclinical antibodies, peptides and
    T-oligonucleotide technology into preclinical studies and
    clinical trials for the treatment of various solid tumor cancers.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Identify Additional Product Candidates Based
    on Our Anti-Angiogenesis Technology
    Platform.We plan to leverage our
    research and preclinical experience in angiogenesis to identify
    additional product candidates that will interact with sites
    exposed during the remodeling of the extracellular matrix. In
    addition, we intend to explore using our anti-angiogenesis
    product candidates in combination with other therapies such as
    immunotherapy, chemotherapy and radiation.                                                                                                                                                                                                             
|
| |  | Expand Our Product Pipeline and Technologies
    Through Acquisitions and Licensing.In
    addition to our internal development efforts, we plan to
    selectively license and acquire product opportunities,
    technologies and businesses that complement our target markets.
    For example, we acquired Cell-Matrix in January 2002 to acquire
    the rights to our anti-angiogenesis platform technology, and
    entered into a license agreement with New York University
    in June 2003 to further expand our anti-angiogenesis technology.
    In March 2004, we sublicensed rights from SemaCo to certain                                                                                                   

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| |  |                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------
| |  | T-oligonucleotide technology that has potential
    in the prevention, treatment, control, prognosis and diagnosis
    of cancer.

Marketing

We intend to market and sell Canvaxin and future
products directly or with a co-promotion partner in the United
States. The three groups of clinicians that are primarily
involved in the diagnosis and treatment of melanoma are medical
oncologists, surgeons/ surgical oncologists and dermatologists.
As a result, we believe that a small, focused sales and
marketing organization will enable us to effectively penetrate
our target markets. We plan to build a sales force of
approximately 75 to 100 sales representatives to launch
Canvaxin for advanced-stage melanoma.

Outside of the United States, we plan to
establish strategic collaborations for the marketing and
development of Canvaxin. We may enter into collaboration
agreements with third parties with respect to other cancer
therapeutics that we may develop, which may include co-marketing
or co-promotion arrangements. Alternatively, we may grant
exclusive marketing rights to our strategic collaborators in
exchange for up-front fees, milestone payments and royalties on
future sales, if any.

Manufacturing and Supply

We produce Canvaxin in our biologics
manufacturing facility for use in our clinical trials and plan
to manufacture commercial quantities at the same facility. This
facility is operated in accordance with the FDAs current
good manufacturing practices, known as cGMPs. In 2004 and
2005, we plan to expand our production capabilities. The capital
expenditures associated with this expansion are anticipated to
be approximately $16 million, a significant portion of
which we intend to fund through new leasehold and equipment
financing.

We use standard biologics manufacturing processes
to produce Canvaxin. We separately grow the individual cell
lines, which are then harvested, pooled and dispensed into
individual vials for storage in the vapor phase of liquid
nitrogen. Next, Canvaxin is irradiated to ensure that the cells
are unable to replicate. Prior to shipment, each lot of Canvaxin
is tested to ensure that the quality, purity and potency of the
product conform to all applicable performance standards. We take
these steps in an effort to ensure that each released lot of
Canvaxin meets specifications that have been accepted by the FDA
and other regulatory agencies.

We previously modified our manufacturing process
for Canvaxin and switched from a small volume flask process to a
larger scale flask process in an effort to improve our
manufacturing process and scale up our manufacturing capability
to produce larger quantities of this product candidate. We
introduced Canvaxin manufactured with this new process in our
two Phase 3 clinical trials for advanced-stage melanoma in
2003.

We obtain BCG, an adjuvant that we administer to
patients with the first two doses of Canvaxin, from a single
source of supply, Organon Teknika Corporation. Our supply
agreement with Organon Teknika, which was assigned to us in July
2000, had an initial term of one year beginning in April 1998,
with automatic renewals for successive one year terms. However,
under some circumstances, Organon Teknika can terminate the
agreement if we fail to purchase BCG under the agreement for
specified periods of time. If the manufacturing source of BCG is
changed, the FDA may require us to conduct a comparability study
before patients can be administered BCG from the alternate
source with Canvaxin.

Collaborations

We engage in collaborations with private industry
and academic institutions in the course of conducting our
research and clinical studies.

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| |                            
| | ---------------------------
| | John Wayne Cancer Institute

JWCI is a leading cancer treatment and research
center located in Santa Monica, California. Our founder, Donald
L. Morton, M.D., is currently Medical Director and
Surgeon-in-Chief and a member of the board of directors of JWCI.

In 2001, we entered into a clinical trial
services agreement under which JWCI transferred the IND for the
Phase 3 clinical trials of Canvaxin in advanced-stage
melanoma to us. Under the terms of this agreement, JWCI performs
clinical trial services for us, including review of patient
eligibility. We are required to reimburse JWCI for all approved
payments to clinical trial study sites that are not covered by
National Cancer Institute grants. In addition, we agreed to
reimburse JWCI for expenses and disbursements actually incurred
up to $5,000 per month, plus a 25% administrative fee on
specified expenses. We also agreed to pay JWCI $25,000 per
year during the time period when payments to the clinical trial
study sites are covered by the National Cancer Institute grants
and $50,000 per year thereafter, or such greater amounts
incurred by JWCI in connection with the Phase 3 clinical
trials. In July 2002, this agreement was amended to require us
to directly reimburse the clinical trial study sites for the
approved payments that are not covered by National Cancer
Institute grants, as opposed to reimbursing such amounts to
JWCI. Once we assumed responsibility for the IND, we
discontinued enrolling patients into the Phase 3 clinical
trials at JWCI to avoid the appearance of a conflict of
interest. We continue to work with JWCI on various clinical
trials involving Canvaxin, including the ongoing Phase 1/2
clinical trial testing of Canvaxin with GM-CSF.

Pursuant to a cross-license agreement with JWCI,
under which JWCI transferred to us the rights to certain
ancillary technology developed at JWCI related to Canvaxin, as
well as certain other technology, we committed to pay upfront
and periodic payments totaling $1,250,000 and to issue to JWCI a
specified ownership interest in us. In August 2000, we satisfied
the ownership commitment by issuing to JWCI 284,090 shares
of common stock, which represented approximately 4.8% of our
outstanding capital stock at the time of issuance. The value of
the common stock was estimated to be $306,817, or $1.08 per
share. The $1.08 was the then estimated fair market value of the
common stock, as determined by the board of directors. For
accounting purposes, no value was assigned to the common stock
because the carrying value of the assets acquired was zero. As
of December 31, 2003, we have paid JWCI installments
totaling $875,000, and we are obligated to pay three additional
installments to JWCI of $125,000 each in 2004, 2005 and 2006. We
also are obligated to pay JWCI 50% of the initial net royalties
we receive from any sublicensees from sales of Canvaxin, if any,
up to $3.5 million. Subsequently, we are obligated to pay
JWCI a 1% royalty on net sales, if any, of Canvaxin to third
parties by us, our sublicensees and affiliates. The
cross-license agreement terminates upon the later of the
expiration of the last to expire of the patent rights covered by
the agreement, which is currently November 24, 2015, or ten
years from the date of the agreement. If either party commits a
material breach of the agreement, the other party has the right
to terminate the license rights it has granted under the
agreement upon 90 days written notice to the
breaching party unless such breach has been cured within that
time. Any such termination by JWCI would affect only the
ancillary technology that is the subject of the cross-license
agreement and not our core patents related to Canvaxin.



| |                            
| | ---------------------------
| | Applied Molecular Evolution

In November 1999, we entered into a collaboration
agreement with Applied Molecular Evolution, Inc., or AME,
in San Diego, California to have AME humanize two of our
murine monoclonal antibodies. A humanized antibody is
constructed by replacing portions, known as peptides, of the
antibody of a non-human species with peptide sequences that
match the human sequence. This process reduces the likelihood of
an immune response against the antibody when the antibody is
administered to the patient. In consideration for humanizing the
antibodies, we paid AME a fixed fee of $500,000 for each of the
two antibodies. In addition, AME is entitled to certain
milestone payments, up to a maximum of $3,250,000 per
therapeutic product developed using these antibodies and
$1,250,000 per diagnostic product developed using these
antibodies. AME is also entitled to royalties on net sales of
products, if any, developed using these antibodies. To date
$750,000 per antibody has been paid to AME for milestones

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achieved. In the aggregate, a total of $2,500,000
has been paid to AME including both the fixed fee costs and
milestone payments. From January 2002, the date we acquired
Cell-Matrix and assumed this agreement, through
December 31, 2003, we have not recognized any expenses
under the agreement. The agreement expires ten years after the
date of the first commercial sale of the last product that
incorporates or is derived from one or more of the antibodies
that are the subject of the agreement. If we fail to make
milestone or royalty payments to AME or if we fail to file an
IND application for one or more products that incorporate or are
derived from one or more of the antibodies that are the subject
of the agreement by a specified date or fail to meet certain
other specified commercial development obligations, then AME has
the right to terminate the agreement. In the event of such
termination, we will be required to grant to AME an exclusive
license under all of our patent rights relating to the
antibodies that are the subject of the agreement and the
products that incorporate or are derived from one or more of the
antibodies that are the subject of the agreement and will have
to assign and deliver copies of all related regulatory filings.
In exchange for this exclusive license, we would be entitled to
royalties on both future net sales and payments received as
consideration for the grant of a sublicense, if any. We have no
future obligation to humanize additional monoclonal antibodies
with AME.




| |                                  
| | ---------------------------------
| | University of Southern California

We hold exclusive, worldwide licenses to
specified technology originating from the University of Southern
California, or USC. We entered into license agreements with USC
in September 1999 and May 2000 for specific anti-angiogenesis
technology. In consideration for these technology licenses, we
paid USC up-front license fees of $500,000 for the September
1999 license agreement and $250,000 for the May 2000 license
agreement and we are obligated to pay USC royalties on future
net sales of products relating to our licenses, subject to a
minimum annual royalty payment of $10,000 for each of the two
agreements commencing on the third anniversary of the
agreements. From January 2002, the date we acquired Cell-Matrix
and assumed these agreements, through December 31, 2003, we
have recognized a total of $25,000 in expenses under the license
agreements. The license agreements terminate upon the later of
the expiration of the last of any patent rights to licensed
products that are developed under the applicable agreement or
15 years from the effective date of the applicable
agreement. We may terminate the USC license agreements for any
reason following 30 days written notice to USC.



| |                           
| | --------------------------
| | Scripps Research Institute

We hold exclusive, worldwide licenses to
specified technology originating from The Scripps Research
Institute. We entered into a license agreement with Scripps in
2001 for technology related to angiogenesis, including
anti-angiogenic diagnostic applications. In consideration for
these technology licenses, we paid up-front license fees of
$50,000 to Scripps, and we are obligated to pay Scripps
royalties on future net sales of products relating to our
licenses, subject to a minimum annual royalty payment of $10,000
commencing on the third anniversary of the agreement. In
addition, we are obligated to pay Scripps milestone payments, up
to a maximum of $1,225,000 per therapeutic product and
$385,000 per diagnostic product, based on meeting certain
regulatory and clinical milestones. From January 2002, the date
we acquired Cell-Matrix and assumed this agreement, through
December 31, 2003, we have not recognized any expenses
under the license agreement. The license agreement terminates
upon the later of the expiration of the last of any patent
rights to licensed products that are developed under the
agreement or 15 years after the date of the first
commercial sale of the last product licensed or developed under
the agreement.



| |                        
| | -----------------------
| | Eyetech Pharmaceuticals

In March 2001, we sublicensed to Eyetech
Pharmaceuticals, Inc. several antibodies and related
technology for ophthalmic indications. Eyetech Pharmaceuticals
paid us a signing fee of $2,400,000 and is obligated to pay us
milestone payments, up to a maximum of $20,000,000 per
therapeutic product and $2,400,000 per diagnostic product
developed under the agreement, based on meeting specified
regulatory and clinical milestones and royalties on future net
sales of products, if any. From January 2002, the date

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we acquired Cell-Matrix and assumed this
agreement, through December 31, 2003, we have not
recognized any revenues under the agreement. Eyetech
Pharmaceuticals is also responsible for research and development
costs in the ophthalmic area. The agreement terminates upon the
later of the expiration of the last of any patent rights to
licensed products that are developed under this agreement or
10 years after the date of the first commercial sale of the
last product licensed or developed under the agreement. Either
party may terminate this agreement for any reason following
90 days written notice to the other party. Eyetech
Pharmaceuticals is a public biotechnology company whose focus is
on the treatment of diseases related to the back of the eye,
such as age-related macular degeneration and diabetic
retinopathy.




| |                    
| | -------------------
| | M-Tech Therapeutics

In October 2002, we acquired the exclusive
worldwide commercialization rights from M-Tech Therapeutics to
three human monoclonal antibodies that appear to target
tumor-associated antigens that are expressed in a variety of
solid tumor cancers. Pursuant to our licensing arrangement, we
paid M-Tech Therapeutics upfront payments and are obligated to
pay future annual license fees of $10,000 for each of the three
licensed cell lines. We are also obligated to pay milestone
payments, up to a maximum of $1,050,000 for each product
developed under this agreement, based on meeting certain
regulatory and clinical milestones and royalties. From inception
through December 31, 2003, we have recognized a total of
$280,000 in expenses under the agreement, $160,000 of which was
licensing fees and $120,000 of which was an upfront payment. The
agreement terminates upon the later of the expiration of the
last of any patent rights to licensed products that are
developed under this agreement or 15 years after the date
of the first commercial sale of the last product licensed or
developed under the agreement. M-Tech Therapeutics may
terminate, on an individual basis, the licenses granted under
the agreement to the three human monoclonal antibodies if we
determine not to file and obtain approval of an
IND application for a licensed product by a specified date
and conduct clinical trials for such product, or we determine
not to file an IND application for a licensed product by a
specified date because of negative preclinical results. In
either event, we would be subject to specified termination fees.



| |                    
| | -------------------
| | New York University

In June 2003, we licensed from New York
University, or NYU, the exclusive worldwide commercial rights to
several peptides that appear to inhibit angiogenesis in
preclinical models. Pursuant to our licensing arrangement, we
paid New York University an upfront payment of $66,666 and
are obligated to pay an additional $66,667 on the first
anniversary of the date of the agreement and $66,667 on the
second anniversary. In addition, we are obligated to pay future
anniversary payments of $15,000 representing license maintenance
fees. We are also obligated to pay milestone payments, up to a
maximum of $750,000 per product relating to the licenses,
based on regulatory and clinical milestones and royalties on
both future net sales of products relating to the licenses and
payments received as consideration for the grant of a
sublicense, if any. From inception through December 31,
2003, we have recognized a total of $67,000 in expenses under
the agreement, all of which were licensing fees. The agreement
terminates upon the later of the expiration of the last of any
patent rights to licensed products that are developed under this
agreement, or 15 years after the date of the first
commercial sale of the last product licensed or developed under
the agreement. We may terminate the agreement for any reason
following 180 days written notice to NYU. This agreement
may be terminated by NYU if we fail to meet specified commercial
development obligations under the agreement and we do not
materially cure this failure in one year.



| |          
| | ---------
| | Synteract

In January 2002, we contracted with
Synteract, Inc. to perform data collection, data management
and data analysis for our two Phase 3 clinical trials in
advanced-stage melanoma as well as for specified Phase 1
and Phase 2 clinical trials. From inception through
December 31, 2003, we have recognized a total of $4,300,000
in expenses under this agreement. This agreement requires
Synteract to provide these services to us through
December 31, 2005. However, this agreement is subject to
early termination by

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either party without cause upon
90 days notice to the other party. This agreement may
also be terminated by either party for material breach upon
30 days notice to the other party.




| |       
| | ------
| | SemaCo

In March 2004, we acquired the exclusive
worldwide commercialization rights from SemaCo to novel
technology using T-oligonucleotides for the potential treatment
or prevention of cancer. In 2003 and 2004, we paid SemaCo a
total of $350,000 in option payments. Pursuant to our
licensing arrangement, in 2004 we paid SemaCo $450,000 in
upfront payments and $256,000 for reimbursement of certain
patent costs. We are also obligated to pay research support
totaling $1.2 million over three years, milestone payments
of up to a maximum of $9.2 million for each product
developed under this agreement, based on meeting certain
regulatory and other milestones, and royalties. The agreement
terminates upon the later of the expiration of the last of any
patent rights to licensed products that are developed under this
agreement or 15 years after the date of the first
commercial sale of the last product licensed or developed under
the agreement. We may terminate this agreement for any reason
following 60 days written notice to SemaCo.

Patents and Proprietary Technology

Our success will depend in large part on our
ability to:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | maintain and obtain patent and other proprietary
    protection for cell lines, antigens, antibodies and delivery
    systems;
|
| |  | defend patents;                                                                                                               
|
| |  | preserve trade secrets; and                                                                                                   
|
| |  | operate without infringing the patents and
    proprietary rights of third parties.                                           

We intend to seek appropriate patent protection
for our proprietary technologies by filing patent applications
when possible in the United States and selected other countries.
As of December 31, 2003 we had exclusive rights to develop
for commercial purposes specified therapeutic cancer vaccines
under four issued patents in the United States and additional
patents in Europe and Australia. In addition, a patent
application has been published in Japan and another is pending
in Canada. The patents include composition of matter claims as
well as process claims. The issued patents in the United States
expire during 2010 and 2015, and our issued patents in Europe
and Australia expire in 2010. We intend to continue using our
scientific expertise to pursue and file patent applications on
new developments with respect to uses, methods and compositions
to enhance our intellectual property position in the field of
cancer treatment.

We own the exclusive rights to commercialize for
use in cancer treatment the three human melanoma cell lines that
comprise Canvaxin, which are designated as M10, M101, M24. We
own 20 additional cell lines derived from human tumors.
Although we believe our rights under patents and patent
applications provide a competitive advantage, the patent
positions of pharmaceutical and biotechnology companies are
highly uncertain and involve complex legal and factual
questions. We may not be able to develop patentable products or
processes, and may not be able to obtain patents from pending
applications. Even if patent claims are allowed, the claims may
not issue, or in the event of issuance, may not be sufficient to
protect the technology owned by or licensed to us.

Any patents or patent rights that we obtain may
be circumvented, challenged or invalidated by our competitors.
For example, Boehringer Ingelheim GmbH filed an opposition to
one of the patents related to our product candidates and
technology in Europe. While we prevailed in the opposition
proceeding and the appeal by Boehringer Ingelheim was rejected
on procedural grounds, our patents may be the subject of other
challenges by our competitors in Europe, the United States and
elsewhere.

We are party to several license agreements that
give us rights to use technologies in our research and
development. We have licensed intellectual property for
technology related to Canvaxin from Cancer Diagnostics
Laboratories, Inc. and JWCI, to our angiogenesis technology
from USC, Scripps and NYU, to

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our human antibody technology from M-Tech
Therapeutics, and to our T-oligonucleotide technology from
SemaCo. These parties have been responsible for filing various
patent applications, including patents and patent applications
containing composition claims that encompass the three cancer
cell lines used for Canvaxin and patent applications directed to
Cell-Matrixs angiogenesis technology. We may be unable to
maintain our licenses and may be unable to secure additional
licenses in the future. Therefore, we may be forced to abandon
certain product areas or develop alternative methods for
operating in those areas.


We also rely on trade secrets and proprietary
know-how, especially when we do not believe that patent
protection is appropriate or can be obtained. Our policy is to
require each of our employees, consultants and advisors to
execute a confidentiality and inventions agreement before
beginning their employment, consulting or advisory relationship
with us obligating them not to disclose our confidential
information.

Competition

We are aware of a number of competitive products
currently available in the marketplace or under development that
are used for the prevention and treatment of the diseases we
have targeted for product development. Products marketed in the
United States and elsewhere for melanoma include Chiron
Corporations Proleukin® (IL-2), Schering-Plough
Corporations IntronA® (interferon alpha) and
Bayer AGs chemotherapeutic agent dacarbazine. Despite
the side effects associated with these chemotherapy and
biotherapy products, these products are currently being used in
the treatment of patients with melanoma. In addition, Corixa
Corporations Melacine® has been approved in Canada
for the treatment of melanoma, however, Corixa recently
announced that it is discontinuing the U.S. development of
Melacine for melanoma. A number of other competitors are
developing immunotherapeutics and other approaches for the
treatment of melanoma, including Progenics
Pharmaceuticals, Inc.s GMKTM,
Antigenics, Inc.s OncophageTM, Maxim
Pharmaceutical, Inc.s CepleneTM, Celgene
Corporations RevimidTM and
Genta, Inc.s GenasenseTM, which are all in
Phase 3 clinical trials. In November 2003, Maxim announced
that it has filed for European approval to market Ceplene, in
combination with interleukin-2 for the treatment of advanced
malignant melanoma in patients with liver metastases, and in
February 2004, Genta announced that the FDA had accepted for
priority review a new drug application for Genasense, for use in
combination with dacarbazine for the treatment of patients with
advanced malignant melanoma. Oncophage, Ceplene, Revimid and
Genasense are all being studied in patients with metastatic
melanoma, but none of these clinical trials require that
patients undergo surgical resection to remove all clinically
detectable disease prior to initiating their treatment. This is
contrasted with patients who are being studied in
Canvaxins Phase 3 clinical trials, who have their
tumors and all clinically detectable metastases resected. If we
receive approval to market and sell Canvaxin, we may compete
with these companies and their products as well as other
products in various stages of development.

Various companies are currently marketing or
developing biopharmaceutical products that may compete with our
product candidates that target colon cancer. Canvaxin and other
product candidates we may develop are subject to competition in
the treatment of colon cancer from a number of products already
approved and on the market, including the following chemotherapy
products: AstraZeneca PLCs Tomudex®,
Hoffmann-LaRoche, Inc.s Xeloda® (capecitabine),
Immunex Corporations Leucovorin® calcium,
Pfizer, Inc.s Camptosar® (irinotecan) and
Aduracil® (5-FU) and Sanofi-Synthelabo Groupes
EloxatinTM (oxaliplatin). In February 2004, the FDA
approved a BLA for Imclone Systems, Inc.s
ErbituxTM, a monoclonal antibody directed at the
epidermal growth factor receptor, for use in combination with
Camptosar® for the treatment of colorectal cancer. In the
same month, the FDA also approved a BLA for Genentech,
Inc.s AvastinTM, a therapeutic antibody
designed to inhibit vascular endothelial growth factor, for use
in combination with the IFL chemotherapy regimen (5-FU/
Leucovorin/ irinotecan) for the treatment of colorectal cancer.
Other product candidates currently in late stages of development
for the treatment of colorectal cancer include
Antigenics, Inc.s OncophageTM, Aphton
Corporations G-17TM, AVI
BioPharma, Inc.s AvicineTM,
GlaxoSmithKlines EniluracilTM, Intracel
Corporations OncovaxTM and Titan
Pharmaceuticals, Inc.s CeaVacTM. We also
face competition from a number of companies working in the
fields of anti-angiogenesis and specific active immunotherapy
for the treatment of other solid tumor cancers, and working to
develop technologies similar to the T-oligonucleotide technology
that use internal

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cellular mechanisms to regulate cell responses as
a treatment for cancer. We expect that competition among
specific active immunotherapy and anti-angiogenesis products
approved for sale will be based on various factors, including
product efficacy, safety, reliability, availability, price and
patent position.


We also face competition from pharmaceutical and
biotechnology companies, academic institutions, governmental
agencies and private research organizations in recruiting and
retaining highly qualified scientific personnel and consultants
and in the development and acquisition of technologies.
Moreover, technology controlled by third parties that may be
advantageous to our business may be acquired or licensed by our
competitors, thereby preventing us from obtaining technology on
commercially reasonable terms, if at all. Because part of our
strategy is to target markets outside of the United States
through collaborations with third parties, we will compete for
the services of third parties that may have already developed or
acquired internal biotechnology capabilities or made commercial
arrangements with other biopharmaceutical companies to target
the diseases on which we have focused.

Government Regulation and Product
Approval



| |        
| | -------
| | General

Governmental authorities in the United States and
other countries extensively regulate the preclinical and
clinical testing, manufacturing, labeling, storage,
record-keeping, advertising, promotion, export, marketing and
distribution, among other things, of biologic products. In the
United States, the FDA under the Federal Food, Drug, and
Cosmetic Act, the Public Health Service Act and other federal
statutes and regulations subjects pharmaceutical and biologic
products to rigorous review. If we do not comply with applicable
requirements, we may be fined, the government may refuse to
approve our marketing applications or allow us to manufacture or
market our product candidates and products, and we may be
criminally prosecuted. The FDA also has the authority to revoke
previously granted marketing authorizations if we fail to comply
with regulatory standards or if we encounter problems following
initial marketing.

In April 2002, the FDA placed our two
Phase 3 clinical trials of Canvaxin in advanced-stage
melanoma on partial clinical hold. The partial clinical hold was
not the result of safety or clinical practice concerns, but
rather because of questions regarding the production, testing
and characterization of Canvaxin. The FDAs action with
respect to our Phase 3 clinical trials was consistent with
clinical holds placed on other companies immunotherapy
products, and with similar requests for additional information
sent to all holders of IND applications for products involving
somatic cell or gene therapies. During the partial clinical
hold, we were allowed to continue treating patients who were
already enrolled in the Phase 3 clinical trials but were
not allowed to enroll new patients. The FDA removed the partial
clinical hold in April 2003 after reviewing and accepting our
responses to the issues raised, and we resumed enrolling
patients in our Phase 3 clinical trials soon afterwards.



| |                     
| | --------------------
| | FDA Approval Process

To obtain approval of a new product from the FDA,
we must, among other requirements, submit data supporting safety
and efficacy as well as detailed information on the manufacture
and composition of the product candidate. In most cases, this
entails extensive laboratory tests and preclinical and clinical
trials. This testing and the preparation of necessary
applications and processing of those applications by the FDA are
expensive and typically take many years to complete. The FDA may
not act quickly or favorably in reviewing these applications,
and we may encounter significant difficulties or costs in our
efforts to obtain FDA approvals that could delay or preclude us
from marketing any products we may develop. The FDA also may
require post-marketing testing and surveillance to monitor the
safety and efficacy of approved products or place conditions on
any approvals that could restrict the commercial applications of
these products. Regulatory authorities may withdraw product
approvals if we fail to comply with regulatory standards or if
we encounter problems at any time following initial marketing.
With respect to patented products or technologies, delays
imposed by the governmental approval process may materially
reduce the period during which we will have the exclusive right
to exploit the products or technologies.

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The process required by the FDA before a new drug
or biologic may be marketed in the United States generally
involves the following: completion of preclinical laboratory and
animal testing; submission of an IND, which must become
effective before human clinical trials may begin; performance of
adequate and well-controlled human clinical trials to establish
the safety and efficacy of the proposed drug or biologic for its
intended use; and submission and approval of a New Drug
Application, or NDA, for a drug, or a Biologics License
Application, or BLA, for a biologic. The sponsor typically
conducts human clinical trials in three sequential phases, but
the phases may overlap. In Phase 1 clinical trials, the
product is tested in a small number of patients or healthy
volunteers, primarily for safety at one or more doses. In
Phase 2, in addition to safety, the sponsor evaluates the
efficacy of the product in targeted indications, and identifies
possible adverse effects and safety risks, in a patient
population that is usually larger than Phase 1 clinical
trials. Phase 3 clinical trials typically involve
additional testing for safety and clinical efficacy in an
expanded patient population at geographically-dispersed clinical
trial sites. Clinical trials must be conducted in accordance
with the FDAs Good Clinical Practices requirements. Prior
to commencement of each clinical trial, the sponsor must submit
to the FDA a clinical plan, or protocol, accompanied by the
approval of the committee responsible for overseeing clinical
trials at one of the clinical trial sites. The FDA may order the
temporary or permanent discontinuation of a clinical trial at
any time if it believes that the clinical trial is not being
conducted in accordance with FDA requirements or presents an
unacceptable risk to the clinical trial patients. The
Institutional Review Board, or IRB, at each clinical site may
also require the clinical trial at that site to be halted,
either temporarily or permanently, for the same reasons.

The sponsor must submit to the FDA the results of
the preclinical and clinical trials, together with, among other
things, detailed information on the manufacture and composition
of the product, in the form of a new drug application, or NDA,
or, in the case of a biologic, a BLA. The FDA is regulating our
specific active immunotherapy product candidate, Canvaxin, and
may regulate additional specific active immunotherapy product
candidates we may develop as biologics. Therefore, we will be
submitting BLAs to obtain approval of our product candidates.
However, our monoclonal antibody product candidates will be
regulated as drugs. In a process that may take from several
months to several years, the FDA reviews these applications and,
when and if it decides that adequate data are available to show
that the new compound is both safe and effective and that other
applicable requirements have been met, approves the drug or
biologic for marketing. The amount of time taken for this
approval process is a function of a number of variables,
including whether the product has received a fast track
designation, the quality of the submission and studies
presented, the potential contribution that the compound will
make in improving the treatment of the disease in question, and
the workload at the FDA. It is possible that our product
candidates will not successfully proceed through this approval
process or that the FDA will not approve them in any specific
period of time, or at all.

The FDA may, during its review of a NDA or BLA,
ask for additional test data. If the FDA does ultimately approve
the product, it may require post-marketing testing, including
potentially expensive Phase 4 studies, to monitor the
safety and effectiveness of the product. In addition, the FDA
may in some circumstances impose restrictions on the use of the
product, which may be difficult and expensive to administer and
may require prior approval of promotional materials.

We will also be subject to a variety of
regulations governing clinical trials and sales of our products
outside the United States. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory
authorities of foreign countries and regions must be obtained
prior to the commencement of marketing the product in those
countries. The approval process varies from one regulatory
authority to another and the time may be longer or shorter than
that required for FDA approval. In the European Union, Canada,
and Australia, regulatory requirements and approval processes
are similar, in principle, to those in the United States.



| |                       
| | ----------------------
| | Fast Track Designation

We received fast track designation from the FDA
for Canvaxin for the treatment of patients with advanced-stage
melanoma in January 2003. Congress enacted the Food and Drug
Administration

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Modernization Act of 1997, in part to ensure the
availability of safe and effective drugs, biologics and medical
devices by expediting the FDA review process for new products.
The Modernization Act establishes a statutory program for the
review of fast track products, including biologics. A fast track
product is defined as a new drug or biologic intended for the
treatment of a serious or life-threatening condition that
demonstrates the potential to address unmet medical needs for
this condition. Under the fast track program, the sponsor of a
new drug or biologic may request that the FDA designate the drug
or biologic as a fast track product at any time during the
development of the product, prior to marketing.


The Modernization Act specifies that the FDA must
determine if the product qualifies for fast track designation
within 60 days of receipt of the sponsors request.
The FDA can base approval of a marketing application for a fast
track product on an effect, on a surrogate endpoint, or on
another endpoint that is reasonably likely to predict clinical
benefit. The FDA may subject approval of an application for
certain fast track products to post-approval studies to validate
the surrogate endpoint or confirm the effect on the clinical
endpoint and prior review of all promotional materials. In
addition, the FDA may withdraw its approval of a fast track
designation on a number of grounds, including the sponsors
failure to conduct any required post-approval study in a timely
manner.

If a preliminary review of clinical data suggests
that a fast track product may be effective, the FDA may initiate
review of entire sections of a marketing application for a fast
track product before the sponsor completes the application. This
rolling review is available if the applicant provides a schedule
for submission of remaining information and pays applicable user
fees. However, the time periods specified under the Prescription
Drug User Fee Act concerning timing goals to which the FDA has
committed in reviewing an application do not begin until the
sponsor submits the entire application.



| |                        
| | -----------------------
| | Orphan Drug Designation

We have received orphan drug designation from the
FDA for the use of Canvaxin as a treatment for invasive
melanoma, which includes Stage III and Stage IV
melanoma. Orphan drug designation is designed to encourage
manufacturers to develop drugs intended for a rare disease or
certain conditions affecting fewer than 200,000 individuals
in the United States. Orphan drug designation qualifies us for
tax credits and marketing exclusivity for seven years following
the date of the drugs marketing approval if granted by FDA.



| |                                
| | -------------------------------
| | Ongoing Regulatory Requirements

Before approving an NDA or BLA, the FDA will
inspect the facilities at which the product is manufactured and
will not approve the product unless the manufacturing facilities
are in compliance with FDAs good manufacturing practices,
or GMP, regulations which govern the manufacture, holding and
distribution of a product. Manufacturers of biologics also must
comply with FDAs general biological product standards.
Following approval, the FDA periodically inspects drug and
biologic manufacturing facilities to ensure continued compliance
with the good manufacturing practices regulations. Manufacturers
must continue to expend time, money and effort in the areas of
production and quality control and record keeping and reporting
to ensure full compliance with those requirements. Failure to
comply with these requirements subjects the manufacturer to
possible legal or regulatory action, such as suspension of
manufacturing, seizure of product, or voluntary recall of
product. Adverse experiences with the product must be reported
to the FDA and could result in the imposition of marketing
restrictions through labeling changes or market removal. Product
approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety
or efficacy of the product occur following approval.

The labeling, advertising, promotion, marketing
and distribution of a drug or biologic product also must be in
compliance with FDA and Federal Trade Commission, or FTC,
requirements which include, among others, standards and
regulations for off-label promotion, industry sponsored
scientific and educational activities, promotional activities
involving the internet, and direct-to-consumer advertising. The
FDA and FTC have very broad enforcement authority, and failure
to abide by these regulations can result

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in penalties, including the issuance of a Warning
Letter directing the company to correct deviations from
regulatory standards and enforcement actions that can include
seizures, injunctions and criminal prosecution.


Manufacturers are also subject to various laws
and regulations governing laboratory practices, the experimental
use of animals, and the use and disposal of hazardous or
potentially hazardous substances in connection with their
research. In each of these areas, as above, the FDA has broad
regulatory and enforcement powers, including the ability to levy
fines and civil penalties, suspend or delay issuance of product
approvals, seize or recall products, and deny or withdraw
approvals.

Employees

As of December 31, 2003, we employed
151 full-time employees, of whom approximately 62 were
engaged in research, development and regulatory affairs, 62 in
manufacturing and quality assurance, and 27 in administration,
finance, management information systems, corporate development
and human resources. Twenty-two of our employees hold a Ph.D.,
M.D. or Pharm.D. degree and are engaged in activities
relating to research and development, manufacturing, quality
assurance and business development.

Available Information

We make available free of charge on or through
our Internet website our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports as soon as
reasonably practicable after such material is electronically
filed with or furnished to the Securities and Exchange
Commission. Our Internet address is www.cancervax.com.

Risk Factors

The following information sets forth factors
that could cause our actual results to differ materially from
those contained in forward-looking statements we have made in
this report, the information incorporated herein by reference
and those we may make from time to time.



| |                                               
| | ----------------------------------------------
| | Risks Related to Our Business and
    Industry

We are dependent on the success of our lead
product candidate, Canvaxin, and we cannot be certain that it
will be approved by regulatory authorities or that it will be
commercialized.

We have expended significant time, money and
effort in the development of our lead product candidate,
Canvaxin, which has not yet received regulatory approval and
which may never be commercialized. Before we can market and sell
Canvaxin, we will need to demonstrate in Phase 3 clinical
trials that the product candidate is safe and effective and will
also need to obtain necessary approvals from the FDA and similar
foreign regulatory agencies. Canvaxin is currently in two
Phase 3 clinical trials for advanced-stage melanoma.

Even if we were to ultimately receive regulatory
approval, we may be unable to gain market acceptance of Canvaxin
for a variety of reasons, including the treatment regimen. Under
this treatment regimen, patients will require 33 doses of
Canvaxin over a five-year period and will be advised against the
use of other approved treatments during this period that
suppress their immune systems, such as chemotherapy. In
addition, the success of Canvaxin may be affected by the
prevalence and severity of adverse side effects, which include
blistering, stinging, itching and redness at the site of
injection, flu-like symptoms and a decrease in energy. Side
effects, such as allergic reactions, may also be associated with
bacillus Calmette-Guérin, or BCG, which is the adjuvant we
administer to patients with the first two doses of Canvaxin.
Furthermore, the availability of alternative treatments and the
cost effectiveness of Canvaxin will affect our ability to
commercialize Canvaxin. If we fail to commercialize this lead
product candidate, our business, financial condition and results
of operations will be materially and adversely affected.

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We are subject to extensive government
regulation that increases the cost and uncertainty associated
with gaining regulatory approval of Canvaxin and our other
product candidates.

The preclinical development, clinical trials,
manufacturing and marketing of our product candidates are all
subject to extensive regulation by United States and foreign
governmental authorities. It takes many years and significant
expense to obtain the required regulatory approvals for
biological products. Satisfaction of regulatory requirements
depends upon the type, complexity and novelty of the product
candidate and requires the expenditure of substantial resources.
In particular, the specific active immunotherapy technology on
which Canvaxin is based is a relatively new form of cancer
therapy that presents novel issues for regulatory authorities to
consider and, therefore, may be subject to heightened scrutiny
in the regulatory process. For example, in 2002, the FDA sent a
letter requesting additional information from all holders of
Investigational New Drug, or IND, applications for products
involving somatic cell or gene therapies, including Canvaxin. We
cannot be certain that any of our product candidates will be
shown to be safe and effective or that we will ultimately
receive approval from the FDA or foreign regulatory authorities
to market these products. In addition, even if granted, product
approvals and designations such as fast-track and orphan drug
may be withdrawn or limited at a later time.

Our projected launch date for Canvaxin in 2006 is
dependent upon the FDAs acceptance of a positive result in
a single Phase 3 clinical trial as sufficient for marketing
approval. Although the FDA typically requires successful results
in two Phase 3 clinical trials to support marketing
approval, the FDA has, on a number of occasions, approved
products based on a single Phase 3 clinical trial that
demonstrates a high level of statistical significance where
there is an unmet need for a life-threatening condition. In the
event that the FDA requires the results of a second Phase 3
clinical trial before accepting a marketing application or
before granting approval of Canvaxin, the launch of Canvaxin
would be delayed.

In addition, manufacturers of biological
products, including specific active immunotherapies, must comply
with the FDAs current good manufacturing practice
regulations. These regulations apply to our biologics
manufacturing facility, located in the Los Angeles,
California area, where we currently manufacture Canvaxin. These
regulations include quality control, quality assurance and the
maintenance of records and documentation. Our manufacturing
facility also is subject to the licensing requirements of the
California Department of Health Services and may be inspected by
the FDA and the California Department of Health Services at any
time. We and our present or future suppliers may be unable to
comply with the applicable good manufacturing practice
regulations and with other FDA, state and foreign regulatory
requirements. Failure to maintain a license from the California
Department of Health Services or to meet the inspection criteria
of the FDA and the California Department of Health Services
would disrupt our manufacturing processes and would delay our
clinical trials. If an inspection by the FDA, California
Department of Health Services or a foreign regulatory authority
indicates that there are deficiencies, we could be required to
take remedial actions, we could be prohibited from supplying
product for our ongoing clinical trials and for commercial sale,
or our facility could be closed.

If clinical trials of Canvaxin or any other
product candidates that we may develop do not produce successful
results, we will be unable to commercialize these product
candidates.

In order to receive regulatory approval for the
commercial sale of our product candidate Canvaxin or any other
product candidates that we may develop, we must conduct,
primarily at our own expense, extensive clinical trials to
demonstrate safety and efficacy. Clinical testing is expensive,
can take many years and has an uncertain outcome. For example,
while difficult to predict, we estimate that we will incur at
least an additional $100 million in costs, including
internal costs, prior to commercialization of Canvaxin. Failure
can occur at any phase of the clinical testing. While Canvaxin
is currently being studied in two Phase 3 clinical trials
for advanced-stage melanoma, these trials may not produce
positive results and may, under some circumstances, be
terminated early. Both Phase 3 clinical trials for Canvaxin
in advanced-stage melanoma were designed with three interim
analyses prior to the planned completion of the clinical trials.
At each interim analysis, an independent data and safety
monitoring board will review unblinded data from the clinical
trials primarily to evaluate the safety of Canvaxin. It is
possible that in connection with any of the interim analyses or
at any other stage of the trials, the monitoring board may

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determine that there are safety risks associated
with Canvaxin or that it is not sufficiently effective to
continue the trials, and may, as a result, recommend the
discontinuation of these clinical trials.


In February 2004, the independent DSMB
responsible for providing oversight of our Phase 3 clinical
trials completed its planned, second, interim analysis of our
Phase 3 clinical trial of Canvaxin in Stage III
melanoma. Based upon its review of data from 842 patients
enrolled in the trial, the DSMB recommended that we continue
both of the Phase 3 clinical trials as planned. We
anticipate that in 2004 we will complete the planned, second
interim analysis of our Phase 3 clinical trial of Canvaxin
in Stage IV melanoma.

We have encountered regulatory delays in our
clinical trials in the past and we may encounter significant
delays or discontinue our clinical trials in the
future.

We or regulators may suspend or terminate our
clinical trials for a number of reasons. We may voluntarily
suspend or terminate our clinical trials if at any time we
believe that they present an unacceptable risk to the patients
enrolled in our clinical trials. In addition, regulatory
agencies may order the temporary or permanent discontinuation of
our clinical trials at any time if they believe that the
clinical trials are not being conducted in accordance with
applicable regulatory requirements or that they present an
unacceptable safety risk to the patients enrolled in our
clinical trials. In April 2002, the FDA placed our two
Phase 3 clinical trials of Canvaxin in advanced-stage
melanoma on partial clinical hold. The FDAs action with
respect to our Phase 3 clinical trials was consistent with
clinical holds placed on other companies immunotherapy
products, and with requests for additional information sent to
us and all other holders of IND applications for products
involving somatic cell or gene therapies. The partial clinical
hold was the result of questions regarding the production,
testing and characterization of Canvaxin. During the partial
clinical hold, we were allowed to continue treating patients who
were already enrolled in our Phase 3 clinical trials but
were not allowed to enroll new patients. The FDA removed the
partial clinical hold in April 2003 and we resumed enrolling
patients in the Phase 3 clinical trials. We may be subject
to additional clinical holds imposed by the FDA or other
regulatory authorities in the future.

Our clinical trial operations are subject to
inspection by the FDA and other regulatory authorities at any
time, and the FDA has previously noted deficiencies in our
clinical trials at these inspections. Any temporary or permanent
hold imposed on our clinical trial operations as a result of
these inspections or for any other reason would harm the testing
and development of Canvaxin and our other product
candidates.

Our clinical trial operations are subject to
regulatory inspections at any time. If regulatory inspectors
conclude that we or our clinical trial sites are not in
compliance with applicable regulatory requirements for
conducting clinical trials, we may receive reports of
observations or warning letters detailing deficiencies, and we
will be required to implement corrective actions. If regulatory
agencies deem our responses to be inadequate, or are
dissatisfied with the corrective actions we or our clinical
trial sites have implemented, our clinical trials may be
temporarily or permanently discontinued, we may be fined, we or
our investigators may be precluded from conducting the ongoing
or any future clinical trials, the government may refuse to
approve our marketing applications or allow us to manufacture or
market our products, and we may be criminally prosecuted. In
April 2002, the FDA inspected our clinical trial operations and
three of our clinical trial sites. As a result of the FDAs
inspections, we received a report of observations from the FDA.
The deficiencies noted in this report included inadequate
documentation of the review and approval of clinical site
investigators and a contract clinical trial monitoring firm;
delays in obtaining formal internal approvals of some of our
standard operating procedures; and lack of timeliness in
preparing and filing certain reports associated with the
clinical trials and in obtaining compliance with corrective
action plans by several clinical trial sites. We responded to
the FDAs report of observations and, in December 2002, we
received an untitled letter from the FDA, requesting
additional follow-up information related to the April 2002
inspection. We provided the requested information and have
received no further requests from the FDA in that regard. In
addition, JWCI and the Medical College of Virginia received
reports of observations and formal warning letters from the FDA.
The deficiencies noted in these warning letters included the use
of an incorrect version of patient informed consent forms,
delayed reporting of serious adverse events and failures to
rigorously follow the investigational plan. Both sites

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responded to the FDAs report of
observations and, in December 2002, the FDA notified the two
clinical trial sites that received the warning letters that it
had reviewed their responses and that no further responses were
necessary at that time. There were no delays to the clinical
trials attributable to these inspections, reports of
observations or warning letters. We cannot be sure that the FDA
or other regulatory authorities will not request further data or
information regarding our clinical trial operations in the
future. The FDA may elect to reinspect our clinical operations
for a variety of reasons, including to confirm that we and our
clinical trial sites continue to observe the corrective actions
taken in response to the initial FDA inquiry. Moreover, if the
FDA determines that the deficiencies noted at any of the sites
are of sufficient concern, it could require that data from such
sites be excluded from our clinical trial results and additional
patients be enrolled as part of the protocol, that the
Phase 3 studies be redone, or that additional Phase 3
clinical trials be conducted.


We have undertaken two Phase 3 clinical
trials for the treatment of patients with advanced-stage
melanoma based on the positive results of the Phase 1 and
Phase 2 clinical trials conducted by our founder,
Dr. Morton, who has a substantial ownership interest in our
common stock and other economic incentives. If the results of
these Phase 1 and Phase 2 clinical trials are affected
by a bias or conflict of interest and we fail to obtain
satisfactory Phase 3 clinical trial results, our
development of Canvaxin would be significantly delayed or may be
terminated.

There is potential for bias in connection with
the Phase 1 and Phase 2 clinical trials of Canvaxin
conducted at JWCI and the UCLA School of Medicine because Donald
L. Morton, M.D., our founder, served as Medical Director
and Surgeon-in-Chief and a member of the board of directors of
JWCI and was a professor and Chief of the Division of Surgical
Oncology at the UCLA School of Medicine during the time these
trials were being conducted.

Of the approximately 2,600 patients who have
been administered Canvaxin in Phase 1 and Phase 2
clinical trials, fewer than 50 of those patients received
Canvaxin at locations other than JWCI and UCLA. As of
December 31, 2003, Dr. Morton beneficially owned
approximately 19.4% of our common stock. In addition, pursuant
to a cross-license agreement with JWCI, in August 2000 we issued
JWCI 284,090 shares of common stock, which represented
approximately 4.8% of our common stock at the time of issuance.
Moreover, Dr. Morton and JWCI received significant funding
from the National Institutes of Health to support the early
clinical trials of Canvaxin and this funding was a significant
source of revenue for JWCI. We are obligated to pay JWCI 50% of
the initial net royalties we receive from any sublicensees from
sales of Canvaxin, if any, up to $3.5 million.
Subsequently, we are obligated to pay JWCI a 1% royalty on net
sales, if any, of Canvaxin to third parties by us, our
sublicensees and affiliates. We have undertaken two
international Phase 3 clinical trials for the treatment of
patients with advanced-stage melanoma based on the positive
results of the Phase 1 and Phase 2 clinical trials
conducted by Dr. Morton. If it is determined that the
results of these Phase 1 and Phase 2 clinical trials
are affected by a bias or conflict of interest and we fail to
obtain satisfactory Phase 3 clinical trial results, our
development of Canvaxin would be significantly delayed or may be
terminated.

The results of Phase 1 and Phase 2
clinical trials of Canvaxin may not be predictive of the future
results of our ongoing Phase 3 clinical trials. Data from
these Phase 1 and Phase 2 clinical trials were
evaluated using retrospective survival analyses that may be
subject to potential selection biases.

In the Phase 1 and Phase 2 clinical
trials of Canvaxin, clinicians and statisticians at JWCI and
other institutions used the JWCI database of
approximately 11,000 melanoma patients to perform
retrospective analyses comparing the survival of the
Canvaxin-treated group with the survival of patients who did not
receive Canvaxin.

In addition to analyses of survival data from all
patients with advanced-stage melanoma in the JWCI database who
met certain criteria, matched-pair analyses were performed.
These matched-pair analyses were conducted by using prognostic
factors to match patients who received Canvaxin with similar
patients in the database who did not receive Canvaxin. Median
overall survival and five-year survival rates were compared
between patients treated with Canvaxin and the matched-pair
patient control groups who were not treated with Canvaxin. All
clinical data reported regarding the patients in the
Phase 1 and Phase 2

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clinical trials were obtained from JWCIs
database and we have not independently performed any audit or
other reconciliation against actual patient medical records. In
addition, retrospective analyses of matched-pair data are not
generally deemed sufficient by the FDA and most foreign
regulatory authorities as a basis for approval to market a
product because they may be subject to potential selection
biases that may be minimized in prospective, randomized,
double-blind, placebo-controlled clinical trials.


Due to the differences in patient populations and
study methodologies, it may be difficult to compare results from
the retrospective analyses in our Phase 1 and Phase 2
clinical trials for Canvaxin to any other analyses by other
groups. Differences in survival rates between studies in
patients with Stage III and Stage IV melanoma are
affected by the following factors:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | time from which survival of patients is initially
    calculated, such as the time of diagnosis, the time of surgery
    or time of treatment;
|
| |  | definitions of mortality, such as all
    causes mortality or disease-specific mortality;                                                   
|
| |  | diagnosis status of patients, such as initial
    diagnosis or recurrent disease; and                                                         
|
| |  | severity of disease, such as size of tumors and
    number of metastases.                                                                     

In particular, specialty cancer centers such as
JWCI tend to treat patients with more advanced disease than
other types of healthcare facilities. As a result of these
factors and the uncertainties affecting the clinical trial
process generally, the results of the Phase 1 and
Phase 2 clinical trials may not be predictive of the future
results of our Phase 3 clinical trials.

We depend on clinical investigators and
medical institutions to enroll patients in our clinical trials
and other third parties to perform related data collection and
analysis, and, as a result, we may face costs and delays outside
of our control.

In our Phase 3 clinical trials, we plan to
enroll 1,118 patients with Stage III melanoma, and
670 patients with Stage IV melanoma, and we rely on
clinical investigators and medical institutions to enroll these
patients. As of March 15, 2004, 891 patients had been
enrolled in our Phase 3 clinical trial in Stage III
melanoma and 354 patients had been enrolled in our
Phase 3 clinical trial in Stage IV melanoma. From
June 1, 2003, through the end of February 2004, the rate of
patient enrollment in these trials has been between 18 and
31 patients per month for the clinical trial in
Stage III melanoma, and between 4 and 11 patients per
month for the clinical trial in Stage IV melanoma. We
anticipate that the rate of enrollment will increase as the new
clinical trials sites we have added begin to enroll patients,
and as we add additional clinical trial sites to our program,
but we cannot be sure that we will be able to accelerate
clinical trial enrollment or enroll an adequate number of
patients to complete the Phase 3 clinical trials. In
addition, we may not be able to control the amount and timing of
resources that the medical institutions that conduct the
clinical testing may devote to these Phase 3 clinical
trials. If these clinical investigators and medical institutions
fail to enroll a sufficient number of patients in our clinical
trials, we will be unable to complete these trials, which could
prevent us from obtaining regulatory approvals for Canvaxin. In
addition, the interim and final analyses of the data from these
clinical trials may not be performed until a specified number of
patients in each of these clinical trials has expired, so a
delay in enrollment will adversely impact the timely completion
of these clinical trials. A total of 392 patients
participating in the Phase 3 clinical trial in
Stage III melanoma, and a total of 390 patients
participating in the Phase 3 clinical trial in
Stage IV melanoma, respectively, must have died before we
can perform the final analyses on these clinical trials.
Eighty clinical trial sites are currently participating in
our two Phase 3 clinical trials. In the event that we are
unable to maintain our relationship with any of these clinical
trial sites, or elect to terminate the participation of any of
these clinical trial sites, we may experience the loss of
follow-up information on patients enrolled in the Phase 3
clinical trials unless we are able to transfer the care of those
patients to another clinical trial site. Any delays could
significantly slow the pace of our patient enrollment activities
and the ultimate development of Canvaxin.

We contract with Synteract, Inc. to perform
data collection, data management and data analysis for our two
Phase 3 clinical trials in advanced-stage melanoma as well
as for specified Phase 1 and Phase 2

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clinical trials. Our agreement with Synteract
requires Synteract to provide these services to us through
December 31, 2005. However, this agreement is subject to
early termination by either party without cause upon
90 days notice to the other party. This agreement may
also be terminated by either party for material breach upon
30 days notice to the other party. In the event that
we are unable to maintain our relationship with Synteract, and
are required to transfer the data collection, data management
and data analysis functions for our clinical trials to another
suitable third party, we may experience significant additional
expenditures and substantial delays in the completion of our
clinical trials. We may not be able to maintain our agreement
with Synteract or any of our relationships with other third
parties, or establish new ones without undue delays or excessive
expenditures.


Our agreements with clinical investigators and
medical institutions for clinical testing and with a third party
for data management services place substantial responsibilities
on these parties, which could result in delays in, or
termination of, our clinical trials if these parties fail to
perform as expected. For example, if any of our clinical trial
sites fail to comply with FDA-approved good clinical practices,
we may be unable to use the data gathered at those sites. If
these clinical investigators, medical institutions or other
third parties do not carry out their contractual duties or
obligations or fail to meet expected deadlines, or if the
quality or accuracy of the clinical data they obtain is
compromised due to their failure to adhere to our clinical
protocols or for other reasons, our clinical trials may be
extended, delayed or terminated, and we may be unable to obtain
regulatory approval for or successfully commercialize Canvaxin.

We have limited experience in manufacturing
and testing biological products and may encounter problems or
delays that could result in delayed development of Canvaxin and
our other product candidates as well as lost revenue.

We expend significant time, money and effort in
production, record keeping and quality systems to assure that
Canvaxin will meet FDA-approved product specifications and other
regulatory requirements. We are continuing to develop and plan
to validate specialized assays to enable us to ensure the
characterization, potency and consistency of our lead product
candidate, Canvaxin. We are also validating our quality systems,
manufacturing processes and product container closure systems.
However, we have no experience producing commercial quantities
of Canvaxin. We previously modified our manufacturing process
for Canvaxin and switched from a small volume flask process to a
larger scale flask process in an effort to improve our
manufacturing process and scale up our manufacturing capability
to produce larger quantities. We introduced Canvaxin that was
manufactured using this new process into our two Phase 3
clinical trials for advanced-stage melanoma in 2003.

We have experienced significant delays in
connection with our commercial-scale manufacturing processes and
may encounter delays in the future. For example, as a result of
a sterility concern caused by a third party testing process
related to one lot of Canvaxin used in our Phase 3 clinical
trials, we initiated a product retrieval from 35 clinical
trial sites in June 2003. While we do not believe this voluntary
product retrieval was due to our manufacturing process, we may
experience other delays in our development programs and
commercialization efforts stemming from our manufacturing and
testing processes, including testing and other services
performed by third parties. Additionally, in March 2004, we
reminded the clinical trial sites participating in the
Phase 3 clinical trials of Canvaxin of the need to ensure
that the storage containers in which vials of Canvaxin and
placebo are stored are not over-filled with liquid nitrogen,
which could result in the submersion of the vials and could,
potentially, damage the container closure system. We also
notified the clinical trials sites to take measures to prevent
the vials from becoming submerged while being thawed in water
baths, and to carefully inspect vials of Canvaxin and placebo to
ensure that the vials do not exhibit protruding gaskets, which
could indicate damage to the container closure system.

In 2004 and 2005, we plan to expand our
production capabilities. If we are unable to manufacture
sufficient quantities of Canvaxin using our commercial-scale
process in accordance with FDA and foreign regulatory authority
regulations, the lack of supply could delay our clinical trials,
thereby delaying submission of Canvaxin for regulatory approval
and its commercial launch. Similarly, if we are unable to
complete the development and validation of the specialized
assays required to ensure the consistency of

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our product candidates, our quality systems,
manufacturing processes and product container closure systems,
our ability to manufacture and deliver products in a timely
manner could be impaired or precluded. The approval of our
manufacturing processes and facility will be a part of the
review process performed by FDA and foreign regulatory
authorities in connection with our applications to obtain
regulatory approvals of Canvaxin. If the FDA or foreign
regulatory authorities have any issues with our manufacturing
facilities or processes, we may have to perform additional
studies in order to obtain such regulatory approvals.


If we are unable to renew our lease for our
sole manufacturing facility in the Los Angeles, California
area, or if the facility is damaged or destroyed, our ability to
manufacture Canvaxin will be significantly affected, and we will
be delayed or prevented from completing our clinical trials and
commercializing Canvaxin.

We rely on the availability and condition of our
sole biologics manufacturing facility, located in the
Los Angeles, California area, to manufacture Canvaxin. Our
lease is scheduled to expire on August 14, 2011, although
we have the option to renew the terms for an additional five
years. After that time, we may not be able to negotiate a new
lease for our facility. Our facility is located in a seismic
zone, and there is the possibility of an earthquake which could
be disruptive to our operations and result in a lack of supply
of Canvaxin. Any lack of supply could, in turn, delay our
clinical trials and any potential commercial sales. In addition,
if the facility or the equipment in the facility is
significantly damaged or destroyed for any reason, we may not be
able to replace our manufacturing capacity, and our business,
financial condition and results of operations will be materially
and adversely affected.

If we or others identify side effects after
our products are on the market, we may be required to perform
lengthy additional clinical trials, change the labeling of our
products or withdraw our products from the market, any of which
would hinder or preclude our ability to generate
revenues.

If we or others identify side effects after any
of our products are on the market:



| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | regulatory authorities may withdraw their
    approvals;                                                                                                                                                                                          
|
| |  | we may be required to reformulate our products,
    conduct additional clinical trials, make changes in the labeling
    of our products, implement changes to or obtain re-approvals of
    our manufacturing facilities, or recall our products;
|
| |  | we may experience a significant drop in the sales
    of the affected products;                                                                                                                                                                   
|
| |  | our reputation in the marketplace may
    suffer; and                                                                                                                                                                                             
|
| |  | we may become the target of lawsuits, including
    class action suits.                                                                                                                                                                           

Any of these events could harm or prevent sales
of the affected products or could substantially increase the
costs and expenses of commercializing and marketing these
products.

Our efforts to discover, develop and
commercialize new product candidates beyond Canvaxin are in a
very early stage and, therefore, these efforts are subject to a
high risk of failure.

Our strategy is to discover, develop and
commercialize new products for the treatment of cancer. The
process of successfully developing product candidates is very
time-consuming, expensive and unpredictable. We have only
recently begun to direct significant effort toward the expansion
of our scientific staff and research capabilities to identify
and develop product candidates in addition to Canvaxin. We do
not know whether our planned preclinical development or clinical
trials for these other product candidates will begin on time or
be completed on schedule, if at all. In addition, we do not know
whether these clinical trials will result in marketable
products. Typically, there is a high rate of attrition for
product candidates in preclinical and clinical trials. We do not
anticipate that any of our product candidates will reach the
market for at least several years.

We may not identify, develop or commercialize any
additional new product candidates from our proprietary specific
active immunotherapy, anti-angiogenesis, or T-oligonucleotide
technology platforms or

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other technologies. Our ability to develop
successfully any of these product candidates depends on our
ability to demonstrate safety and efficacy in humans through
extensive preclinical testing and clinical trials and to obtain
regulatory approval from the FDA and other regulatory
authorities. Our development programs for product candidates
will also depend upon our ability to fund our research and
development operations.


If we are unable to establish or manage
strategic collaborations in the future, our revenue and product
development may be limited.

Our strategy includes substantial reliance on
strategic collaborations for marketing and commercialization of
Canvaxin, and we may rely even more on strategic collaborations
for research, development, marketing and commercialization of
our other product candidates. To date, we have not entered into
any strategic collaborations with third parties capable of
providing these services. In addition, we have not yet marketed
or sold any of our product candidates in the United States or
elsewhere and we will need to continue to build our internal
marketing and sales capabilities or enter into successful
collaborations for these services in order to ultimately
commercialize our product candidates. Establishing strategic
collaborations is difficult and time-consuming. Our discussions
with potential collaborators may not lead to the establishment
of new collaborations on favorable terms, if at all. For
example, potential collaborators may reject collaborations based
upon their assessment of our financial, regulatory or
intellectual property position. If we successfully establish new
collaborations, these relationships may never result in the
successful development or commercialization of our product
candidates or the generation of sales revenue. To the extent
that we enter into co-promotion or other collaborative
arrangements, our product revenues are likely to be lower than
if we directly marketed and sold any products that we may
develop.

Management of our relationships with our
collaborators will require:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | significant time and effort from our management
    team;                                                                           
|
| |  | coordination of our research and development
    programs with the research and development priorities of our
    collaborators; and
|
| |  | effective allocation of our resources to multiple
    projects.                                                                     

If we enter into research and development
collaborations at an early phase of product development, our
success will in part depend on the performance of our corporate
collaborators. We will not directly control the amount or timing
of resources devoted by our corporate collaborators to
activities related to our product candidates. Our corporate
collaborators may not commit sufficient resources to our
research and development programs or the commercialization,
marketing or distribution of our product candidates. If any
corporate collaborator fails to commit sufficient resources, our
preclinical or clinical development programs related to the
collaboration could be delayed or terminated. Also, our
collaborators may pursue existing or other development-stage
products or alternative technologies in preference to those
being developed in collaboration with us. Finally, our
collaborators may terminate our relationships, and we may be
unable to establish additional corporate collaborations in the
future on acceptable terms, if at all. For example, if we fail
to make required milestone or royalty payments to our
collaborators or to observe other obligations in our agreements
with them, our collaborators may have the right to terminate
those agreements.

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

The biotechnology and pharmaceutical industries
are subject to rapid and significant technological change. We
have many potential competitors, including major drug and
chemical companies, large, diversified biotechnology companies,
smaller, specialized biotechnology firms, universities and other
research institutions. These companies and other institutions
may develop technologies and products that are more effective
than our product candidates or that would make our technology
and product candidates obsolete or non-competitive. Many of
these companies and other institutions have greater financial and

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technical resources and development, production
and marketing capabilities than we do. In addition, many of
these companies and other institutions have more experience than
we do in preclinical testing, human clinical trials and
manufacturing of new or improved biological therapeutics, as
well as in obtaining FDA and foreign regulatory approvals.


Various companies are developing or
commercializing products that are used for the treatment of
melanoma, colon cancer and other diseases that we have targeted
for product development. Some of these products use therapeutic
approaches that may compete directly with our product
candidates. These companies may succeed in obtaining approvals
from the FDA and foreign regulatory authorities for their
products sooner than we do for ours.

We are aware of a number of competitive products
currently available in the marketplace or under development for
the prevention and treatment of the diseases we have targeted
for product development. Products marketed in the United States
and elsewhere for melanoma include Chiron Corporations
Proleukin® (IL-2), Schering-Plough Corporations
IntronA® (interferon alpha) and Bayer AGs
chemotherapeutic agent dacarbazine. Despite the side effects
associated with these chemotherapy and biotherapy products,
these products are currently being used in the treatment of
patients with melanoma. In addition, Corixa Corporations
Melacine® has been approved in Canada for the treatment of
melanoma, however, Corixa recently announced that it is
discontinuing the development of Melacine in the United States
for melanoma. A number of other potential competitors are
developing immunotherapeutics and other approaches for the
treatment of melanoma, including Progenics
Pharmaceuticals, Inc.s GMKTM,
Antigenics, Inc.s Oncophage®, Maxim
Pharmaceutical, Inc.s CepleneTM,
Celgene, Inc.s RevimidTM and
Genta, Inc.s GenasenseTM, which are all in
Phase 3 clinical trials. In November 2003, Maxim announced
that it has filed for European approval to market Ceplene, in
combination with interleukin-2 for the treatment of advanced
malignant melanoma in patients with liver metastases, and in
February 2004, Genta announced that the FDA had accepted for
priority review a new drug application for Genasense, for use in
combination with dacarbazine for the treatment of patients with
advanced malignant melanoma. Oncophage, Ceplene, Revimid and
Genasense are all being studied in patients with metastatic
melanoma, but none of these clinical trials require that
patients undergo surgical resection to remove all clinically
detectable disease prior to the initiation of their treatment.
This is contrasted with patients who are being studied in
Canvaxins Phase 3 clinical trials, who have their
tumors and all clinically detectable metastases resected. If we
receive approval to market and sell Canvaxin, we may compete
with these companies and their products as well as other
products in varying stages of development. In addition,
researchers are continually learning more about the treatment of
melanoma and other forms of cancer, and new discoveries may lead
to new technologies for treatment. As a result, Canvaxin, or any
other product candidates that we may develop, may be rendered
obsolete and noncompetitive.

Various companies are currently marketing or
developing biopharmaceutical products that may compete with our
product candidates that target colon cancer. Canvaxin and other
product candidates we may develop are subject to competition in
the treatment of colon cancer from a number of products already
approved and on the market, including the following
chemotherapy products: AstraZeneca PLCs Tomudex®,
Hoffmann-LaRoche Inc.s Xeloda® (capecitabine),
Immunex Corporations Leucovorin® calcium, Pfizer,
Inc.s Camptosar® (irinotecan) and Aduracil®
(5-FU) and Sanofi-Synthelabo Groupes EloxatinTM
(oxaliplatin). In February 2004, the FDA approved a BLA for
Imclone Systems, Inc.s ErbituxTM, a monoclonal
antibody directed at the epidermal growth factor receptor, for
use in combination with Camptosar® for the treatment of
colorectal cancer. In the same month, the FDA also approved a
BLA for Genentech, Inc.s AvastinTM, a
therapeutic antibody designed to inhibit vascular endothelial
growth factor, for use in combination with the
IFL chemotherapy regimen (5-FU/ Leucovorin/ irinotecan) for
the treatment of colorectal cancer. Other product candidates
currently in late stages of development for the treatment of
colorectal cancer include Antigenics, Inc.s
OncophageTM, Aphton Corporations
G-17TM, AVI BioPharma, Inc.s
AvicineTM, GlaxoSmithKlines
EniluracilTM, Intracel Corporations
OncovaxTM and Titan Pharmaceuticals Inc.s
CeaVacTM. We also face competition from a number of
companies working in the fields of anti-angiogenesis and
specific active immunotherapy for the treatment of other solid
tumor cancers, and working to develop technologies similar to
the T-oligonucleotides that use internal cellular

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mechanisms to regulate cell responses to treat
cancer. We expect that competition among such products approved
for sale will be based on various factors, including product
efficacy, safety, reliability, availability, price and patent
position.


We are subject to uncertainty relating to
health care reform measures and reimbursement policies which, if
not favorable to our product candidates, could hinder or prevent
our product candidates commercial success.

The continuing efforts of the government,
insurance companies, managed care organizations and other payors
of health care costs to contain or reduce costs of health care
may adversely affect:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | our ability to generate revenues and achieve
    profitability;                                       
|
| |  | the future revenues and profitability of our
    potential customers, suppliers and collaborators; and
|
| |  | the availability of capital.                                                                          

In certain foreign markets, the pricing of
prescription pharmaceuticals is subject to government control.
In the United States, given recent federal and state government
initiatives directed at lowering the total cost of health care,
the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of
prescription pharmaceuticals and on the reform of the Medicare
and Medicaid systems. For example, legislation was enacted on
December 8, 2003, which provides a new Medicare
prescription drug benefit beginning in 2006 and mandates other
reforms. While we cannot predict the full effects of the
implementation of this new legislation or whether any
legislative or regulatory proposals affecting our business will
be adopted, the implementation of this legislation or
announcement or adoption of these proposals could have a
material and adverse effect on our business, financial condition
and results of operations.

Our ability to commercialize our product
candidates successfully will depend in part on the extent to
which governmental authorities, private health insurers and
other organizations establish appropriate reimbursement levels
for the cost of our products and related treatments. Third-party
payors are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed
health care in the United States, which could significantly
influence the purchase of health care services and products, as
well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for
our product candidates or exclusion of our product candidates
from reimbursement programs. The cost containment measures that
health care payors and providers are instituting and the effect
of any health care reform could materially and adversely affect
our results of operations.

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

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



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | our ability to provide acceptable evidence of
    safety and efficacy;                         
|
| |  | convenience and ease of administration;                                                        
|
| |  | prevalence and severity of adverse side effects;                                               
|
| |  | availability of alternative treatments;                                                        
|
| |  | cost effectiveness;                                                                            
|
| |  | effectiveness of our marketing strategy and the
    pricing of any product that we may develop;
|
| |  | publicity concerning our products or competitive
    products; and                             
|
| |  | our ability to obtain third-party coverage or
    reimbursement.                               

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Even if we receive regulatory approval and
satisfy the above criteria for Canvaxin or any of our other
product candidates, physicians may be reluctant to recommend, or
patients may be reluctant to use, our products. One reason for
this reluctance may be concerns about the side effects
associated with Canvaxin, which include blistering, stinging,
itching and redness at the site of injection, flu-like symptoms
and a decrease in energy. Side effects, such as allergic
reactions, may also be associated with BCG, which we administer
to patients with the first two doses of Canvaxin. The treatment
protocol for Canvaxin, which includes a total of 33 doses
over five years, may limit physician and patient acceptance of
the product. During the course of treatment with Canvaxin,
patients will be advised not to receive treatment with products,
such as chemotherapy, that suppress the immune system because
those treatments could reduce the effectiveness of Canvaxin.
Patients may be unwilling to forego chemotherapy treatment and
their physicians may be unwilling to recommend foregoing such
treatment.

In the event Canvaxin does not achieve market
acceptance for one indication, such as advanced-stage melanoma,
it may be even more difficult to promote Canvaxin for other
indications, such as colon cancer. If any product that we may
develop fails to achieve market acceptance, we may not be able
to successfully market and sell the product, which would limit
our ability to generate revenue and could materially and
adversely affect our results of operations.

If we are unable to establish our sales,
marketing and distribution capabilities, we will be unable to
successfully commercialize our product candidates.

To date, we have no experience as a company in
selling, marketing or distributing biological products. If we
are successful in developing and obtaining regulatory approvals
for Canvaxin or our other product candidates, we will need to
establish sales, marketing and distribution capabilities.
Developing an effective sales and marketing force will require a
significant amount of our financial resources and time. We may
be unable to establish and manage an effective sales force in a
timely or cost-effective manner, if at all, and any sales force
we do establish may not be capable of generating demand for
Canvaxin or our other product candidates. Although we intend to
establish strategic collaborations to market our products
outside the United States, if we are unable to establish such
collaborations, we may be required to market our product
candidates outside of the United States directly. In that event,
we may need to build a corresponding international sales and
marketing capability with technical expertise and with
supporting distribution capabilities.

We currently plan to distribute Canvaxin from our
manufacturing facility in pressurized liquid nitrogen storage
containers which will require any distribution service we retain
to comply with exacting standards and precise specifications in
order to preserve Canvaxin in the appropriate form for
administration to patients. Although there are several
distributors that could potentially meet our requirements for
the handling, storage and distribution of Canvaxin, we may be
unable to obtain distribution services on economically viable
terms, or at all. Any failure to comply with the precise
handling and storage requirements for Canvaxin by our
distribution service or any medical facility that may store
Canvaxin prior to administration to patients could adversely
affect its quality and, as a result, materially and adversely
affect our results of operations.

If we are required to seek alternative sources
for bacillus Calmette-Guérin, our clinical trials and/or
marketing of Canvaxin could be disrupted.

We are currently dependent on a sole source
supplier, Organon Teknika Corporation, for the strain of BCG
that we administer to patients with the first two doses of
Canvaxin. Our supply agreement with Organon Teknika had an
initial term of one year beginning in April 1998, with automatic
renewals for successive one year terms. Under some
circumstances, Organon Teknika can terminate the agreement if we
fail to purchase BCG for specified periods of time. However, we
have purchased BCG recently, which should preserve our agreement
with Oganon Teknika for the foreseeable future. The FDA may
require that if the manufacturing source of BCG is changed,
comparability be demonstrated before patients may be
administered BCG from the alternative source with Canvaxin. If
required, the demonstration of comparability may require
additional clinical trials to be conducted. There may be similar
requirements if we change our suppliers for other components. We
may not be able to demonstrate comparability and the

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effort to do so may require significant
expenditures of time and money, which could have a material and
adverse effect on our results of operations.


Organon Teknika is also subject to FDA rules and
regulations. Therefore, our ability to continue to purchase BCG
from Organon Teknika could be significantly delayed or halted
completely if Organon Teknika failed to comply with applicable
regulatory requirements or if the FDA or another regulatory
agency instituted a hold on the manufacture of BCG. In addition,
Organon Teknika may supply BCG to a number of significant
purchasers and may in the future experience capacity constraints
that would cause it to limit the quantity of BCG that we can
purchase. Organon Teknika manufactures BCG at a single location.
Any interruption or unavailability of this critical adjuvant
used with the first two doses of Canvaxin would delay or prevent
us from completing our clinical trials and commercializing
Canvaxin.

We may encounter difficulties managing our
growth, which could adversely affect our results of
operations.

We will need to expand and effectively manage our
organization, operations and facilities in order to successfully
pursue our research, development and commercialization efforts
and secure collaborations to market and distribute our products.
We increased the number of our full-time employees from 22 as of
December 31, 2000 to 151 as of December 31, 2003, and
we expect the number of employees to continue to grow to meet
our strategic objectives. If we continue to grow, it is possible
that our management and scientific personnel, systems and
facilities currently in place may not be adequate. Our need to
effectively manage our operations, growth and various projects
requires that we continue to improve our operational, financial
and management controls, reporting systems and procedures and to
attract and retain sufficient numbers of talented employees. We
may be unable to successfully implement these tasks on a larger
scale and, accordingly, may not achieve our research,
development and commercialization goals.

If we do not successfully integrate the
operations of any future acquisitions, we may incur unexpected
costs and disruptions to our business.

In 2002, we acquired Cell-Matrix, Inc., a
privately held biotechnology company specializing in the field
of angiogenesis. We may acquire additional complementary
companies. Future acquisitions may entail numerous operational
and financial risks, including:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | exposure to unknown liabilities;                                                                                                      
|
| |  | disruption of our business and diversion of our
    managements time and attention to developing acquired
    technologies;          
|
| |  | increased amortization expenses;                                                                                                      
|
| |  | higher than expected acquisition and integration
    costs;                                                                           
|
| |  | difficulty and cost in combining the operations
    and personnel of acquired businesses with our operations and
    personnel;       
|
| |  | impairment of relationships with key suppliers or
    customers of acquired businesses due to changes in management
    and ownership;
|
| |  | inability to retain key employees of acquired
    businesses; and                                                                     
|
| |  | incurrence of substantial debt or dilutive
    issuances of securities to pay for acquisitions.                                       

Although we periodically engage in preliminary
discussions with respect to acquisitions of companies, we are
not currently a party to any agreements or commitments and we
have no understandings with respect to any such acquisitions.

If we are unable to retain our management,
scientific staff and scientific advisors or to attract
additional qualified personnel, our product development efforts
will be seriously jeopardized.

We have a consulting agreement with our founder,
Donald L. Morton, M.D. This agreement expires in December
2004, and Dr. Morton will thereafter be able to develop
products that compete with

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Canvaxin and our other product candidates. In
addition, Dr. Morton has retained the right to use the cell
lines in Canvaxin for the diagnosis or detection of cancer.


The loss of the services of any principal member
of our management and scientific staff, including David F. Hale,
our President and Chief Executive Officer, and John
Petricciani, M.D., our Senior Vice President, Medical and
Regulatory Affairs, could significantly delay or prevent the
achievement of our scientific and business objectives.
Mr. Hales employment agreement expires in October
2005, and Dr. Petriccianis employment agreement
expires in January 2005. Competition among biotechnology
companies for qualified employees is intense, and the ability to
retain and attract qualified individuals is critical to our
success. For example, it took more than six months to fill
executive positions in our research, quality and manufacturing
areas. We may be unable to attract and retain key personnel on
acceptable terms, if at all. We do not maintain key
person life insurance on any of our officers, employees or
consultants, including Mr. Hale or Drs. Morton and
Petricciani.

We have relationships with scientific advisors at
academic and other institutions, some of whom conduct research
at our request or assist us in formulating our research,
development or clinical strategy. These scientific advisors are
not our employees and may have commitments to, or consulting or
advisory contracts with, other entities that may limit their
availability to us. We have limited control over the activities
of these scientific advisors and can generally expect these
individuals to devote only limited time to our activities.
Failure of any of these persons to devote sufficient time and
resources to our programs could harm our business. In addition,
these advisors may have arrangements with other companies to
assist those companies in developing technologies that may
compete with our products.

Any claims relating to our improper handling,
storage or disposal of biological, hazardous and radioactive
materials could be time-consuming and costly.

Our research and development involves the
controlled use of biological, hazardous and radioactive
materials and waste. We are subject to federal, state and local
laws and regulations governing the use, manufacture, storage,
handling and disposal of these materials and waste products.
Although we believe that our safety procedures for handling and
disposing of these materials comply with legally prescribed
standards, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. In the event of an
accident, we could be held liable for damages or penalized with
fines, and this liability could exceed our resources. We may
have to incur significant costs to comply with future
environmental laws and regulations.

Product liability claims may damage our
reputation and, if insurance proves inadequate, the product
liability claims may harm our business.

We may be exposed to the risk of product
liability claims that is inherent in the manufacturing, testing
and marketing of therapies for treating people with cancer or
other diseases. A product liability claim may damage our
reputation by raising questions about a products safety
and efficacy and could limit our ability to sell one or more
products by preventing or interfering with product
commercialization.

Product liability claims may stem from side
effects that are associated with Canvaxin, including blistering,
stinging, itching and redness at the site of injection and a
decrease in energy. Some patients have experienced flu-like
symptoms, including headache, muscle aches, joint aches, fever,
nausea, diarrhea, vomiting, cough, chills and loss of appetite,
as well as irritation and ulceration at the injection sites. A
small number of patients who received Canvaxin have had a drop
in the number of white blood cells in their blood or developed
white patches on their skin. Two patients out of approximately
3,000 who have received Canvaxin experienced degeneration of
part of their retinas. In addition, although Canvaxin is treated
with radiation to prevent the melanoma cells in Canvaxin from
replicating when administered to patients, there is a
theoretical possibility that these cells may develop into a
tumor after injection. There is also a small possibility that
Canvaxin may contain unidentified agents, such as bacteria or
viruses, which could cause infections or other diseases, or that
patients could have an allergic reaction to Canvaxin. Side
effects may also be associated with BCG, which we administer to
patients with the first two doses of Canvaxin. BCG is also used
to prevent tuberculosis and some patients treated with BCG have
developed

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serious complications such as an infection with
BCG or a severe muscle and nerve weakness known as Guillain
Barre syndrome. To date, neither of these complications has been
reported in patients who received BCG with Canvaxin. However,
both Canvaxin and BCG are investigational for treating
metastatic melanoma and may have other side effects that have
not been seen or predicted. While we would expect to provide
adequate disclosure to patients of the potential for adverse
side effects, we cannot be sure that we will be able to do so or
that we will be able to avoid the cost and expense of defending
product liability claims.


Although we have product liability and clinical
trial liability insurance with coverage limits of
$5 million, this coverage may be inadequate, or may be
unavailable in the future on acceptable terms, if at all.
Defending a suit, regardless of its merit, could be costly and
could divert management attention.



| |                                                                  
| | -----------------------------------------------------------------
| | Risks Related to Our Financial Results and
    Need for Financing

We have a history of net losses, which we
expect to continue for at least several years and, as a result,
we are unable to predict the extent of any future losses or when
we will become profitable.

We have incurred $94.8 million in net losses
from our inception through December 31, 2003. To date, we
have recognized no revenues and we do not anticipate generating
significant revenues for at least several years. We expect to
increase our operating expenses over the next several years as
we expand the clinical trials for Canvaxin, advance other
product candidates into clinical trials, expand our research and
development activities, acquire or license new technologies and
product candidates and scale up our manufacturing and quality
operations. As a result, we expect to continue to incur
significant and increasing operating losses for the foreseeable
future. Because of the numerous risks and uncertainties
associated with our product development efforts, we are unable
to predict the extent of any future losses or when we will
become profitable, if at all.

If we fail to obtain the capital necessary to
fund our operations, we will be unable to develop or
commercialize Canvaxin or other product candidates.

We will need to raise additional capital in order
to expand the clinical trials for Canvaxin, advance other
product candidates into clinical trials and expand our research
and development activities. Our ability to scale up our
manufacturing and quality operations and respond to competitive
pressures could be significantly limited if we are unable to
obtain the necessary capital. We do not know whether additional
financing will be available when needed, or whether it will be
available on favorable terms or at all. Our future capital
requirements will depend on, and could increase significantly as
a result of, many factors, including:



| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the expansion of clinical testing for Canvaxin;                                                                                                  
|
| |  | progress in preclinical development and clinical
    trials for our other product candidates;                                                    
|
| |  | the time and costs involved in obtaining and
    maintaining regulatory approvals for Canvaxin and our other
    product candidates;             
|
| |  | progress in, and the costs of, our research and
    development programs;                                                                        
|
| |  | the scope, prioritization and number of programs
    we pursue;                                                                                  
|
| |  | the costs involved in preparing, filing,
    prosecuting, maintaining, enforcing and defending patent and
    other intellectual property claims;
|
| |  | the costs of expanding our manufacturing
    capabilities;                                                                                       
|
| |  | our ability to enter into corporate
    collaborations and the terms and success of these collaborations;                                        
|
| |  | our acquisition and development of technologies
    and product candidates; and                                                                  
|
| |  | competing technological and market developments.                                                                                                 

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If adequate funds are not available, we may be
required to delay, reduce the scope of or eliminate one or more
of our research or development programs or our commercialization
efforts.

We currently have no source of revenue and may
never become profitable.

Our ability to generate revenue depends on a
number of factors, including our ability to successfully
complete our ongoing Phase 3 clinical trials for Canvaxin
and obtain regulatory approvals to commercialize this product
candidate. To date, Canvaxin has not generated any revenue, and
we do not know when or if any of our product candidates will
generate revenue. Even if Canvaxin receives regulatory
approvals, we will need to establish and maintain sales,
marketing and distribution capabilities. We plan to rely on
strategic collaborators to help generate revenues in markets
outside of the United States, and, potentially, to co-promote
our products in the United States, and we cannot be sure that
our collaborations, if any, will be successful. Even if we are
able to commercialize Canvaxin, we may not achieve profitability
for at least several years after generating material revenue. If
we are unable to generate revenue, we may not become profitable,
and we may be unable to continue our operations.

Our quarterly operating results and stock
price may fluctuate significantly.

We expect our results of operations to be subject
to quarterly fluctuations. The level of our revenues, if any,
and results of operations at any given time, will be based
primarily on the following factors:



| |   |                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the status of development of Canvaxin and our
    other product candidates;                                                                                                                                                         
|
| |  | the time at which we enter into research and
    license agreements with strategic collaborators that provide for
    payments to us, and the timing and accounting treatment of
    payments to us, if any, under those agreements;
|
| |  | whether or not we achieve specified research or
    commercialization milestones under any agreement that we enter
    into with collaborators and the timely payment by commercial
    collaborators of any amounts payable to us; 
|
| |  | the addition or termination of research programs
    or funding support;                                                                                                                                                            
|
| |  | the timing of milestone and other payments that
    we may be required to make to others; and                                                                                                                                       
|
| |  | variations in the level of expenses related to
    our product candidates or potential product candidates during
    any given period.                                                                                              

These factors may cause the price of our stock to
fluctuate substantially. We believe that quarterly comparisons
of our financial results are not necessarily meaningful and
should not be relied upon as an indication of our future
performance.



| |                                                              
| | -------------------------------------------------------------
| | Risks Related to Our Intellectual Property and
    Litigation

Our success depends upon our ability to
protect our intellectual property and our proprietary
technology.

The patent protection of our product candidates
and technology is generally very uncertain and involves complex
legal and factual questions. We cannot be certain that any of
the patents or patent applications related to our products and
technology will provide adequate protection from competing
products. Our success will depend, in part, on whether we can:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | obtain and maintain patents to protect our
    product candidates;                                               
|
| |  | obtain and maintain licenses to use certain
    technologies of third parties, which may be protected by patents;
|
| |  | protect our trade secrets and know-how; and                                                                      
|
| |  | operate without infringing the intellectual
    property and proprietary rights of others.                       

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We hold exclusive rights to commercialize the
technology under the patents related to Canvaxin for the
treatment or prevention of cancer in humans under a contribution
and exchange agreement between us and Donald L.
Morton, M.D. and a license agreement, and amendments to
that agreement, between us and Cancer Diagnostic
Laboratories, Inc., a company wholly-owned by
Dr. Morton. Cancer Diagnostic Laboratories has retained the
rights to this patented technology for diagnostic applications,
and has retained the right to control the prosecution of these
diagnostic patent applications. However, we have obtained rights
to the diagnostic applications under Cancer Diagnostic
Laboratories patents and patent applications where necessary for
us to treat or prevent cancer in humans.

In addition, we hold rights to commercialize our
anti-angiogenesis product candidates and our rights to
additional cell lines for the development of cancer vaccines
under agreements that require, among other things, royalty
payments on future sales, if any, and our achievement of certain
development milestones. We hold rights to three human monoclonal
antibodies under a license from M-Tech Therapeutics, which can
be terminated if we determine not to file and obtain approval of
an IND application for a licensed product by a specified date
and conduct clinical trials for such product, or if we determine
not to file and obtain approval of an IND application for a
licensed product by a specified date because of negative
pre-clinical results. We hold rights to certain
T-oligonucelotide technology under a sublicense agreement from
SemaCo, which can be terminated if we fail to perform any of the
obligations that we are required to perform under that
agreement, including using commercially reasonable efforts to
develop commercially viable products based on the licensed
technology.

We are party to a collaboration agreement with
Applied Molecular Evolution, Inc., or AME, under which AME
utilized their technology to humanize two of our antibodies.
AME, which recently completed a merger with Eli Lilly and
Company, may terminate the agreement if we fail to make
milestone or royalty payments to AME or if we fail to file an
IND application for one or more products that incorporate or are
derived from one or more of the antibodies that are the subject
of the agreement or fail to meet certain other specified
commercial development obligations. In the event of such
termination, we will be required to grant to AME an exclusive
license under all of our patent rights relating to the
antibodies that are the subject of this agreement and the
products that incorporate or are derived from one or more of the
antibodies that are the subject of the agreement. If we were to
materially breach any of the agreements discussed above or any
of our other license and collaboration agreements, we could lose
our ability to commercialize the related technologies, and our
business could be materially and adversely affected.

We cannot be certain that patents will be issued
on our anti-angiogenesis product candidates or on our
T-oligonucleotide technology as a result of pending applications
filed to date. If a third party has also filed a patent
application relating to an invention claimed by us or our
licensors, we may be required to participate in an interference
proceeding declared by the U.S. Patent and Trademark Office
to determine priority of invention, which could result in
substantial uncertainties and cost for us, even if the eventual
outcome is favorable to us. The degree of future protection for
our proprietary rights is uncertain. For example:



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we might not have been the first to make the
    inventions covered by each of our pending patent applications;                                                                                                                                                                                   
|
| |  | we might not have been the first to file patent
    applications for these inventions;                                                                                                                                                                                                            
|
| |  | others may independently develop similar or
    alternative technologies or duplicate any of our technologies;                                                                                                                                                                                    
|
| |  | it is possible that none of our pending patent
    applications will result in issued patents;                                                                                                                                                                                                    
|
| |  | any patents under which we hold rights may not
    provide us with a basis for commercially-viable products, may
    not provide us with any competitive advantages or may be
    challenged by third parties as not infringed, invalid, or
    unenforceable under United States or foreign laws;

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| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | any of the issued patents under which we hold
    rights may not be valid or enforceable; or
|
| |  | we may not develop additional proprietary
    technologies that are patentable.             

Proprietary trade secrets and unpatented know-how
are also very important to our research, development and
manufacturing activities. However, we cannot be certain that
others will not develop the same or similar technologies on
their own. Although we have taken steps, including entering into
confidentiality and intellectual property disclosure agreements
with all of our employees to protect our trade secrets and
unpatented know-how and keep them secret, third parties may
still obtain this information. In particular, before we obtained
commercial development rights to Canvaxin and related
technology, development of some of the related technology was
carried out at UCLA Medical Center and JWCI over a period of
15 years. While we have agreements with these parties
designed to protect our trade secrets and know-how, these
agreements may not be sufficient to prevent all parties who have
had access to this proprietary information over the years from
using this information to compete with us.

If our products violate third party patents or
were derived from a patients cell lines without the
patients consent, we could be forced to pay royalties or
cease selling our products.

We know that others have filed patent
applications in various countries that relate to several areas
in which we are developing products. Some of these patent
applications have already resulted in patents and some are still
pending. The pending patent applications may also result in
patents being issued. In addition, since patent applications are
secret until patents are issued in the United States, or
corresponding applications are published in foreign countries,
and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, we cannot be
certain that Dr. Morton, from whom we have acquired the
patent rights for Canvaxin, was the first to make his inventions
or to file patent applications for those inventions. Issued
patents are entitled to a rebuttable presumption of validity
under the laws of the United States and certain other countries.
These issued patents may therefore limit our ability to develop
commercial products. If we need licenses to such patents to
permit us to develop or market our product candidates, we may be
required to pay significant fees or royalties and we cannot be
certain that we would be able to obtain such licenses at all.

It is the standard policy of the UCLA Medical
Center and JWCI to obtain each patients consent to use
their tumor cell lines. However, we cannot be certain that all
of these consents were obtained. If any of the cell lines that
comprise Canvaxin or the other cell lines derived from human
tumors that we have acquired were derived from a patient without
his or her consent, that patient or his or her estate could
assert a claim for royalties on the use of the cell line or
prevent us from selling our products.

We may be involved in lawsuits or proceedings
to protect or enforce our patent rights, trade secrets or
know-how, which could be expensive and time consuming.

There has been significant litigation in the
biotechnology industry over patents and other proprietary
rights. One of our issued European patents covering Canvaxin was
challenged in Europe by Boehringer Ingelheim GmbH.

While we prevailed in the opposition proceeding
and the appeal by Boehringer Ingelheim was rejected on
procedural grounds, our patents and patents that we have
licensed the rights to may be the subject of other challenges by
our competitors in Europe, the United States and elsewhere.
Furthermore, our patents and the patents that we have licensed
the rights to may be circumvented or challenged and declared
narrow in scope, invalid or unenforceable.

Legal standards relating to the scope of claims
and the validity of patents in the biotechnology field are still
evolving, and no assurance can be given as to the degree of
protection any patents issued to or licensed to us would
provide. The defense and prosecution of intellectual property
suits and related legal and administrative proceedings can be
both costly and time consuming. Litigation and interference
proceedings could result in substantial expense to us and
significant diversion of effort by our technical and management
personnel. Further, the outcome of patent litigation is subject
to uncertainties that cannot be adequately quantified in
advance, including the demeanor and credibility of witnesses and
the identity of

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the adverse party. This is especially true in
biotechnology related patent cases that may turn on the
testimony of experts as to technical facts upon which experts
may reasonably disagree. An adverse determination in an
interference proceeding or litigation, particularly with respect
to Canvaxin, to which we may become a party could subject us to
significant liabilities to third parties or require us to seek
licenses from third parties. If required, the necessary licenses
may not be available on acceptable terms or at all. Adverse
determinations in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from
commercializing our product candidates, which could have a
material and adverse effect on our business, financial condition
and results of operations.




| |                                                                              
| | -----------------------------------------------------------------------------
| | Risks Related to the Securities Markets and
    Ownership of Our Common Stock

Future sales of our common stock may cause our
stock price to decline.

Our current stockholders hold a substantial
number of shares of our common stock that they will be able to
sell in the public market in the near future. A significant
portion of these shares are held by a small number of
stockholders. Sales by our current stockholders of a substantial
number of shares could significantly reduce the market price of
our common stock. Moreover, the holders of approximately
14,481,602 shares of common stock, including shares issued
upon the exercise of warrants, will have rights, subject to some
conditions, to require us to file registration statements
covering their shares or to include their shares in registration
statements that we may file for ourselves or other stockholders.
We have registered all common stock that we may issue under our
stock incentive plans and employee stock purchase plan. These
shares generally can be freely sold in the public market upon
issuance. In addition, directors, officers and all persons known
to us to hold of record 5% or more of our outstanding shares of
common stock prior to our initial public offering have agreed
under lock-up agreements, subject to specified exceptions, not
to, directly or indirectly, offer, sell or otherwise dispose of
any shares of our common stock without the prior written consent
of Lehman Brothers Inc. for a period of 180 days from
October 29, 2003. If any of these holders cause a large
number of securities to be sold in the public market, the sales
could reduce the trading price of our common stock. These sales
also could impede our ability to raise future capital.

Our stock price may be volatile, and you may
lose all or a substantial part of your investment.

The market price for our common stock is
volatile, in part because our shares have only recently become
publicly traded. In addition, the market price of our common
stock may fluctuate significantly in response to a number of
factors, most of which we cannot control, including:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in the regulatory status of our product
    candidates, including results of our clinical trials for
    Canvaxin, significant contracts, new technologies, acquisitions,
    commercial relationships, joint ventures or capital commitments;
|
| |  | fluctuations in stock market prices and trading
    volumes of similar companies;                                                                                                                                                                     
|
| |  | variations in our quarterly operating results;                                                                                                                                                                                                        
|
| |  | changes in securities analysts estimates of
    our financial performance;                                                                                                                                                                           
|
| |  | changes in accounting principles;                                                                                                                                                                                                                     
|
| |  | sales of large blocks of our common stock,
    including sales by our executive officers, directors and
    significant stockholders;                                                                                                                 
|
| |  | additions or departures of key personnel; and                                                                                                                                                                                                         
|
| |  | discussion of CancerVax or our stock price by the
    financial and scientific press and online investor communities
    such as chat rooms.                                                                                                          

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We may incur increased costs as a result of
recently enacted and proposed changes in laws and
regulations.

Recently enacted and proposed changes in the laws
and regulations affecting public companies, including the
provisions of the Sarbanes-Oxley Act of 2002 and rules proposed
by the Securities and Exchange Commission and by the Nasdaq
Stock Market, could result in increased costs to us. The new
rules could make it more difficult or more costly for us to
obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of
these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors,
our board committees or as executive officers. We are presently
evaluating and monitoring developments with respect to new and
proposed rules and cannot predict or estimate the amount of the
additional costs we may incur or the timing of such costs.

If our officers and directors choose to act
together, they may be able to control our management and
operations, acting in their best interests and not in the best
interests of other stockholders.

As of December 31, 2003, our officers and
directors beneficially owned approximately 38.0% of our common
stock. As a result, these stockholders, acting together, can
significantly influence all matters requiring approval by our
stockholders, including the election of directors and the
approval of mergers or other business combination transactions.
The interests of this group of stockholders may not always
coincide with our interests or the interests of other
stockholders, and they may act in a manner that advances their
best interests and not necessarily those of other stockholders.

Anti-takeover provisions in our organizational
documents and Delaware law may discourage or prevent a change in
control, even if an acquisition would be beneficial to our
stockholders, which could affect our stock price adversely and
prevent attempts by our stockholders to replace or remove our
current management.

Our amended and restated certificate of
incorporation and amended and restated bylaws contain provisions
that may delay or prevent a change in control, discourage bids
at a premium over the market price of our common stock and
adversely affect the market price of our common stock and the
voting and other rights of the holders of our common stock.
These provisions include:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dividing our board of directors into three
    classes serving staggered three-year terms;                                                                  
|
| |  | prohibiting our stockholders from calling a
    special meeting of stockholders;                                                                            
|
| |  | permitting the issuance of additional shares of
    our common stock or preferred stock without stockholder approval;                                       
|
| |  | prohibiting our stockholders from making certain
    changes to our certificate of incorporation or bylaws except
    with 66 2/3% stockholder approval; and
|
| |  | requiring advance notice for raising matters of
    business or making nominations at stockholders meetings.                                               

We are also subject to provisions of the Delaware
corporation law that, in general, prohibit any business
combination with a beneficial owner of 15% or more of our common
stock for five years unless the holders acquisition of our
stock was approved in advance by our board of directors.

Future changes in financial accounting
standards or practices or existing taxation rules or practices
may cause adverse unexpected financial reporting fluctuations
and affect our reported results of operations.

A change in accounting standards or practices or
a change in existing taxation rules or practices can have a
significant effect on our reported results and may even affect
our reporting of transactions completed before the change is
effective. New accounting pronouncements and taxation rules and
varying interpretations of accounting pronouncements and
taxation practice have occurred and may occur in the future.
Changes to existing rules or the questioning of current
practices may adversely affect our reported

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financial results or the way we conduct our
business. For example, any changes requiring that we record
compensation expense in the statement of operations for employee
stock options using the fair value method or changes in existing
taxation rules related to stock options could have a significant
negative effect on our reported results. Several agencies and
entities are considering, and the Financial Accounting Standards
Board has announced, proposals to change generally accepted
accounting principles in the United States, that, if
implemented, would require us to record charges to earnings for
employee stock option grants. This pending requirement would
negatively impact our earnings. For example, if we accounted for
employee stock options under the fair value recognition
provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation, our net loss would have increased by
$1.1 million and $0.5 million for 2003 and 2002,
respectively.







|        |           
|------- | ----------
|Item 2. | Properties

We entered into a ten-year lease, which commenced
in July 2002, for our corporate headquarters and research and
development facility of approximately 60,000 square feet located
in Carlsbad, California. We have options to renew this lease for
two additional periods of five years each. We believe that this
facility will suffice for our anticipated future corporate
headquarters and research and development requirements through
2005.

Our biologics manufacturing facility consists of
approximately 51,000 square feet of space located in the
Los Angeles, California, area. JWCI entered into an
original lease for 25,600 square feet of space in July
1999, with a commencement date in August 1999, which was
subsequently assigned to us. We entered into an amendment to our
lease to add 25,150 square feet of space at the same
address on October 1, 2001. Our lease is scheduled to
expire on August 14, 2011. We have an option to renew this
lease for an additional term of five years. In 2004 and 2005, we
plan to expand our production capabilities in this facility. The
capital expenditures associated with this expansion are
anticipated to be approximately $16 million, a significant
portion of which we intend to fund through new leasehold and
equipment financing. We believe that, following the planned
expansion, this facility will have sufficient capacity to
satisfy potential commercial demand for several years after we
launch Canvaxin.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not currently a party to any material
legal proceedings.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

On October 9, 2003, our stockholders acted
by written consent to approve the following:



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a 1-for-4.4 reverse split of our common stock;                                                                                                                                                                    
|
| |  | our restated certificate of incorporation which,
    among other things, provided for authorized capital stock of
    75,000,000 shares of common stock and 10,000,000 shares of
    undesignated preferred stock;
|
| |  | our amended and restated bylaws;                                                                                                                                                                                  
|
| |  | the classification of our board of directors and
    the election of our directors to their respective classes;                                                                                                   
|
| |  | indemnification agreements to be entered into
    between us and our directors and executive officers;                                                                                                            
|
| |  | our 2003 equity incentive award plan and the
    reservation of 2,500,000 shares of common stock to be issued
    upon the exercise of awards granted thereunder; and                                             
|
| |  | our employee stock purchase plan and the
    reservation of 300,000 shares of common stock to initially be
    issued thereunder.                                                                                 

Stockholders holding an aggregate of
18,762,365 shares approved each of the above matters and
stockholders holding approximately 1,913,009 shares did not
vote with respect to such matters.

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PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and
    Related Stockholder Matters

Market Information

Our common stock has been traded on the Nasdaq
National Market since October 30, 2003 under the symbol
CNVX. Prior to such time, there was no public market for our
common stock. The following table sets forth the high and low
sales prices for our common stock as reported on the Nasdaq
National Market for the periods indicated.

|                                            |  |      |       |     |  |   |      | 
|------------------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|                                            |  | High |       | Low
|                                            |  |      |       |    
|Year Ended December 31, 2003                |  |      |       |     |  |   |      | 
|Fourth Quarter (beginning October 30, 2003) |  | $    | 13.24 |     |  | $ | 8.82 | 

As of March 10, 2004, there were
approximately 299 holders of record of our common stock.

Dividend Policy

We have never declared or paid cash dividends on
our capital stock. We currently intend to retain all available
funds and any future earnings for use in the operation and
expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.

Recent Sales of Unregistered
Securities

During the year ended December 31, 2003, we
issued and sold the following unregistered securities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In February 2003, we issued a warrant to purchase
    150,000 shares of our Vendor preferred stock, Series 1
    with an exercise price of $2.45 per share. Upon completion of
    our initial public offering on November 4, 2003, this
    warrant became exercisable for 34,091 shares of our common
    stock with an exercise price of $10.78 per share. The warrant
    was issued to a collaborator as partial consideration for the
    collaboration services from this party. This warrant had a fair
    value of $199,000, using the Black Scholes valuation model. The
    offer, sale, and issuance of the warrant was deemed to be exempt
    from registration under the Securities Act in reliance on
    Section 4(2) of the Securities Act in that the issuance of
    the warrant did not involve a public offering. The recipient of
    the warrant represented its intention to acquire the warrant for
    investment only and not with a view to or for sale in connection
    with any distribution thereof and an appropriate legend was
    affixed to the warrant issued in such transaction. The recipient
    of the warrant was an accredited person and had adequate access,
    through employment, business or other relationships, to
    information about us;
|
| |  | In August 2003, we issued and sold an aggregate
    of 20,572,789 shares of Series C preferred stock to
    institutional and accredited investors at a per share price of
    $2.01 for aggregate consideration of $41.2 million. Upon
    completion of our initial public offering on November 4,
    2003, these shares of Series C preferred stock were
    converted into 4,675,634 shares of common stock at a
    conversion price of $8.84 per share. The offer, sale, and
    issuance of the Series C preferred stock were deemed to be
    exempt from registration under the Securities Act in reliance on
    Rule 506 of Regulation D in that the issuance of
    securities to the accredited investors did not involve a public
    offering. The purchasers of securities in such transaction
    represented their intention to acquire the securities for
    investment only and not with a view to or for sale in connection
    with any distribution thereof and appropriate legends were
    affixed to the share certificates issued in such transaction.
    Each of the recipients of securities in the sale of
    Series C preferred stock were accredited investors under
    Rule 501 of Regulation D; and                                                         
|
| |  | Between January 1, 2003 and October 29,
    2003, we granted options to purchase 919,324 shares of
    common stock to employees, directors and consultants under our
    stock incentive plan at exercise prices ranging from $3.30 to
    $6.60 per share. During such time, 128,037 shares of common
    stock were purchased pursuant to exercises of stock options and
    no shares were repurchased and returned                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to the stock incentive plan option pool. The
    offers, sales, and issuances of the options and common stock
    were deemed to be exempt from registration under the Securities
    Act in reliance on Rule 701 in that the transactions were
    under compensatory benefit plans and contracts relating to
    compensation as provided under such rule. The recipients of such
    options and common stock were our employees, directors or bona
    fide consultants and received the securities under our stock
    incentive plan. Appropriate legends were affixed to the share
    certificates issued in such transactions. Each of these
    recipients had adequate access, through employment or other
    relationships, to information about us.

Use of Proceeds

Our initial public offering of common stock was
effected through a Registration Statement on Form S-1 (File
No. 333-107993) that was declared effective by the
Securities and Exchange Commission on October 29, 2003. On
November 4, 2003, 6,000,000 shares of common stock
were sold on our behalf at an initial public offering price of
$12.00 per share, for an aggregate offering price of
approximately $72.0 million, through a syndicate of
underwriters managed by Lehman Brothers Inc., Citigroup Global
Markets Inc., Thomas Weisel Partners LLC and U.S. Bancorp
Piper Jaffray Inc.

We paid to the underwriters underwriting
discounts and commissions totaling approximately
$5.0 million in connection with the offering. In addition,
we incurred additional expenses of approximately
$1.9 million in connection with the offering, which when
added to the underwriting discounts and commissions paid by us,
amounts to total expenses of approximately $6.9 million.
Thus, the net offering proceeds to us, after deducting
underwriting discounts and commissions and offering expenses,
were approximately $65.1 million. No offering expenses were
paid directly or indirectly to any of our directors or officers
(or their associates) or persons owning ten percent or more of
any class of our equity securities or to any other affiliates.

We have used approximately $5.6 million of
the net proceeds from the public offering to continue the
development of our specific active immunotherapeutic product
candidate, Canvaxin, and fund other working capital and general
corporate purposes. We expect to use the majority of the balance
of the net proceeds of the offering to continue the development
and prepare for the commercialization of our specific active
immunotherapy product candidate, Canvaxin, and to scale up our
manufacturing operations and quality systems. To a lesser
extent, we anticipate using the net proceeds from the offering
to:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expand our research and development programs;                                                                                                   
|
| |  | advance our preclinical anti-angiogenesis,
    T-oligonucleotide and human monoclonal antibody product
    candidates into clinical development;
|
| |  | in-license technology and acquire or invest in
    businesses, products or technologies that are complementary to
    our own; and              
|
| |  | fund other working capital and general corporate
    purposes.                                                                                  

Although we periodically engage in preliminary
discussions with respect to acquisitions, we are not currently a
party to any agreements or commitments and we have no
understandings with respect to any acquisitions.

The amounts and timing of our actual expenditures
depend on several factors, including the progress of our
research and development efforts and the amount of cash used by
our operations. We have not determined the amount or timing of
the expenditures in the areas listed above. Pending their use,
we intend to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments.

46



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|        |                                          
|------- | -----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data.

The Consolidated Statement of Operations Data and
Consolidated Balance Sheet Data presented below should be read
in conjunction with Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations,
and the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K. The Selected
Consolidated Quarterly Financial Data presented below has been
derived from our unaudited consolidated interim financial
statements which, in our opinion, have been prepared on
substantially the same basis as the audited consolidated
financial statements contained herein and include all normal
recurring adjustments necessary for a fair presentation of the
financial information for the periods presented. These unaudited
quarterly results should be read in conjunction with our audited
consolidated financial statements and related notes appearing
elsewhere in this Form 10-K. The operating results in any
quarter are not necessarily indicative of the results that may
be expected for any future period. Amounts are in thousands,
except per share amounts.

|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |     | 
|-------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---- | ------- | ------------------------ | - | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------ | ----- |  | - | ----- | --- | 
|                                                                                             |                                                          |      |         |                          |   |     
|                                                                                             |                                                          |      |         | Years Ended December 31, |   |     
|                                                                                             |                                                          |      |         |                          |   |     
|                                                                                             |                                                          | 2003 |         | 2002                     |   | 2001 |         | 2000   |   | 1999
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |     
|Consolidated Statement of Operations
    Data:                                               |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Operating expenses:                                                                          |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|                                                                                             | Research and development                                 |      | $       | 27,725                   |   |      | $       | 24,517 |   |      | $       | 13,910 |   |   | $      | 3,495 |  |   | $     | 329 | 
|                                                                                             | General and administrative                               |      |         | 6,826                    |   |      |         | 6,514  |   |      |         | 5,441  |   |   |        | 765   |  |   |       |    | 
|                                                                                             | Amortization of employee stock-based
    compensation(1) |      |         | 2,643                    |   |      |         | 1,412  |   |      |         |       |   |   |        |      |  |   |       |    | 
|                                                                                             | Purchased in-process research and development            |      |         |                         |   |      |         | 2,840  |   |      |         |       |   |   |        |      |  |   |       |    | 
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Total operating expenses                                                                     |                                                          |      | 37,194  |                          |   |      | 35,283  |        |   |      | 19,351  |        |   |   | 4,260  |       |  |   | 329   |    
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Other income (expense):                                                                      |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|                                                                                             | Option fee income                                        |      |         |                         |   |      |         |       |   |      |         |       |   |   |        | 1,000 |  |   |       |    | 
|                                                                                             | Interest income                                          |      |         | 553                      |   |      |         | 691    |   |      |         | 909    |   |   |        | 147   |  |   |       |    | 
|                                                                                             | Interest expense                                         |      |         | (932                     | ) |      |         | (621   | ) |      |         | (140   | ) |   |        |      |  |   |       |    | 
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Total other income (expense)                                                                 |                                                          |      | (379    | )                        |   |      | 70      |        |   |      | 769     |        |   |   | 1,147  |       |  |   |      |    
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Net loss                                                                                     |                                                          |      | (37,573 | )                        |   |      | (35,213 | )      |   |      | (18,582 | )      |   |   | (3,113 | )     |  |   | (329  | )  
|Accretion to redemption value of redeemable
    convertible preferred stock                  |                                                          |      | (7,867  | )                        |   |      | (7,635  | )      |   |      | (4,105  | )      |   |   |       |       |  |   |      |    
|Deemed dividend resulting from beneficial
    conversion feature on Series C preferred stock |                                                          |      | (14,775 | )                        |   |      |        |        |   |      |        |        |   |   |       |       |  |   |      |    
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Net loss applicable to common stockholders                                                   |                                                          | $    | (60,215 | )                        |   | $    | (42,848 | )      |   | $    | (22,687 | )      |   | $ | (3,113 | )     |  | $ | (329  | )  
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Basic and diluted net loss per share(2)(3)                                                   |                                                          | $    | (13.30  | )                        |   | $    | (153.85 | )      |   | $    | (266.02 | )      |   | $ | (0.58  | )     |  | $ | (0.06 | )  
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    
|Weighted average shares used to compute basic and
    diluted net loss per share(2)(3)       |                                                          |      | 4,527   |                          |   |      | 279     |        |   |      | 85      |        |   |   | 5,361  |       |  |   | 5,405 |    
|                                                                                             |                                                          |      |         |                          |   |      |         |        |   |      |         |        |   |   |        |       |  |   |       |    

47



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---



|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amortization of employee stock-based compensation
    is allocated among operating expense categories as follows for
    the years ended December 31, 2003 and 2002:

|                           |  |      |       |      |  |   |       | 
|-------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                           |  | 2003 |       | 2002
|                           |  |      |       |     
|Research and development   |  | $    | 838   |      |  | $ | 379   | 
|General and administrative |  |      | 1,805 |      |  |   | 1,033 | 
|                           |  |      |       |      |  |   |       | 
|                           |  |      | 2,643 |      |  |   | 1,412 | 
|                           |  |      |       |      |  |   |       | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | As a result of the conversion of our preferred
    stock into 20.1 million shares of our common stock upon
    completion of our initial public offering on November 4,
    2003, there is a lack of comparability in the basic and diluted
    net loss per share amounts for the years ended December 31,
    2003, 2002 and 2001. Please reference Note 1 to our
    consolidated financial statements included elsewhere in this
    Form 10-K for an unaudited pro forma basic and diluted net
    loss per share calculation for these periods.
|   
|(3) | In December 2000, we exchanged 6.0 million
    shares of our common stock for shares of Junior preferred stock
    on a 1-for-4.4 basis. Please reference Note 7 to our
    consolidated financial statements included elsewhere in this
    Form 10-K for further discussion.                                                                                                                                                                                                                                                                       

|                                                             |  |                    |          |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |      |  
|------------------------------------------------------------ |  | ------------------ | -------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ---- | -
|                                                             |  |                   
|                                                             |  | As of December 31,
|                                                             |  |                   
|                                                             |  | 2003               |          | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                             |  |                    |          |      |  |      |         |      |  |     
|Consolidated Balance Sheet Data:                             |  |                    |          |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |      |  
|Cash, cash equivalents and securities
    available-for-sale |  | $                  | 107,092  |      |  | $    | 36,201  |      |  | $    | 10,103  |   |  | $ | 29,194 |   |  | $ | 10   |  
|Total assets                                                 |  |                    | 127,007  |      |  |      | 55,187  |      |  |      | 20,795  |   |  |   | 32,854 |   |  |   | 10   |  
|Long-term debt, net of current portion                       |  |                    | 1,811    |      |  |      | 7,379   |      |  |      | 3,353   |   |  |   | 625    |   |  |   |     |  
|Redeemable convertible preferred stock                       |  |                    |         |      |  |      | 96,582  |      |  |      | 32,455  |   |  |   |       |   |  |   |     |  
|Accumulated deficit                                          |  |                    | (129,192 | )    |  |      | (68,977 | )    |  |      | (26,129 | ) |  |   | (3,442 | ) |  |   | (329 | )
|Total stockholders equity (deficit)                         |  |                    | 112,773  |      |  |      | (55,878 | )    |  |      | (20,663 | ) |  |   | 30,651 |   |  |   | (319 | )

|                                                    |  |                              |        |         |  |         |         |         |  |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ---------------------------- | ------ | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                                    |  |                             
|                                                    |  | Year Ended December 31, 2003
|                                                    |  |                             
|                                                    |  | First                        |        | Second  |  | Third   |         | Fourth 
|                                                    |  | Quarter                      |        | Quarter |  | Quarter |         | Quarter
|                                                    |  |                              |        |         |  |         |         |        
|Selected Consolidated Quarterly Financial
    Data: |  |                              |        |         |  |         |         |         |  |   |         |   |  |   |         |  
|Total operating expenses                            |  | $                            | 7,698  |         |  | $       | 8,451   |         |  | $ | 9,907   |   |  | $ | 11,138  |  
|Net loss                                            |  |                              | (7,816 | )       |  |         | (8,602  | )       |  |   | (10,013 | ) |  |   | (11,142 | )
|Net loss attributable to common stockholders        |  |                              | (9,966 | )       |  |         | (10,752 | )       |  |   | (27,357 | ) |  |   | (12,140 | )
|Basic and diluted net loss per common share         |  |                              | (27.72 | )       |  |         | (24.83  | )       |  |   | (57.14  | ) |  |   | (0.73   | )

|                                             |  |                              |         |         |  |         |         |         |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ---------------------------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- | -
|                                             |  |                             
|                                             |  | Year Ended December 31, 2002
|                                             |  |                             
|                                             |  | First                        |         | Second  |  | Third   |         | Fourth 
|                                             |  | Quarter                      |         | Quarter |  | Quarter |         | Quarter
|                                             |  |                              |         |         |  |         |         |        
|Total operating expenses                     |  | $                            | 10,489  |         |  | $       | 8,316   |         |  | $ | 8,182   |   |  | $ | 8,296   |  
|Net loss                                     |  |                              | (10,525 | )       |  |         | (8,204  | )       |  |   | (8,113  | ) |  |   | (8,371  | )
|Net loss attributable to common stockholders |  |                              | (11,710 | )       |  |         | (10,355 | )       |  |   | (10,262 | ) |  |   | (10,521 | )
|Basic and diluted net loss per common share  |  |                              | (72.24  | )       |  |         | (34.89  | )       |  |   | (32.46  | ) |  |   | (31.25  | )

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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and Results of Operations.

The following discussion contains
forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of various factors, including those set forth under the
caption Business  Risk Factors. This
Managements Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with our
consolidated financial statements and related notes included
elsewhere in this Form 10-K.

Overview

We are a biotechnology company focused on the
research, development and commercialization of novel biological
products for the treatment and control of cancer. Our lead
product candidate, Canvaxin, is one of a new class of products
being developed in the area of specific active immunotherapy,
also known as therapeutic cancer vaccines. Canvaxin is currently
in two Phase 3 clinical trials at 80 sites worldwide
for the treatment of advanced-stage melanoma. Canvaxin is based
on our proprietary specific active immunotherapy development
platform that uses human tumor cell lines that express a broad
array of tumor related antigens. Canvaxin has also been studied
in a Phase 1/2 clinical trial for advanced-stage colorectal
cancer, and we are finalizing the design of a Phase 2
clinical trial for patients with Stage III colon cancer.

In addition to Canvaxin, we have a number of
product candidates in research and preclinical development,
including three humanized monoclonal antibodies, three human
antibodies and six peptides that target various solid tumor
cancers. We also plan to identify and develop new product
candidates based on our proprietary specific active
immunotherapy, anti-angiogenesis, and T-oligonucleotide
technology platforms, our human monoclonal antibodies and other
technologies.

We were incorporated in Delaware in June 1998 and
have incurred net losses since inception. As of
December 31, 2003, our accumulated deficit was
approximately $129.2 million. We expect to incur
substantial and increasing losses for the next several years as
we:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continue the development and prepare for the
    commercialization of our specific active immunotherapy product
    candidate, Canvaxin;        
|
| |  | advance our preclinical anti-angiogenesis, human
    monoclonal antibody and T-oligonucleotide product candidates
    into clinical development;
|
| |  | scale up our manufacturing operations and quality
    systems;                                                                                  
|
| |  | expand our research and development programs; and                                                                                               
|
| |  | in-license technology and acquire or invest in
    businesses, products or technologies that are complementary to
    our own.                  

We have a limited history of operations. To date,
we have funded our operations primarily through sales of equity
securities as well as through equipment and leasehold
improvement financing.

We have retained worldwide commercialization
rights to Canvaxin and intend to market it through our own sales
force or with a co-promotion partner in the United States and
through strategic collaborations outside of the United States.
Agreements with potential collaborators may include joint
marketing or promotion arrangements. Alternatively, we may grant
exclusive marketing rights to potential collaborators in
exchange for up-front fees, milestones and royalties on future
sales, if any. We manufacture Canvaxin at our biologics
manufacturing facility located in the Los Angeles,
California area. We plan to expand the production capabilities
at our biologics manufacturing facility and anticipate capital
expenditures of approximately $16 million in 2004 and 2005
associated with this expansion. We intend to fund a significant
portion of these capital expenditures through new leasehold and
equipment financing. Upon completion of this expansion, we
believe our biologics manufacturing facility will have the
capacity to satisfy commercial demand for Canvaxin for several
years after the initial launch.

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Our business is subject to significant risks,
including the risks inherent in our ongoing clinical trials and
the regulatory approval process, the results of our research and
development efforts, competition from other products and
uncertainties associated with obtaining and enforcing patent
rights.

In January 2002, we completed the acquisition of
Cell-Matrix, Inc., a private company focused on developing
products and technologies in the field of angiogenesis, in a
transaction accounted for as a purchase. In connection with the
acquisition of Cell-Matrix, we paid cash of $0.1 million,
assumed $2.5 million of notes payable and issued
2.1 million shares of our acquisition preferred stock
valued at approximately $5.7 million, which converted into
approximately 0.5 million shares of our common stock upon
completion of our initial public offering on November 4,
2003. The operating results of Cell-Matrix are included in our
results of operations commencing as of the date of acquisition.
Upon completing the acquisition, we recorded goodwill of
$5.4 million and a charge for purchased in-process research
and development of $2.8 million.

Research and Development

Our research and development expenses consist
primarily of costs associated with the clinical trials of our
product candidates, compensation and other expenses for research
and development personnel, supplies and materials, costs for
consultants and related contract research, facility costs,
amortization of purchased technology and depreciation. We charge
all research and development expenses to operations as they are
incurred. Our research and development activities are primarily
focused on clinical trials of Canvaxin for advanced-stage
melanoma, the development of additional indications for Canvaxin
and the development of product candidates based on our
proprietary specific active immunotherapy, anti-angiogenesis and
T-oligonucleotide technology platforms. We are also developing
several human monoclonal antibodies that target various solid
tumor cancers.

From our inception through December 31,
2003, we incurred costs of approximately $68.0 million
associated with the research and development of Canvaxin,
representing over 97% of our research and development expenses
for all program areas. Included in the costs associated with the
research and development of Canvaxin are certain external costs
of our Phase 3 clinical trials for Canvaxin, including
payments made to clinical sites participating in the trials and
payments to third parties for data collection, management and
analysis services and clinical trial monitoring services, all of
which are recognized as research and development expenses. In
2003, we recognized $4.6 million of these external costs
associated with the Canvaxin Phase 3 clinical trials. While
difficult to predict, we estimate that we will incur at least an
additional $100 million in costs, including internal costs,
prior to the commercialization of Canvaxin.

We are unable to estimate with any certainty the
costs we will incur in the continued development of our other
product candidates for commercialization. However, we expect our
research and development costs to increase as we continue to
develop new applications for our proprietary specific active
immunotherapy technology, refine our manufacturing processes and
quality systems and move other product candidates through
preclinical and clinical trials.

Clinical development timelines, likelihood of
success and total costs vary widely. Although we are currently
focused primarily on advancing Canvaxin through Phase 3
clinical trials for advanced-stage melanoma, we anticipate that
we will make determinations as to which research and development
projects to pursue and how much funding to direct to each
project on an on-going basis in response to the scientific and
clinical success of each product candidate.

Product candidate completion dates and completion
costs vary significantly for each product candidate and are
difficult to estimate. The expenditure of substantial resources
will be required for the lengthy process of clinical development
and obtaining regulatory approvals as well as to comply with
applicable regulations. Any failure by us to obtain, or any
delay in obtaining, regulatory approvals could cause our
research and development expenditures to increase and, in turn,
have a material adverse effect on our results of operations. If
we obtain the requisite regulatory approval of Canvaxin, we
anticipate launching the product candidate in the United States
and Europe in 2006. Our projected launch date for Canvaxin in
the United States in 2006 is dependent upon the FDAs
acceptance of a positive result in one of our two

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ongoing Phase 3 clinical trials as
sufficient for marketing approval. Although the FDA typically
requires successful results in two Phase 3 clinical trials
to support marketing approval, the FDA has, on several
occasions, approved products based on a single Phase 3
clinical trial that demonstrates a high level of statistical
significance where there is an unmet need for a life-threatening
condition. In the event that the FDA requires the results of a
second Phase 3 clinical trial before accepting a marketing
application or before granting approval of Canvaxin, the launch
of Canvaxin would be delayed. We cannot be certain when any net
cash inflows from Canvaxin or any of our other development
projects will commence.


We anticipate that the rate of enrollment in our
Phase 3 clinical trials for Canvaxin will increase as we
add additional clinical trial sites to our program, but we
cannot be sure that we will be able to accelerate clinical trial
enrollment or enroll an adequate number of patients to complete
the Phase 3 clinical trials. In addition, we may not be
able to control the amount and timing of resources that the
medical institutions that conduct the clinical testing may
devote to these Phase 3 clinical trials. If these clinical
investigators and medical institutions fail to enroll a
sufficient number of patients in our clinical trials, we will be
unable to complete these trials, which could prevent us from
obtaining regulatory approvals for Canvaxin. In addition, the
interim and final analyses of the data from these clinical
trials may not be performed until a specified number of patients
in each of these clinical trials has expired, so a delay in
enrollment will adversely impact the timely completion of these
clinical trials.

Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of the consolidated financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities and expenses
and the related disclosure of contingent assets and liabilities.
We review our estimates on an on-going basis, including those
related to valuation of goodwill, intangibles and other
long-lived assets. We base our estimates on historical
experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities. Actual results may differ from these
estimates under different assumptions or conditions. Our
accounting policies are described in more detail in Note 1 to
our consolidated financial statements. We have identified the
following as the most critical accounting policies and estimates
used in the preparation of our consolidated financial statements.



| |         
| | --------
| | Goodwill

In accordance with Statement of Financial
Accounting Standards, or SFAS, No. 142, Goodwill and
Other Intangible Assets, we do not amortize goodwill.
Instead, we review goodwill for impairment at least annually and
whenever events or changes in circumstances indicate a reduction
in the fair value of the reporting unit to which the goodwill
has been assigned. Conditions that would necessitate a goodwill
impairment assessment include a significant adverse change in
legal factors or in the business climate, an adverse action or
assessment by a regulator, unanticipated competition, a loss of
key personnel, or the presence of other indicators that would
indicate a reduction in the fair value of the reporting unit to
which the goodwill has been assigned. SFAS No. 142
prescribes a two-step process for impairment testing of
goodwill. The first step of the impairment test is used to
identify potential impairment by comparing the fair value of the
reporting unit to which the goodwill has been assigned to its
carrying amount, including the goodwill. Such a valuation
requires significant estimates and assumptions including but not
limited to: determining the timing and expected costs to
complete in-process projects, projecting regulatory approvals,
estimating future cash inflows from product sales and other
sources, and developing appropriate discount rates and
probability rates by project. If the carrying value of the
reporting unit exceeds the fair value, the second step of the
impairment test is performed in order to measure the impairment
loss.

Our goodwill has a carrying value of
$5.4 million at December 31, 2003 and resulted from
our acquisition of Cell-Matrix in January 2002. We have assigned
the goodwill to our Cell-Matrix reporting unit. In October 2003,
we performed our annual goodwill impairment test in accordance
with

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SFAS No. 142 and determined that the
carrying amount of goodwill was recoverable. In determining the
fair value of the Cell-Matrix reporting unit, we considered
internal risk-adjusted cash flow projections which utilize
several key assumptions, including estimated timing and costs to
complete development of the anti-angiogenesis technology and
estimated future cash inflows from existing collaborations,
anticipated future collaborations and projected product sales.
Additionally, we reviewed the implied market capitalization of
the Cell-Matrix reporting unit, based on the number of shares
issued by us in the acquisition, and third party revenue
projections for other products and product candidates utilizing
similar technology. Our analysis of the fair value of the
Cell-Matrix reporting unit assumes the timely and successful
completion of development of the anti-angiogenesis technology.
The major risks and uncertainties associated with the timely and
successful completion of development of the anti-angiogenesis
technology include the risk that we will not be able to confirm
the safety and efficacy of the technology with data from
clinical trials and the risk that we will not be able to obtain
necessary regulatory approvals. No assurance can be given that
the underlying assumptions used to forecast the cash flows or
the timely and successful completion of development will
materialize as estimated. We cannot assure you that our future
reviews of goodwill impairment will not result in a material
charge.




| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

Long-lived assets to be held and used, including
property and equipment and intangible assets subject to
amortization, are reviewed for impairment at least annually and
whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recoverable.
Conditions that would necessitate an impairment assessment
include a significant decline in the market price of an asset or
asset group, a significant adverse change in the extent or
manner in which an asset or asset group is being used, a
significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset or
asset group, or the presence of other indicators that would
indicate that the carrying amount of an asset or asset group is
not recoverable. Determination of recoverability is based on the
undiscounted future cash flows resulting from the use of the
asset or asset group and its eventual disposition. The
determination of the undiscounted cash flows requires
significant estimates and assumptions including but not limited
to: determining the timing and expected costs to complete
in-process projects, projecting regulatory approvals and
estimating future cash inflows from product sales and other
sources. In the event that such cash flows are not expected to
be sufficient to recover the carrying amount of the asset or
asset group, the carrying amount of the asset is written down to
its estimated fair value. There have been no indicators of
impairment with respect to our long-lived assets through
December 31, 2003.

Results of Operations

The comparisons which follow compare actual
results for the applicable periods and do not reflect any pro
forma adjustments for our acquisition of Cell-Matrix in January
2002.



| |                                                             
| | ------------------------------------------------------------
| | Comparison of the Years Ended
    December 31, 2003 and 2002

Research and Development Expenses.Research and development expenses were
$27.7 million for the year ended December 31, 2003,
compared with $24.5 million for the year ended
December 31, 2002. Research and development expenses are
associated with our three main research and development
programs, our specific active immunotherapy platform, including
Canvaxin, our anti-angiogenesis platform and our human
monoclonal antibody program. The costs related to the continuing
development of Canvaxin constituted the majority of our research
and development expenses for the years ended December 31,
2003 and 2002.

The $3.2 million increase in our research
and development expenses reflects several factors, including
additional investment in personnel in the manufacturing,
clinical affairs, quality and research and development
departments, higher manufacturing expenses for our lead product
candidate, Canvaxin, due to the resumption of patient enrollment
in our Phase 3 clinical trials and the full year effect of
an increase in facility expenses due to the need for a larger
facility to support our growth and the expansion of our

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research, analytical and clinical development
capabilities. Excluded from research and development expenses
for the years ended December 31, 2003 and 2002, was
$0.8 million and $0.4 million, respectively, of
non-cash employee stock-based compensation which is reported
under a separate caption.


General and Administrative Expenses.General and administrative expenses
were $6.8 million for the year ended December 31, 2003
compared with $6.5 million for the year ended
December 31, 2002. General and administrative expenses
consist primarily of salaries and benefits for administrative,
finance, business development, human resources, legal and
internal systems support personnel. In addition, general and
administrative expenses include insurance costs, professional
services and facilities costs. The $0.3 million increase
was primarily due to a general increase in compensation costs.
Excluded from general and administrative expenses for the years
ended December 31, 2003 and 2002 was $1.8 million and
$1.0 million, respectively, of non-cash employee
stock-based compensation which is reported under a separate
caption.

Amortization of Employee Stock-based
Compensation.In connection with the
grant of stock options to employees and directors, we recorded
deferred employee stock-based compensation of $5.0 million
and $2.7 million for the years ended December 31, 2003
and 2002, respectively, representing the difference between the
exercise price and the estimated fair value of the underlying
common stock on the option grant date. We recorded the
$5.0 million and the $2.7 million as a component of
stockholders equity (deficit) and will amortize the
amounts, on an accelerated basis, as a non-cash charge to
operations over the vesting period of the options. For the years
ended December 31, 2003 and 2002, amortization of deferred
employee stock-based compensation totaled $2.6 million and
$1.4 million, respectively. The $1.2 million increase
is due to the grant of stock options to employees and directors
in May through October 2003 that contained exercise prices that
were below our revised estimated fair value of our common stock.
As of December 31, 2003, we had $3.4 million of
deferred employee stock-based compensation. We anticipate
recognizing amortization of deferred employee stock-based
compensation of approximately $2.0 million,
$1.0 million, $0.3 million and $0.1 million in
2004, 2005, 2006 and 2007, respectively.

Purchased In-Process Research and Development.In the first quarter of 2002, we
recorded an expense of $2.8 million representing the
write-off of the fair value of acquired in-process research and
development related to the Cell-Matrix acquisition. The amount
expensed represents the estimated fair value of purchased
in-process research and development programs that had not
reached technological feasibility and had no alternative future
use. The principal technology acquired related to
anti-angiogenic monoclonal antibodies and peptides that were in
the process of being developed. The fair value of the in-process
research and development technology was based on a cost approach
that attempts to estimate the cost of replicating the
technology, including outside contracted services, the level of
full-time employees and lab supplies that would be required in
the development effort, net of tax. As of December 31,
2003, due to the inherent uncertainty and lengthy development
life of the underlying antibodies, we cannot estimate with any
certainty the costs that will be incurred, or the anticipated
completion dates, in the continued development of these
antibodies.

Interest Income.Interest income for the year ended
December 31, 2003 was $0.6 million, compared with
$0.7 million for the year ended December 31, 2002. The
$0.1 million decrease was primarily attributable to lower
prevailing interest rates during 2003 as compared to the
previous year, partially offset by the effect of an increase in
average invested balances due to the proceeds from the sale of
our Series C preferred stock and our initial public
offering of common stock in the second half of 2003.

Interest Expense.Interest expense for the year ended
December 31, 2003 was $0.9 million, compared with
$0.6 million for the year ended December 31, 2002. The
$0.3 million increase was primarily due to our increased
debt balances that were incurred during the second half of 2002
related to the financing of equipment and leasehold improvements.

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| |                                                             
| | ------------------------------------------------------------
| | Comparison of the Years Ended
    December 31, 2002 and 2001

Research and Development Expenses.Research and development expenses were
$24.5 million for the year ended December 31, 2002,
compared with $13.9 million for the year ended
December 31, 2001. Research and development expenses are
associated with our three main research and development
programs, our specific active immunotherapy platform, including
Canvaxin, our anti-angiogenesis platform and our human
monoclonal antibody program. The costs related to the continuing
development of Canvaxin constituted the majority of our research
and development expenses for the years ended December 31,
2002 and 2001.

The $10.6 million increase in our research
and development expenses reflects several factors, including
higher Canvaxin Phase 3 clinical trial data management
costs, new hires in the clinical affairs and research
departments, a decline in the amount of grant reimbursement
funds and an increase in facility expenses due to the need for a
larger facility to support our growth and the expansion of our
research, analytical and clinical development capabilities.
Excluded from research and development expenses for the year
ended December 31, 2002 was $0.4 million of non-cash
employee stock-based compensation which is reported under a
separate caption. There was no employee stock-based compensation
recognized in the year ended December 31, 2001.

General and Administrative Expenses.General and administrative expenses
were $6.5 million for the year ended December 31,
2002, compared with $5.4 million for the year ended
December 31, 2001. The $1.1 million increase in
general and administrative expenses primarily reflects
$0.4 million of increased legal and accounting fees
associated with a discontinued financing and $0.7 million
of increased salaries and employee benefit costs resulting from
newly hired personnel in our administrative functions to support
organizational growth. Excluded from general and administrative
expenses for the year ended December 31, 2002 was
$1.0 million of employee stock-based compensation which is
reported under a separate caption. There was no employee
stock-based compensation recognized in the year ended
December 31, 2001.

Amortization of Employee Stock-Based
Compensation.In connection with the
grant of stock options to employees and directors, we recorded
deferred employee stock-based compensation of $2.7 million
for the year ended December 31, 2002 representing the
difference between the exercise price and the estimated fair
value of the underlying common stock on the option grant date.
The deferred employee stock-based compensation will be
amortized, on an accelerated basis, over the vesting period of
the options. For the year ended December 31, 2002,
amortization of deferred employee stock-based compensation
totaled $1.4 million. There was no employee stock-based
compensation recognized in the year ended December 31, 2001.

Purchased In-Process Research and Development.In the first quarter of 2002, we
recorded an expense of $2.8 million representing the
write-off of the fair value of acquired in-process research and
development related to the Cell-Matrix acquisition. The amount
expensed represents the estimated fair value of purchased
in-process research and development programs that had not
reached technological feasibility and had no alternative future
use. The principal technology acquired related to
anti-angiogenic monoclonal antibodies and peptides that were in
the process of being developed. The fair value of the in-process
research and development technology was based on a cost approach
that attempts to estimate the cost of replicating the
technology, including outside contracted services, the level of
full-time employees and lab supplies that would be required in
the development effort, net of tax.

Interest Income.Interest income was $0.7 million
for the year ended December 31, 2002, compared with
$0.9 million for the year ended December 31, 2001. The
$0.2 million decrease in interest income was primarily
attributable to lower prevailing interest rates associated with
cash investments.

Interest Expense.Interest expense was $0.6 million
for the year ended December 31, 2002, compared with
$0.1 million for the year ended December 31, 2001. The
$0.5 million increase was primarily due to our increased
debt balances that were incurred during the second half of 2002
related to the purchase of equipment and leasehold improvements.

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Liquidity and Capital Resources

As of December 31, 2003, we had
$107.1 million in cash, cash equivalents and securities
available-for-sale as compared to $36.2 million as of
December 31, 2002, an increase of $70.9 million. This
increase resulted from the $41.2 million in net proceeds
from the sale of our Series C preferred stock in August
2003 and $65.1 million in net proceeds from our initial
public offering of common stock on November 4, 2003.

Net cash used in operating activities was
$30.9 million in 2003, compared with $28.8 million in
2002. The increase in net cash used in operating activities was
primarily due to the increase in our operating expenses as we
expanded our research and development activities.

Net cash provided by investing activities was
$2.3 million in 2003, compared with cash used in investing
activities of $14.4 million in 2002. Significant components
of cash flows from investing activities in 2003 included a
$4.5 million net decrease in our securities
available-for-sale portfolio, $1.6 million of purchases of
property and equipment and a $0.5 million increase in
restricted cash. Significant components of cash flows from
investing activities in 2002 included a $10.1 million net
increase in our securities available-for-sale portfolio,
$4.4 million of purchases of property and equipment and a
$0.6 million decrease in restricted cash.

Net cash provided by financing activities was
$104.1 million in 2003, compared with $59.1 million in
2002. Significant components of cash flows from financing
activities in 2003 included $65.1 million in net proceeds
from our initial public offering of common stock on
November 4, 2003, $41.2 million in net proceeds from
the sale of our Series C preferred stock in August 2003 and
net payments on long-term debt of $2.4 million. Significant
components of cash flows from financing activities in 2002
included $55.6 million in net proceeds from the sale of our
Series B preferred stock in March 2002 and net proceeds
from long-term debt of $3.4 million.

Our future capital uses and requirements depend
on numerous forward-looking factors. These factors include but
are not limited to the following:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | the progress of our clinical trials;                                                                  
|
| |  | the progress of our research activities;                                                              
|
| |  | the number and scope of our research programs;                                                        
|
| |  | the progress of our preclinical development
    activities;                                           
|
| |  | our ability to establish and maintain strategic
    collaborations;                                   
|
| |  | the costs involved in enforcing or defending
    patent claims and other intellectual property rights;
|
| |  | the costs and timing of regulatory approvals;                                                         
|
| |  | the costs of establishing or expanding
    manufacturing, sales and distribution capabilities;        
|
| |  | the success of the commercialization of Canvaxin;
    and                                             
|
| |  | the extent to which we acquire or invest in other
    products, technologies and businesses.          

We believe that our existing cash and cash
equivalents will be sufficient to meet our projected operating
requirements for the next 18 months.

To date, we have funded our operations primarily
through the sale of equity securities as well as through
equipment and leasehold improvement financing. Through
December 31, 2003, we had received aggregate net proceeds
of approximately $196.6 million from the sale of equity
securities. In addition, through December 31, 2003, we had
financed through capital leases and loans the purchase of
equipment and leasehold improvements totaling approximately
$9.3 million, of which $4.8 million remained
outstanding under the loans as of December 31, 2003. These
obligations are secured by the purchased equipment and leasehold
improvements, bear interest at rates ranging from approximately
9.3% to 14.0%

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and are due in monthly installments through June
2006. As of December 31, 2003, no further draws may be made
under our credit facilities.


We plan to expand the production capabilities at
our biologics manufacturing facility located in the
Los Angeles, California area and anticipate capital
expenditures of approximately $16 million in 2004 and 2005
associated with this expansion. We intend to fund a significant
portion of these capital expenditures through new leasehold and
equipment financing.

Until we can generate significant cash from our
operations, we expect to continue to fund our operations with
existing cash resources that were primarily generated from the
proceeds of offerings of our equity securities and from
equipment and leasehold improvement financing. In addition, we
may finance future cash needs through the sale of additional
equity securities, strategic collaboration agreements and debt
financing. However, we may not be successful in obtaining
collaboration agreements, or in receiving milestone or royalty
payments under those agreements. In addition, we cannot be sure
that our existing cash and marketable securities resources will
be adequate or that additional financing will be available when
needed or that, if available, financing will be obtained on
terms favorable to us or our stockholders. Having insufficient
funds may require us to delay, scale back or eliminate some or
all of our research or development programs or to relinquish
greater or all rights to product candidates at an earlier stage
of development or on less favorable terms than we would
otherwise choose. Failure to obtain adequate financing also may
adversely affect our ability to operate as a going concern. If
we raise additional funds by issuing equity securities,
substantial dilution to existing stockholders would likely
result. If we raise additional funds by incurring debt
financing, the terms of the debt may involve significant cash
payment obligations as well as covenants and specific financial
ratios that may restrict our ability to operate our business.

Contractual Obligations

The following summarizes our long-term
contractual obligations as of December 31, 2003 (in
thousands):

|                                               |  |       |        |                        |  |        |       |        |  |         |       |  |  |   |       |  |  |   |       | 
|---------------------------------------------- |  | ----- | ------ | ---------------------- |  | ------ | ----- | ------ |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                               |  |       |        |                       
|                                               |  |       |        | Payments Due by Period
|                                               |  |       |        |                       
|                                               |  |       |        | Less than              |  | 1 to 3 |       | 4 to 5 |  | After 5
|Contractual Obligations                        |  | Total |        | 1 Year                 |  | Years  |       | Years  |  | Years  
|                                               |  |       |        |                        |  |        |       |        |  |        
|Operating leases                               |  | $     | 21,165 |                        |  | $      | 2,309 |        |  | $       | 4,796 |  |  | $ | 5,103 |  |  | $ | 8,957 | 
|Contractual license payments                   |  |       | 1,277  |                        |  |        | 274   |        |  |         | 353   |  |  |   | 150   |  |  |   | 500   | 
|Equipment and tenant improvement notes payable |  |       | 4,802  |                        |  |        | 3,241 |        |  |         | 1,395 |  |  |   | 166   |  |  |   |      | 
|Notes payable to related parties               |  |       | 2,725  |                        |  |        | 2,725 |        |  |         |      |  |  |   |      |  |  |   |      | 
|Installment obligation due to JWCI             |  |       | 375    |                        |  |        | 125   |        |  |         | 250   |  |  |   |      |  |  |   |      | 
|                                               |  |       |        |                        |  |        |       |        |  |         |       |  |  |   |       |  |  |   |       | 
|                                               |  | $     | 30,344 |                        |  | $      | 8,674 |        |  | $       | 6,794 |  |  | $ | 5,419 |  |  | $ | 9,457 | 
|                                               |  |       |        |                        |  |        |       |        |  |         |       |  |  |   |       |  |  |   |       | 

We have two irrevocable standby letters of credit
associated with the operating leases for our corporate
headquarters and research and development facility and our
manufacturing facility. The amount of the letter of credit
related to the operating lease for our corporate headquarters
and research and development facility is $1.4 million,
varying up to a maximum of $1.9 million based on our cash
position. The amount of the letter of credit related to the
operating lease for our manufacturing facility is
$0.6 million, decreasing through the end of the lease term.
At December 31, 2003 and 2002, the amounts of the letters
of credit totaled $2.0 million and $1.6 million,
respectively. To secure the letters of credit, we pledged
twelve-month certificates of deposit for similar amounts as of
December 31, 2003 and 2002 which have been classified as
restricted cash on our consolidated balance sheets. Subsequent
to December 31, 2003, the amount of the letter of credit
related to the operating lease for our corporate headquarters
and research and development facility decreased from
$1.4 million to $0.4 million based on our cash
position as of December 31, 2003.

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Additionally, we have entered into various
licensing and research and development arrangements under which
we may be obligated to make future milestone payments upon the
achievement of certain success-based objectives and royalties on
sales of commercialized products, if any.

Related Party Transactions

For a description of our related party
transactions, see Note 4 to our consolidated financial
statements.

Off-Balance Sheet Arrangements

Through December 31, 2003, we did not have
any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving
non-exchange traded contracts. As such, we are not materially
exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in these relationships. We do not
have relationships or transactions with persons or entities that
derive benefits from their non-independent relationship with us
or our related parties other than what is disclosed in Note 4 to
our consolidated financial statements.

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting
Standards, or SFAS, No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities
and Equity. SFAS No. 150 requires that certain
financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include
mandatorily redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations
that can be settled with shares of stock. SFAS No. 150
is effective for all financial instruments entered into or
modified after May 31, 2003. The adoption of
SFAS No. 150 did not have a material impact on our
consolidated financial statements.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
SFAS No. 148, which was effective January 1,
2003, is an amendment to SFAS No. 123 providing
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and also provides additional disclosures about the
method of accounting for stock-based employee compensation. We
have chosen not to adopt the voluntary change to the fair value
based method of accounting for stock-based employee
compensation. If we were required to adopt such a method, its
implementation pursuant to SFAS No. 148 would have a
material effect on our consolidated results of operations.





|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About
    Market Risk

At December 31, 2003 and 2002, our financial
instruments consisted principally of cash, cash equivalents and
securities available-for-sale. These financial instruments,
principally comprised of corporate obligations and
U.S. government obligations, are subject to interest rate
risk and will decline in value if interest rates increase.
Because of the relatively short maturities of our investments,
we do not expect interest rate fluctuations to materially affect
the aggregate value of our financial instruments. We have not
used derivative financial instruments in our investment
portfolio. Additionally, we do not invest in foreign currencies
or other foreign investments.

Our long-term debt bears interest at fixed rates
and therefore we do not have significant market risk exposure
with respect to our debt obligations.

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

See the list of financial statements filed with
this report under Item 15 below.





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With Accountants
    on Accounting and Financial Disclosures

Not applicable.





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms and
that such information is accumulated and communicated to our
management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

As required by Securities and Exchange Commission
Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management,
including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period
covered by this report. Based on the foregoing, our chief
executive officer and chief financial officer concluded that our
disclosure controls and procedures were effective at the
reasonable assurance level.

There has been no change in our internal controls
over financial reporting during our most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial
reporting.

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PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this item will be
contained in our definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with the Annual
Meeting of our Stockholders (the Proxy Statement),
which is expected to be filed not later than 120 days after
the end of our fiscal year ended December 31, 2003, and is
incorporated in this report by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item will be set
forth in the Proxy Statement and is incorporated in this report
by reference.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this item will be set
forth in the Proxy Statement and is incorporated in this report
by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item will be set
forth in the Proxy Statement and is incorporated in this report
by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information required by this item will be set
forth in the Proxy Statement and is incorporated in this report
by reference.

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PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)Documents filed as part of this
report.

1.     The following
financial statements of CancerVax Corporation and Report of
Ernst & Young LLP, independent auditors, are included in
this report:

Report of Ernst & Young LLP, Independent
Auditors

Consolidated balance sheets as of
December 31, 2003 and 2002

Consolidated statements of operations for the
years ended December 31, 2003, 2002 and 2001



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Consolidated statements of stockholders
    equity (deficit) for the years ended December 31,
    2003, 2002 and 2001

Consolidated statements of cash flows for the
years ended December 31, 2003, 2002 and 2001

Notes to consolidated financial statements

2.     List of financial
statement schedules. All schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or notes thereto.

3.     List of exhibits
required by Item 601 of Regulation S-K. See
part (c) below.

(b) Reports on Form 8-K. There
were no current reports filed on Form 8-K for the quarter
ended December 31, 2003.

(c) Exhibits.The following exhibits
are filed as a part of this report:

|        |           |             |  |                                                                                                                                                                                                                                                                         
|------- | --------- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 2.01(1)   |             |  | Agreement and Plan of Merger, dated
    January 8, 2002, by and among CancerVax Corporation, CMI
    Acquisition Corp. and Cell-Matrix, Inc.                                                                                                                            
|        | 3.01(2)   |             |  | Amended and Restated Certificate of Incorporation                                                                                                                                                                                                                       
|        | 3.02(2)   |             |  | Amended and Restated Bylaws                                                                                                                                                                                                                                             
|        | 4.01(1)   |             |  | Form of Specimen Common Stock Certificate                                                                                                                                                                                                                               
|        | 4.02(1)   |             |  | Second Amended and Restated Investors
    Rights Agreement, made as of August 13, 2003, among
    CancerVax Corporation and the investors listed on
    Schedule A thereto                                                                                             
|        | 4.03(1)   |             |  | Form of Warrant to Purchase Vendor Preferred
    Stock, Series 1                                                                                                                                                                                                        
|        | 4.04(1)   |             |  | Warrant to Purchase Vendor Preferred Stock,
    Series 2, dated September 6, 2002, issued to Venture
    Lending & Leasing III, LLC                                                                                                                                     
|        | 4.05(1)   |             |  | Form of Incidental Registration Rights Agreement                                                                                                                                                                                                                        
|        | 10.01(1)  |             |  | Standard Industrial/ Commercial Single-Tenant
    Lease-Net, dated August 31, 2001, between Blackmore Airport
    Centre and CancerVax Corporation                                                                                                                      
|        | 10.02(1)  |             |  | Lease, made as of July 22, 1999, between
    Spieker Properties, L.P. and John Wayne Cancer Institute                                                                                                                                                                   
|        | 10.03(1)  |             |  | Agreement of Lease Assignment, dated as of
    August 4, 2000, between John Wayne Cancer Institute and
    CancerVax Corporation                                                                                                                                        
|        | 10.04(1)  |             |  | First Amendment to Lease, entered into as of
    October 1, 2001, between EOP  Marina Business
    Center, L.L.C. (as successor in interest to Spieker Properties,
    L.P.) and CancerVax Corporation (as successor in interest to
    John Wayne Cancer Institute)   
|        | 10.05(1)  |             |  | Second Amendment to Lease, entered into as of
    September 4, 2002, between EOP  Marina Business
    Center, L.L.C. (as successor in interest to Spieker Properties,
    L.P.) and CancerVax Corporation (as successor in interest to
    John Wayne Cancer Institute)
|        | 10.06(1)# |             |  | Third Amended and Restated 2000 Stock Incentive
    Plan                                                                                                                                                                                                                
|        | 10.07(1)# |             |  | 2003 Employee Stock Purchase Plan                                                                                                                                                                                                                                       

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|        |           |             |  |                                                                                                                                                                       
|------- | --------- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.08#    |             |  | Employment Agreement, effective as of
    November 18, 2003, between CancerVax Corporation and Steven
    J. Ruhl                                                     
|        | 10.09(1)# |             |  | Form of Indemnification Agreement entered into by
    CancerVax Corporation with its directors and executive officers                                                 
|        | 10.10(1)# |             |  | Employment Agreement, dated October 23,
    2000, between CancerVax Corporation and David F. Hale                                                                     
|        | 10.11(1)# |             |  | First Amendment to Employment Agreement, dated
    April 29, 2003, between CancerVax Corporation and David F.
    Hale                                                
|        | 10.12(1)# |             |  | Amended and Restated Employment Agreement, dated
    January 1, 2001, between CancerVax Corporation and Guy
    Gammon                                                
|        | 10.13(1)# |             |  | Amended and Restated Employment Agreement, dated
    January 5, 2001, between CancerVax Corporation and John
    Petricciani, M.D.                                    
|        | 10.14(1)# |             |  | Amended and Restated Employment Agreement,
    entered into as of January 15, 2001, between CancerVax
    Corporation and Robert L. Jones                             
|        | 10.15(1)# |             |  | Amended and Restated Employment Agreement,
    entered into as of February 9, 2001, between CancerVax
    Corporation and Hazel M. Aker                               
|        | 10.16(1)# |             |  | Amended and Restated Employment Agreement,
    entered into as of April 2, 2001, between CancerVax
    Corporation and William R. LaRue                               
|        | 10.17(1)# |             |  | Amended and Restated Employment Agreement,
    entered into as of November 26, 2001, between CancerVax
    Corporation and Dennis Van Epps                            
|        | 10.18(1)# |             |  | Amended and Restated Employment Agreement,
    entered into as of February 1, 2002, between CancerVax
    Corporation and Debra J. Arnold                             
|        | 10.19(1)# |             |  | Employment Agreement, effective as of
    May 15, 2003, between CancerVax Corporation and Martin A.
    Mattingly                                                     
|        | 10.20(1)# |             |  | Consulting Agreement, effective as of
    December 15, 2000, by and between Dr. Donald L. Morton
    and CancerVax Corporation                                        
|        | 10.21(1)  |             |  | Assignment of Cross-License Agreement, dated as
    of July 31, 2000, by and among 3DLM, Inc., the John Wayne
    Cancer Institute and CancerVax Corporation          
|        | 10.22(1) |             |  | Cross-License Agreement, dated as of
    July 24, 1998, by and between CancerVax, Inc. and the John
    Wayne Cancer Institute                                        
|        | 10.23(1) |             |  | Agreement, dated as July 31, 2000, by and
    between Cancer Diagnostic Laboratories, Inc. and CancerVax
    Corporation                                              
|        | 10.24(1)  |             |  | Amendment No. 1 to CDL Agreement, dated as
    of December 15, 2000, by and between Cancer Diagnostic
    Laboratories, Inc. and CancerVax Corporation                
|        | 10.25(1)  |             |  | Second Amendment to CDL Agreement, dated as of
    May 1, 2002, between Cancer Diagnostic Laboratories, Inc.
    and CancerVax Corporation                            
|        | 10.26(1)  |             |  | Contribution of Technology and Exchange
    Agreement, dated as of December 15, 2000, by and between
    Donald L. Morton, M.D. and CancerVax Corporation             
|        | 10.27(1)  |             |  | First Amendment to Contribution of Technology and
    Exchange Agreement, entered into as of May 1, 2002, between
    Donald L. Morton, M.D. and CancerVax Corporation
|        | 10.28(1)  |             |  | Fetal Antigen License Agreement, dated as of
    December 15, 2000, by and between Donald L. Morton, M.D.
    and CancerVax Corporation                               
|        | 10.29(1) |             |  | License Agreement, dated May 23, 2000, by
    and between the University of Southern California and
    Bio-Management, Inc.                                          
|        | 10.30(1) |             |  | License Agreement, dated September 19, 1999,
    by and between the University of Southern California and
    Bio-Management, Inc.                                    
|        | 10.31(1) |             |  | Development and Sublicensing Agreement, effective
    as of March 5, 2001, by and among EyeTech Pharmaceuticals,
    Inc. and Cell-Matrix, Inc.                       

61



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|        |           |             |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | --------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.32(1) |             |  | License Agreement, dated October 26, 2001,
    by and between The Scripps Research Institute and Cell-Matrix,
    Inc.                                                                                                                                                                                                                                                                             
|        | 10.33(1) |             |  | Collaboration Agreement, dated as of
    November 29, 1999, between Ixsys, Inc. and Bio-Management,
    Inc.                                                                                                                                                                                                                                                                                       
|        | 10.34(1)  |             |  | Amendment to Collaboration Agreement, effective
    as of June 5, 2000, between Cell Matrix, Inc., f/k/a
    Bio-Management, Inc. and Applied Molecular Evolution, Inc.,
    f/k/a Ixsys, Inc.                                                                                                                                                                                                     
|        | 10.35(1)  |             |  | Amendment to Collaboration Agreement, effective
    as of July 3, 2000, between Cell Matrix, Inc., f/k/a
    Bio-Management, Inc. and Applied Molecular Evolution, Inc.,
    f/k/a Ixsys, Inc.                                                                                                                                                                                                     
|        | 10.36(1) |             |  | License Agreement, effective as of June 2,
    2003, between New York University and Cell-Matrix, Inc.                                                                                                                                                                                                                                                                                             
|        | 10.37(1) |             |  | License Agreement, entered into as of
    October 4, 2002, between M-Tech Therapeutics, Inc. and
    CancerVax Corporation                                                                                                                                                                                                                                                                         
|        | 10.38(1)  |             |  | Assignment of Supply Agreement, entered into as
    of July 31, 2000, between 3DLM, Inc., f/k/a CancerVax,
    Inc., and CancerVax Corporation                                                                                                                                                                                                                                                     
|        | 10.39(1) |             |  | Supply Agreement, entered into as of
    April 15, 1998, between CancerVax, Inc. and Organon Teknika
    Corporation                                                                                                                                                                                                                                                                               
|        | 10.40(1)  |             |  | Loan and Security Agreement (Equipment), dated as
    of September 6, 2002, between CancerVax Corporation and
    Venture Lending & Leasing III, Inc.                                                                                                                                                                                                                                              
|        | 10.41(1)  |             |  | Third Amended and Restated Stockholders
    Agreement, dated as of August 13, 2003, by and among
    CancerVax Corporation, The Donald L. Morton Family Trust created
    under trust dated June 2, 1989, the Donald L. Morton, M.D.,
    Grantor Retained Annuity Trust dated September 6, 2002,
    OncoVac, Inc., the investors listed on Exhibit A thereto
    and John Wayne Cancer Institute
|        | 10.42(1) |             |  | Master Services Agreement, entered into as of
    January 22, 2002, among CancerVax Corporation, the John
    Wayne Cancer Institute and Synteract, Inc.                                                                                                                                                                                                                                           
|        | 10.43(1)  |             |  | Letter Agreement, entered into as of
    January 22, 2002, between the John Wayne Cancer Institute
    and CancerVax Corporation                                                                                                                                                                                                                                                                   
|        | 10.44(1)# |             |  | 2003 Equity Incentive Award Plan                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.45(3)+ |             |  | Sublicense Agreement, dated as of March 10,
    2004, by and among SemaCo, Inc., Barbara Gilchrest, M.D. and
    CancerVax Corporation                                                                                                                                                                                                                                                             
|        | 21.01     |             |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                               
|        | 23.01     |             |  | Consent of Ernst & Young LLP, Independent
    Auditors                                                                                                                                                                                                                                                                                                                                             
|        | 31.1      |             |  | Certification of Chief Executive Officer pursuant
    to Rules 13a-14 and 15d-14 promulgated under the Securities
    Exchange Act of 1934                                                                                                                                                                                                                                                         
|        | 31.2      |             |  | Certification of Chief Financial Officer pursuant
    to Rules 13a-14 and 15d-14 promulgated under the Securities
    Exchange Act of 1934                                                                                                                                                                                                                                                         
|        | 32*       |             |  | Certifications of Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002                                                                                                                                                                                                         



---



|    |                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to CancerVax
    Corporations Registration Statement on Form S-1 filed
    with the Securities and Exchange Commission on October 24,
    2003.
|   
|(2) | Incorporated by reference to CancerVax
    Corporations Quarterly Report on Form 10-Q filed with
    the Securities and Exchange Commission on December 11, 2003.        
|   
|(3) | Incorporated by reference to CancerVax
    Corporations Current Report on Form 8-K filed with
    the Securities and Exchange Commission on March 15, 2004.              



| |   |                                                        
| | - | -------------------------------------------------------
| | # | Indicates management contract or compensatory
    plan.

62



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##### Table of Contents





| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | CancerVax Corporation has been granted
    confidential treatment with respect to certain portions of this
    exhibit (indicated by asterisks), which have been filed
    separately with the Securities and Exchange Commission.



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | + | Portions of this exhibit (indicated by asterisks)
    have been omitted pursuant to a request for confidential
    treatment and have been separately filed with the Securities and
    Exchange Commission.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | These certifications are being furnished solely
    to accompany this annual report pursuant to 18 U.S.C.
    Section 1350, and are not being filed for purposes of
    Section 18 of the Securities Exchange Act of 1934 and are
    not to be incorporated by reference into any filing of CancerVax
    Corporation, whether made before or after the date hereof,
    regardless of any general incorporation language in such filing.

63



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |                      
| | ---------------------
| | CANCERVAX CORPORATION

Dated: March 29, 2004

| |     |                  
| | --- | -----------------
| | By: | /s/ DAVID F. HALE

| |  | 
| |  | 
| |  | 

| |                                          
| | -----------------------------------------
| | David F. Hale                            
| | President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                 |  |                                                                                  |  |                |  | 
|------------------------------------------------ |  | -------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                 |  |                                                                                  |  |               
|Name                                             |  | Title                                                                            |  | Date          
|                                                 |  |                                                                                  |  |               
|                                                
|/s/ DAVID F. HALEDavid F. Hale                   |  | President, Chief Executive
    Officer and Director(Principal Executive Officer) |  | March 29, 2004
|                                                
|/s/ WILLIAM R. LARUEWilliam R. LaRue             |  | Chief Financial Officer(Principal Financial and
    Accounting Officer)          |  | March 29, 2004
|                                                
|/s/ IVOR ROYSTONIvor Royston                     |  | Director(Chairman of the Board of Directors)                                     |  | March 29, 2004
|                                                
|/s/ MICHAEL G. CARTERMichael G. Carter           |  | Director                                                                         |  | March 29, 2004
|                                                
|/s/ CAM L. GARNERCam L. Garner                   |  | Director                                                                         |  | March 29, 2004
|                                                
|/s/ CLAYBURN LA FORCE, JR.Clayburn La Force, Jr. |  | Director                                                                         |  | March 29, 2004
|                                                
|/s/ DONALD L. MORTONDonald L. Morton             |  | Director                                                                         |  | March 29, 2004
|                                                
|/s/ BARCLAY A. PHILLIPSBarclay A. Phillips       |  | Director                                                                         |  | March 29, 2004
|                                                
|/s/ PHILLIP M. SCHNEIDERPhillip M. Schneider     |  | Director                                                                         |  | March 29, 2004
|                                                
|/s/ GAIL S. SCHOETTLERGail S. Schoettler         |  | Director                                                                         |  | March 29, 2004

64



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##### Table of Contents



CANCERVAX CORPORATION

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                       |  |      |     | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  |     
|Report of Ernst & Young
    LLP, Independent Auditors                                                                  |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                       |  |      | F-3 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001                         |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the years ended December 31, 2003,
    2002 and 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                         |  |      | F-7 | 
|Notes to Consolidated Financial Statements                                                                             |  |      | F-9 | 

F-1



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##### Table of Contents



REPORT OF ERNST & YOUNG
LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

CancerVax Corporation:


We have audited the accompanying consolidated
balance sheets of CancerVax Corporation (the
Company) as of December 31, 2003 and 2002 and
the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of CancerVax Corporation at
December 31, 2003 and 2002 and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Diego, California

February 13, 2004


except for Note 10 as to which the date is


March 15, 2004


F-2



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##### Table of Contents



CANCERVAX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value
amounts)


|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | -------- | - | - | ------- | ------- | -
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |             
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       | December 31,
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |             
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       | 2003         |         | 2002    
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |         
|Assets                                                                                                                                                                                                          
|Current assets:                                                                                                                                                                                                  |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|                                                                                                                                                                                                                 | Cash and cash equivalents                                                                                                                                                                             |              | $       | 101,681  |   |   | $       | 26,083  |  
|                                                                                                                                                                                                                 | Securities available-for-sale                                                                                                                                                                         |              |         | 5,411    |   |   |         | 10,118  |  
|                                                                                                                                                                                                                 | Restricted cash                                                                                                                                                                                       |              |         | 1,000    |   |   |         |        |  
|                                                                                                                                                                                                                 | Other current assets                                                                                                                                                                                  |              |         | 917      |   |   |         | 133     |  
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|Total current assets                                                                                                                                                                                             |                                                                                                                                                                                                       |              | 109,009 |          |   |   | 36,334  |        
|Property and equipment, net                                                                                                                                                                                      |                                                                                                                                                                                                       |              | 10,529  |          |   |   | 10,845  |        
|Goodwill                                                                                                                                                                                                         |                                                                                                                                                                                                       |              | 5,381   |          |   |   | 5,381   |        
|Intangibles, net                                                                                                                                                                                                 |                                                                                                                                                                                                       |              | 519     |          |   |   | 588     |        
|Restricted cash                                                                                                                                                                                                  |                                                                                                                                                                                                       |              | 1,000   |          |   |   | 1,550   |        
|Other assets                                                                                                                                                                                                     |                                                                                                                                                                                                       |              | 569     |          |   |   | 489     |        
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|Total assets                                                                                                                                                                                                     |                                                                                                                                                                                                       | $            | 127,007 |          |   | $ | 55,187  |        
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|                                                                                                                                                                                                                
|Liabilities and stockholders equity
    (deficit)                                                                                                                                                              
|Current liabilities:                                                                                                                                                                                             |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|                                                                                                                                                                                                                 | Accounts payable and accrued liabilities                                                                                                                                                              |              | $       | 5,650    |   |   | $       | 3,908   |  
|                                                                                                                                                                                                                 | Current portion of long-term debt                                                                                                                                                                     |              |         | 6,091    |   |   |         | 2,960   |  
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|Total current liabilities                                                                                                                                                                                        |                                                                                                                                                                                                       |              | 11,741  |          |   |   | 6,868   |        
|Long-term debt, net of current portion                                                                                                                                                                           |                                                                                                                                                                                                       |              | 1,811   |          |   |   | 7,379   |        
|Deferred rent                                                                                                                                                                                                    |                                                                                                                                                                                                       |              | 682     |          |   |   | 236     |        
|Commitments                                                                                                                                                                                                      |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|Redeemable convertible preferred stock,
    $.00004 par value; no shares authorized at
    December 31, 2003; no shares and 35,155 shares issued
    and outstanding at December 31, 2003 and 2002, respectively |                                                                                                                                                                                                       |              |        |          |   |   | 96,582  |        
|Stockholders equity (deficit):                                                                                                                                                                                  |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|                                                                                                                                                                                                                 | Convertible preferred stock, $.00004 par
    value; no shares authorized at December 31, 2003; no shares
    and 27,189 shares issued and outstanding at
    December 31, 2003 and 2002, respectively |              |         |         |   |   |         | 1       |  
|                                                                                                                                                                                                                 | Common stock, $.00004 par value;
    75,000 shares authorized at December 31, 2003; 26,736
    and 496 shares issued and outstanding at December 31,
    2003 and 2002, respectively                  |              |         | 1        |   |   |         |        |  
|                                                                                                                                                                                                                 | Additional paid-in capital                                                                                                                                                                            |              |         | 245,314  |   |   |         | 14,409  |  
|                                                                                                                                                                                                                 | Accumulated other comprehensive income (loss)                                                                                                                                                         |              |         | 3        |   |   |         | (43     | )
|                                                                                                                                                                                                                 | Deferred compensation                                                                                                                                                                                 |              |         | (3,353   | ) |   |         | (1,268  | )
|                                                                                                                                                                                                                 | Accumulated deficit                                                                                                                                                                                   |              |         | (129,192 | ) |   |         | (68,977 | )
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|Total stockholders equity (deficit)                                                                                                                                                                             |                                                                                                                                                                                                       |              | 112,773 |          |   |   | (55,878 | )      
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        
|Total liabilities and stockholders equity
    (deficit)                                                                                                                                                         |                                                                                                                                                                                                       | $            | 127,007 |          |   | $ | 55,187  |        
|                                                                                                                                                                                                                 |                                                                                                                                                                                                       |              |         |          |   |   |         |        

See accompanying notes to consolidated financial
statements.

F-3



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##### Table of Contents



CANCERVAX CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |        |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------ | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                                                             |                                                   |                         
|                                                                                             |                                                   | Years Ended December 31,
|                                                                                             |                                                   |                         
|                                                                                             |                                                   | 2003                     |         | 2002   |   | 2001
|                                                                                             |                                                   |                          |         |        |   |     
|Operating expenses:                                                                          |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|                                                                                             | Research and development                          |                          | $       | 27,725 |   |      | $       | 24,517 |   |   | $       | 13,910 |  
|                                                                                             | General and administrative                        |                          |         | 6,826  |   |      |         | 6,514  |   |   |         | 5,441  |  
|                                                                                             | Amortization of employee stock-based compensation |                          |         | 2,643  |   |      |         | 1,412  |   |   |         |       |  
|                                                                                             | Purchased in-process research and development     |                          |         |       |   |      |         | 2,840  |   |   |         |       |  
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|Total operating expenses                                                                     |                                                   |                          | 37,194  |        |   |      | 35,283  |        |   |   | 19,351  |       
|Other income (expense):                                                                      |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|                                                                                             | Interest income                                   |                          |         | 553    |   |      |         | 691    |   |   |         | 909    |  
|                                                                                             | Interest expense                                  |                          |         | (932   | ) |      |         | (621   | ) |   |         | (140   | )
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|Total other income (expense)                                                                 |                                                   |                          | (379    | )      |   |      | 70      |        |   |   | 769     |       
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|Net loss                                                                                     |                                                   |                          | (37,573 | )      |   |      | (35,213 | )      |   |   | (18,582 | )     
|Accretion to redemption value of redeemable
    convertible preferred stock                  |                                                   |                          | (7,867  | )      |   |      | (7,635  | )      |   |   | (4,105  | )     
|Deemed dividend resulting from beneficial
    conversion feature on Series C preferred stock |                                                   |                          | (14,775 | )      |   |      |        |        |   |   |        |       
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|Net loss applicable to common stockholders                                                   |                                                   | $                        | (60,215 | )      |   | $    | (42,848 | )      |   | $ | (22,687 | )     
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|Basic and diluted net loss per share(1)                                                      |                                                   | $                        | (13.30  | )      |   | $    | (153.85 | )      |   | $ | (266.02 | )     
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|Weighted averaged shares used to compute basic
    and diluted net loss per share(1)         |                                                   |                          | 4,527   |        |   |      | 279     |        |   |   | 85      |       
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|The allocation of employee stock-based
    compensation is as follows:                       |                                                   |                          |         |       
|                                                                                             | Research and development                          |                          | $       | 838    |   |      | $       | 379    |   |   | $       |       |  
|                                                                                             | General and administrative                        |                          |         | 1,805  |   |      |         | 1,033  |   |   |         |       |  
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       
|                                                                                             |                                                   | $                        | 2,643   |        |   | $    | 1,412   |        |   | $ |        |       
|                                                                                             |                                                   |                          |         |        |   |      |         |        |   |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As a result of the conversion of our preferred
    stock into 20.1 million shares of our common stock upon
    completion of our initial public offering on November 4,
    2003, there is a lack of comparability in the basic and diluted
    net loss per share amounts for the periods presented above.
    Please reference Note 1 for an unaudited pro forma basic
    and diluted net loss per share calculation for the periods
    presented.

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



CANCERVAX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

(In thousands)


|                             |                                                                                                           |                                                  |        |              |   |            |   |               |   |             |     |             |   |               |   |         |   |           |        |       |   |   |     |   |     |   |        |        |   |   |         |         |         |   |         |         |         |  
|---------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------ | ------------ | - | ---------- | - | ------------- | - | ----------- | --- | ----------- | - | ------------- | - | ------- | - | --------- | ------ | ----- | - | - | --- | - | --- | - | ------ | ------ | - | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                             |                                                                                                           |                                                  |        |              |   |            |   |               |   | Accumulated |     |             |   |               |   |        
|                             |                                                                                                           | Convertible                                      |        |              |   |            |   | Other         |   |             |     |             |   | Total        
|                             |                                                                                                           | Preferred Stock                                  |        | Common Stock |   | Additional |   | Comprehensive |   |             |     |             |   | Stockholders
|                             |                                                                                                           |                                                  |        |              |   | Paid-in    |   | Income        |   | Deferred    |     | Accumulated |   | Equity       
|                             |                                                                                                           | Shares                                           |        | Amount       |   | Shares     |   | Amount        |   | Capital     |     | (Loss)      |   | Compensation  |   | Deficit |   | (Deficit)
|                             |                                                                                                           |                                                  |        |              |   |            |   |               |   |             |     |             |   |               |   |         |   |          
|Balance at December 31, 2000 |                                                                                                           |                                                  | 26,690 |              |   | $          | 1 |               |   |             |    |             |   | $             |  |         |   | $         | 5,009  |       |   | $ |    |   |     | $ |       |        |   | $ | (3,442  | )       |         | $ | 1,568   |        
|                             | Exercise of stock options                                                                                 |                                                  |        |             |   |            |   |              |   |             |     | 358         |   |               |   |        |   |           |        | 401   |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 401     |        
|                             | Conversion of Series A convertible preferred
    stock to Series A redeemable convertible preferred stock |                                                  |        | (1,644       | ) |            |   |              |   |             |     |            |   |               |   |        |   |           |        | (1    | ) |   |     |  |     |   |        |       |   |   |         |        |         |   |         | (1      | )      
|                             | Compensation expense from issuance of stock
    options to consultants                                    |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 47    |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 47      |        
|                             | Issuance of warrants in conjunction with debt                                                             |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 10    |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 10      |        
|                             | Accretion to redemption value of redeemable
    convertible preferred stock                               |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        |      |   |   |     |  |     |   |        |       |   |   |         | (4,105  | )       |   |         | (4,105  | )      
|                             | Net loss and comprehensive loss                                                                           |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        |      |   |   |     |  |     |   |        |       |   |   |         | (18,582 | )       |   |         | (18,582 | )      
|                             |                                                                                                           |                                                  |        |              |   |            |   |               |   |             |     |             |   |               |   |         |   |           |        |       |   |   |     |   |     |   |        |        |   |   |         |         |         |   |         |        
|Balance at December 31, 2001 |                                                                                                           |                                                  | 25,046 |              |   |            | 1 |               |   |             | 358 |             |   |               |  |         |   |           | 5,466  |       |   |   |    |   |     |   |       |        |   |   | (26,129 | )       |         |   | (20,662 | )      
|                             | Exercise of stock options                                                                                 |                                                  |        |             |   |            |   |              |   |             |     | 146         |   |               |   |        |   |           |        | 199   |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 199     |        
|                             | Deferred employee stock-based compensation                                                                |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 2,740 |   |   |     |  |     |   |        | (2,740 | ) |   |         |        |         |   |         |        |        
|                             | Unamortized deferred compensation on cancelled
    stock options                                          |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | (60   | ) |   |     |  |     |   |        | 60     |   |   |         |        |         |   |         |        |        
|                             | Amortization of deferred employee stock-based
    compensation                                            |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        |      |   |   |     |  |     |   |        | 1,412  |   |   |         |        |         |   |         | 1,412   |        
|                             | Repurchase of stock                                                                                       |                                                  |        |             |   |            |   |              |   |             |     | (8          | ) |               |   |        |   |           |        | (17   | ) |   |     |  |     |   |        |       |   |   |         |        |         |   |         | (17     | )      
|                             | Compensation expense from issuance of stock
    options to consultants                                    |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 41    |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 41      |        
|                             | Issuance of warrants in conjunction with debt and
    facility lease                                      |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 319   |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 319     |        
|                             | Issuance of stock in conjunction with Cell-Matrix
    acquisition                                         |                                                  |        | 2,143        |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 5,721 |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 5,721   |        
|                             | Accretion to redemption value of redeemable
    convertible preferred stock                               |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        |      |   |   |     |  |     |   |        |       |   |   |         | (7,635  | )       |   |         | (7,635  | )      
|                             | Comprehensive loss:                                                                                       |                                                  |        |              |   |            |   |               |   |             |     |             |   |               |   |         |   |           |        |       |   |   |     |   |     |   |        |        |   |   |         |         |         |   |         |         |        
|                             |                                                                                                           | Net loss                                         |        |              |  |            |   |               |  |             |     |             |  |               |   |         |  |           |        |       |  |   |     |   |    |   |        |        |  |   |         |         | (35,213 | ) |         |         | (35,213 | )
|                             |                                                                                                           | Unrealized loss on securities available-for-sale |        |              |  |            |   |               |  |             |     |             |  |               |   |         |  |           |        |       |  |   |     |   | (43 | ) |        |        |  |   |         |         |        |   |         |         | (43     | )
|                             |                                                                                                           |                                                  |        |              |   |            |   |               |   |             |     |             |   |               |   |         |   |           |        |       |   |   |     |   |     |   |        |        |   |   |         |         |         |   |         |        
|                             | Total comprehensive loss                                                                                  |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        |      |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | (35,256 | )      
|                             |                                                                                                           |                                                  |        |              |   |            |   |               |   |             |     |             |   |               |   |         |   |           |        |       |   |   |     |   |     |   |        |        |   |   |         |         |         |   |         |        
|Balance at December 31, 2002 |                                                                                                           |                                                  | 27,189 |              |   |            | 1 |               |   |             | 496 |             |   |               |  |         |   |           | 14,409 |       |   |   | (43 | ) |     |   | (1,268 | )      |   |   | (68,977 | )       |         |   | (55,878 | )      
|                             | Exercise of stock options and warrants                                                                    |                                                  |        |             |   |            |   |              |   |             |     | 133         |   |               |   |        |   |           |        | 263   |   |   |     |  |     |   |        |       |   |   |         |        |         |   |         | 263     |        
|                             | Deferred employee stock-based compensation                                                                |                                                  |        |             |   |            |   |              |   |             |     |            |   |               |   |        |   |           |        | 4,999 |   |   |     |  |     |   |        | (4,999 | ) |   |         |        |         |   |         |        |        

F-5



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##### Table of Contents



|                             |                                                                                                                         |                                                  |   |              |   |            |   |               |   |             |        |             |   |               |   |         |   |           |         |         |   |   |   |   |    |   |        |       |   |   |          |         |         |   |         |         |         |  
|---------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | - | ------------ | - | ---------- | - | ------------- | - | ----------- | ------ | ----------- | - | ------------- | - | ------- | - | --------- | ------- | ------- | - | - | - | - | -- | - | ------ | ----- | - | - | -------- | ------- | ------- | - | ------- | ------- | ------- | -
|                             |                                                                                                                         |                                                  |   |              |   |            |   |               |   | Accumulated |        |             |   |               |   |        
|                             |                                                                                                                         | Convertible                                      |   |              |   |            |   | Other         |   |             |        |             |   | Total        
|                             |                                                                                                                         | Preferred Stock                                  |   | Common Stock |   | Additional |   | Comprehensive |   |             |        |             |   | Stockholders
|                             |                                                                                                                         |                                                  |   |              |   | Paid-in    |   | Income        |   | Deferred    |        | Accumulated |   | Equity       
|                             |                                                                                                                         | Shares                                           |   | Amount       |   | Shares     |   | Amount        |   | Capital     |        | (Loss)      |   | Compensation  |   | Deficit |   | (Deficit)
|                             |                                                                                                                         |                                                  |   |              |   |            |   |               |   |             |        |             |   |               |   |         |   |          
|                             | Unamortized deferred compensation on cancelled
    stock options                                                        |                                                  |   |             |   |            |   |              |   |             |        |            |   |               |   |        |   |           |         | (271    | ) |   |   |  |    |   |        | 271   |   |   |          |        |         |   |         |        |        
|                             | Amortization of deferred employee stock-based
    compensation                                                          |                                                  |   |             |   |            |   |              |   |             |        |            |   |               |   |        |   |           |         |        |   |   |   |  |    |   |        | 2,643 |   |   |          |        |         |   |         | 2,643   |        
|                             | Compensation expense from issuance of stock
    options to consultants                                                  |                                                  |   |             |   |            |   |              |   |             |        |            |   |               |   |        |   |           |         | 131     |   |   |   |  |    |   |        |      |   |   |          |        |         |   |         | 131     |        
|                             | Issuance of warrants in conjunction with a
    research consulting agreement                                            |                                                  |   |             |   |            |   |              |   |             |        |            |   |               |   |        |   |           |         | 245     |   |   |   |  |    |   |        |      |   |   |          |        |         |   |         | 245     |        
|                             | Issuance of common stock in initial public
    offering                                                                 |                                                  |   |             |   |            |   |              |   |             |        | 6,000       |   |               |   |        |   |           |         | 65,139  |   |   |   |  |    |   |        |      |   |   |          |        |         |   |         | 65,139  |        
|                             | Conversion of redeemable convertible preferred
    stock into common stock                                              |                                                  |   |             |   |            |   |              |   |             |        | 13,892      |   |               |   | 1       |   |           |         | 145,623 |   |   |   |  |    |   |        |      |   |   |          |        |         |   |         | 145,624 |        
|                             | Conversion of convertible preferred stock into
    common stock                                                         |                                                  |   | (27,189      | ) |            |   | (1            | ) |             |        | 6,215       |   |               |   |        |   |           |         | 1       |   |   |   |  |    |   |        |      |   |   |          |        |         |   |         |        |        
|                             | Deemed dividend resulting from beneficial
    conversion feature on Series C redeemable convertible
    preferred stock |                                                  |   |             |   |            |   |              |   |             |        |            |   |               |   |        |   |           |         | 14,775  |   |   |   |  |    |   |        |      |   |   |          | (14,775 | )       |   |         |        |        
|                             | Accretion to redemption value of redeemable
    convertible preferred stock                                             |                                                  |   |             |   |            |   |              |   |             |        |            |   |               |   |        |   |           |         |        |   |   |   |  |    |   |        |      |   |   |          | (7,867  | )       |   |         | (7,867  | )      
|                             | Comprehensive loss:                                                                                                     |                                                  |   |              |   |            |   |               |   |             |        |             |   |               |   |         |   |           |         |         |   |   |   |   |    |   |        |       |   |   |          |         |         |   |         |         |        
|                             |                                                                                                                         | Net loss                                         |   |              |  |            |   |               |  |             |        |             |  |               |   |         |  |           |         |         |  |   |   |   |   |   |        |       |  |   |          |         | (37,573 | ) |         |         | (37,573 | )
|                             |                                                                                                                         | Unrealized gain on securities available-for-sale |   |              |  |            |   |               |  |             |        |             |  |               |   |         |  |           |         |         |  |   |   |   | 46 |   |        |       |  |   |          |         |        |   |         |         | 46      |  
|                             |                                                                                                                         |                                                  |   |              |   |            |   |               |   |             |        |             |   |               |   |         |   |           |         |         |   |   |   |   |    |   |        |       |   |   |          |         |         |   |         |        
|                             |                                                                                                                         | Total comprehensive loss                         |   |              |  |            |   |               |  |             |        |             |  |               |   |         |  |           |         |         |  |   |   |   |   |   |        |       |  |   |          |         |        |   |         |         | (37,527 | )
|                             |                                                                                                                         |                                                  |   |              |   |            |   |               |   |             |        |             |   |               |   |         |   |           |         |         |   |   |   |   |    |   |        |       |   |   |          |         |         |   |         |        
|Balance at December 31, 2003 |                                                                                                                         |                                                  |  |              |   | $          |  |               |   |             | 26,736 |             |   | $             | 1 |         |   | $         | 245,314 |         |   | $ | 3 |   |    | $ | (3,353 | )     |   | $ | (129,192 | )       |         | $ | 112,773 |        
|                             |                                                                                                                         |                                                  |   |              |   |            |   |               |   |             |        |             |   |               |   |         |   |           |         |         |   |   |   |   |    |   |        |       |   |   |          |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



CANCERVAX CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                          |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |         |     |       |  
|----------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------- | ------- | ----- | ----- | - | ------- | ----- | --- | - | ------- | --- | ----- | -
|                                          |                                                                                 |                                                                                        
|                                          |                                                                                 | Years Ended December 31,                                                               
|                                          |                                                                                 |                                                                                        
|                                          |                                                                                 | 2003                                                                                    |                                          | 2002    |       | 2001 
|                                          |                                                                                 |                                                                                         |                                          |         |       |      
|Cash flows from operating
    activities: |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Net loss                                                                        |                                                                                         | $                                        | (37,573 | )     |       | $ | (35,213 | )     |     | $ | (18,582 | )  
|                                          | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                         |                                          |         |       |       |   |         |       |     |   |         |    
|                                          |                                                                                 | Amortization of deferred employee stock-based
    compensation                          |                                          |         | 2,643 |       |   |         | 1,412 |     |   |         |    |      
|                                          |                                                                                 | Stock compensation from the issuance of stock
    options and warrants to third parties |                                          |         | 177   |       |   |         | 41    |     |   |         | 47  |      
|                                          |                                                                                 | Non-cash interest expense from warrants issued
    with debt                            |                                          |         | 93    |       |   |         | 46    |     |   |         | 10  |      
|                                          |                                                                                 | Amortization of premium on securities
    available-for-sale                            |                                          |         | 170   |       |   |         | 56    |     |   |         |    |      
|                                          |                                                                                 | Interest receivable on securities
    available-for-sale                                |                                          |         | 46    |       |   |         | (150  | )   |   |         |    |      
|                                          |                                                                                 | Depreciation                                                                            |                                          |         | 1,891 |       |   |         | 1,443 |     |   |         | 651 |      
|                                          |                                                                                 | Amortization of intangibles                                                             |                                          |         | 252   |       |   |         | 209   |     |   |         | 187 |      
|                                          |                                                                                 | Purchased in-process research and development                                           |                                          |         |      |       |   |         | 2,840 |     |   |         |    |      
|                                          |                                                                                 | Deferred rent                                                                           |                                          |         | 446   |       |   |         | 80    |     |   |         | 64  |      
|                                          |                                                                                 | Changes in operating assets and liabilities:                                            |                                          |         |       |       |   |         |       |     |   |         |     |      
|                                          |                                                                                 |                                                                                         | Other assets                             |         |       | (759  | ) |         |       | (51 | ) |         |     | (188  | )
|                                          |                                                                                 |                                                                                         | Accounts payable and accrued liabilities |         |       | 1,742 |   |         |       | 500 |   |         |     | 2,047 |  
|                                          |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Net cash used in operating activities                                           |                                                                                         |                                          | (30,872 | )     |       |   | (28,787 | )     |     |   | (15,764 | )  
|Cash flows from investing
    activities: |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Cash paid in Cell-Matrix acquisition                                            |                                                                                         |                                          |        |       |       |   | (222    | )     |     |   |        |    
|                                          | Purchases of property and equipment                                             |                                                                                         |                                          | (1,575  | )     |       |   | (4,421  | )     |     |   | (5,956  | )  
|                                          | Purchases of securities available-for-sale                                      |                                                                                         |                                          | (2,942  | )     |       |   | (10,567 | )     |     |   |        |    
|                                          | Maturities of securities available-for-sale                                     |                                                                                         |                                          | 1,998   |       |       |   |        |       |     |   |        |    
|                                          | Sale of securities available-for-sale                                           |                                                                                         |                                          | 5,481   |       |       |   | 500     |       |     |   |        |    
|                                          | Increase in intangibles                                                         |                                                                                         |                                          | (183    | )     |       |   | (234    | )     |     |   |        |    
|                                          | (Increase) decrease in restricted cash                                          |                                                                                         |                                          | (450    | )     |       |   | 578     |       |     |   | (1,778  | )  
|                                          | Stockholder note receivable                                                     |                                                                                         |                                          |        |       |       |   |        |       |     |   | 166     |    
|                                          |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Net cash provided by (used in) investing
    activities                         |                                                                                         |                                          | 2,329   |       |       |   | (14,366 | )     |     |   | (7,568  | )  
|Cash flows from financing
    activities: |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Proceeds from long-term debt                                                    |                                                                                         |                                          | 462     |       |       |   | 4,901   |       |     |   | 4,000   |    
|                                          | Payments on long-term debt                                                      |                                                                                         |                                          | (2,900  | )     |       |   | (1,541  | )     |     |   | (326    | )  
|                                          | Proceeds from exercise of stock options, net                                    |                                                                                         |                                          | 263     |       |       |   | 182     |       |     |   | 401     |    
|                                          | Proceeds from stock subscription receivable                                     |                                                                                         |                                          |        |       |       |   |        |       |     |   | 166     |    
|                                          | Proceeds from issuance of common stock, net                                     |                                                                                         |                                          | 65,139  |       |       |   |        |       |     |   |        |    
|                                          | Proceeds from issuance of preferred stock, net                                  |                                                                                         |                                          | 41,177  |       |       |   | 55,591  |       |     |   |        |    
|                                          |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Net cash provided by financing activities                                       |                                                                                         |                                          | 104,141 |       |       |   | 59,133  |       |     |   | 4,241   |    
|                                          | Increase (decrease) in cash and cash equivalents                                |                                                                                         |                                          | 75,598  |       |       |   | 15,980  |       |     |   | (19,091 | )  
|                                          | Cash and cash equivalents at beginning of year                                  |                                                                                         |                                          | 26,083  |       |       |   | 10,103  |       |     |   | 29,194  |    
|                                          |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        
|                                          | Cash and cash equivalents at end of year                                        |                                                                                         | $                                        | 101,681 |       |       | $ | 26,083  |       |     | $ | 10,103  |    
|                                          |                                                                                 |                                                                                         |                                          |         |       |       |   |         |       |     |   |        

F-7



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##### Table of Contents



|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |       | 
|------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------ | - | ------- |  | ---- | - | ----- | - |  | - | ----- | 
|                                                                          |                                                                                                    |                         
|                                                                          |                                                                                                    | Years Ended December 31,
|                                                                          |                                                                                                    |                         
|                                                                          |                                                                                                    | 2003                     |   | 2002    |  | 2001
|                                                                          |                                                                                                    |                          |   |         |  |     
|Supplemental cash flow information:                                       |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Cash paid during the year for interest                                                             |                          | $ | 750     |  |      | $ | 416   |   |  | $ | 102   | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|Supplemental schedule of non-cash investing
    and financing activities: |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Series A redeemable convertible preferred
    stock issuable                                       |                          | $ |        |  |      | $ | 900   |   |  | $ |      | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Acquisitions (cancellations) of equipment
    purchased through capital leases                     |                          | $ |        |  |      | $ | (60   | ) |  | $ | 116   | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Value of stock issued in Cell-Matrix acquisition                                                   |                          | $ |        |  |      | $ | 5,721 |   |  | $ |      | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Unrealized gain (loss) on available-for-sale
    securities                                        |                          | $ | 46      |  |      | $ | (43   | ) |  | $ |      | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Issuance of warrants in connection with debt,
    facility lease and research consulting agreement |                          | $ | 245     |  |      | $ | 296   |   |  | $ |      | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Accretion to redemption value of redeemable
    convertible preferred stock                        |                          | $ | 7,867   |  |      | $ | 7,635 |   |  | $ | 4,105 | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Deemed dividend resulting from beneficial
    conversion feature on Series C preferred stock       |                          | $ | 14,775  |  |      | $ |      |   |  | $ |      | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      
|                                                                          | Conversion of preferred stock into common stock                                                    |                          | $ | 145,624 |  |      | $ |      |   |  | $ |      | 
|                                                                          |                                                                                                    |                          |   |         |  |      |   |       |   |  |   |      

See accompanying notes to consolidated financial
statements.

F-8



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##### Table of Contents



CANCERVAX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                                
|-- | ---------------------------------------------------------------
|1. | Organization and Summary of Significant
    Accounting Policies



| |                          
| | -------------------------
| | Organization and Business

We were incorporated in Delaware in June 1998 and
are focused on the research, development and commercialization
of novel biological products for the treatment and control of
cancer. We had no operations in 1998.

Our lead product candidate, Canvaxin, is in two
worldwide Phase 3 clinical trials for the treatment of
advanced-stage melanoma. In addition, we are developing a
pipeline of products based upon our proprietary specific active
immunotherapy, anti-angiogenesis and T-oligonucleotide
technology platforms as well as monoclonal human antibodies. Our
biologics manufacturing facility produces Canvaxin for use in
clinical trials and, if Canvaxin is approved, the facility will
be used to produce commercial quantities of Canvaxin. We also
have research collaborations with both private and academic
institutions.



| |                            
| | ---------------------------
| | Principles of Consolidation

The accompanying consolidated financial
statements include our accounts and those of our wholly owned
subsidiary, Cell-Matrix, Inc. All intercompany accounts and
transactions have been eliminated in consolidation.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires our management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our management has made a
number of estimates and assumptions relating to the reported
amounts of assets, liabilities and expenses and the related
disclosure of contingent assets and liabilities in conformity
with accounting principles generally accepted in the United
States. On an on-going basis, we evaluate our estimates,
including those related to the valuation of goodwill,
intangibles and other long-lived assets. We base our estimates
on historical experience and on various other assumptions that
we believe to be reasonable under the circumstances. Actual
results could differ from those estimates.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents are comprised of highly
liquid investments with an original maturity of less than three
months when purchased. Our cash equivalents as of
December 31, 2003 and 2002 totaled $101.5 million and
$25.8 million, respectively, and consist of money market
accounts.



| |                              
| | -----------------------------
| | Securities Available-for-Sale

We consider investments with an original maturity
of more than three months to be short-term investments and we
have classified these securities as available-for-sale. Such
investments are carried at fair value, with unrealized gains and
losses included as accumulated other comprehensive income (loss)
in stockholders equity (deficit). The cost of
available-for-sale securities sold is based on the specific
identification method.



| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

We carry our cash and cash equivalents and
securities available-for-sale at market value. The carrying
amount of accounts payable and accrued liabilities are
considered to be representative of their respective fair values
due to their short-term nature. Based on the borrowing rates
currently available to us for loans with similar terms, we
believe the fair value of the long-term debt approximates its
carrying value.

F-9



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments that potentially subject us
to a significant concentration of credit risk consist primarily
of cash and cash equivalents and securities available-for-sale.
We maintain deposits in federally insured financial institutions
in excess of federally insured limits. We do not believe we are
exposed to significant credit risk due to the financial position
of the depository institutions in which those deposits are held.
Additionally, we have established guidelines regarding
diversification of our investment portfolio and maturities of
investments, which are designed to maintain safety and liquidity.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost and
depreciated over the estimated useful lives of the assets
(ranging from three to seven years) using the
straight  line method. Leasehold improvements are
amortized over the estimated useful life of the asset or the
lease term, whichever is shorter.



| |         
| | --------
| | Goodwill

We have goodwill with a carrying value of
$5.4 million at December 31, 2003 and 2002,
respectively, which resulted from our acquisition of Cell-Matrix
in January 2002. We have assigned the goodwill to our
Cell-Matrix reporting unit. In accordance with Statement of
Financial Accounting Standards, or SFAS, No. 142,
Goodwill and Other Intangible Assets, we do not amortize
goodwill. Instead, we review goodwill for impairment at least
annually and more frequently if events or changes in
circumstances indicate a reduction in the fair value of the
reporting unit to which the goodwill has been assigned. Goodwill
is determined to be impaired if the fair value of the reporting
unit to which the goodwill has been assigned is less than its
carrying amount, including the goodwill. In October 2003, we
performed our annual goodwill impairment test in accordance with
SFAS No. 142 and determined that goodwill was not
impaired.



| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, long-lived assets to be held and used, including
property and equipment and intangible assets subject to
amortization, are reviewed for impairment at least annually and
whenever events or changes in circumstances indicate that the
carrying amount of the assets or related asset group may not be
recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. In the event that
such cash flows are not expected to be sufficient to recover the
carrying amount of the asset or asset group, the carrying amount
of the asset is written down to its estimated fair value.
Long-lived assets to be disposed of are carried at fair value
less costs to sell. There have been no indicators of impairment
with respect to our long-lived assets through December 31,
2003.



| |                         
| | ------------------------
| | Research and Development

Research and development expenses consist
primarily of costs associated with the clinical trials of our
product candidates, compensation and other expenses for research
and development personnel, supplies and development materials,
costs for consultants and related contract research, facility
costs, amortization of purchased technology and depreciation.
Expenditures relating to research and development are expensed
as incurred.



| |                         
| | ------------------------
| | Stock-Based Compensation

We account for our employee stock option grants
under the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Accordingly, stock-

F-10



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

based compensation expense related to employee
stock options is recorded if, on the date of grant, the fair
value of the underlying stock exceeds the exercise price of the
option. In 2003 and 2002, we recorded deferred stock-based
compensation of $5.0 million and $2.7 million,
respectively, representing the difference between the estimated
fair value of our common stock and the exercise price of the
stock options on their respective grant dates. The deferred
stock-based compensation is recognized and amortized on an
accelerated basis in accordance with FASB Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans, over the vesting
period of the related options, which is generally four years. In
2003 and 2002, we recognized stock-based compensation expense
related to employee stock option grants of $2.6 million and
$1.4 million, respectively.

The following table illustrates the effect on net
loss and loss per share for the years ended December 31,
2003, 2002 and 2001 if we had applied the fair value recognition
provisions of SFAS No. 123, Accounting for
Stock-based Compensation, as amended, to stock-based
employee compensation. For purposes of the pro forma
disclosures, the estimated fair value of the options is
amortized to expense over the vesting period of the related
options using the accelerated method.

|                                                                                                                           |  |                                 |         |      |  |      |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                           |  |                                
|                                                                                                                           |  | Years Ended December 31,       
|                                                                                                                           |  |                                
|                                                                                                                           |  | 2003                            |         | 2002 |  | 2001
|                                                                                                                           |  |                                 |         |      |  |     
|                                                                                                                           |  |                                
|                                                                                                                           |  | (In thousands, except per share
|                                                                                                                           |  | amounts)                       
|Net loss applicable to common stockholders, as
    reported                                                                |  | $                               | (60,215 | )    |  | $    | (42,848 | ) |  | $ | (22,687 | )
|Add: Stock-based employee compensation expense
    included in net loss applicable to common stockholders, as
    reported |  |                                 | 2,643   |      |  |      | 1,412   |   |  |   |        |  
|Deduct: Stock-based employee compensation expense
    determined under the fair value based method for all awards          |  |                                 | (3,763  | )    |  |      | (1,939  | ) |  |   | (278    | )
|                                                                                                                           |  |                                 |         |      |  |      |         |   |  |   |         |  
|Pro forma net loss applicable to common
    stockholders                                                                   |  | $                               | (61,335 | )    |  | $    | (43,375 | ) |  | $ | (22,965 | )
|                                                                                                                           |  |                                 |         |      |  |      |         |   |  |   |         |  
|Loss per share:                                                                                                            |  |                                 |         |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share, as reported                                                                          |  | $                               | (13.30  | )    |  | $    | (153.85 | ) |  | $ | (266.02 | )
|                                                                                                                           |  |                                 |         |      |  |      |         |   |  |   |         |  
|Pro forma basic and diluted net loss per share                                                                             |  | $                               | (13.55  | )    |  | $    | (155.74 | ) |  | $ | (269.28 | )
|                                                                                                                           |  |                                 |         |      |  |      |         |   |  |   |         |  

The fair value of our employee stock options was
estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:

|                                 |                                     |                          |      |      |  |      |      |      |  |  |      |      | 
|-------------------------------- | ----------------------------------- | ------------------------ | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | ---- | 
|                                 |                                     |                         
|                                 |                                     | Years Ended December 31,
|                                 |                                     |                         
|                                 |                                     | 2003                     |      | 2002 |  | 2001
|                                 |                                     |                          |      |      |  |     
|Dividend yield                   |                                     |                          | 0    | %    |  |      | 0    | %    |  |  | 0    | %   
|Expected volatility              |                                     |                          | 70   | %    |  |      | 70   | %    |  |  | 70   | %   
|Risk-free interest rate          |                                     |                          | 2.63 | %    |  |      | 3.81 | %    |  |  | 4.55 | %   
|Expected life in years           |                                     |                          | 4.85 |      |  |      | 4.97 |      |  |  | 4.95 |     
|Per share grant date fair value: |                                     |                          |      |      |  |      |      |      |  |  |      |     
|                                 | Exercise prices below fair value    |                          | $    | 7.14 |  |      | $    | 8.58 |  |  |      |     | 
|                                 | Exercise prices equal to fair value |                          | $    | 6.29 |  |      | $    | 1.77 |  |  | $    | 0.91 | 

As required under SFAS No. 123, the pro
forma effects of stock-based compensation on net loss are
estimated at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable.
Because our employee stock options have characteristics
significantly different from those of traded options, and
because changes in the subjective input assumptions can

F-11



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

materially affect the fair value estimate, we
believe that the existing models do not necessarily provide a
reliable single measure of the fair value of our employee stock
options.

In addition to employee stock option grants, we
have granted options to non-employees which we account for in
accordance with SFAS No. 123 and Emerging Issues Task
Force, or EITF, Issue No. 96-18, Accounting for
Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling Goods and
Services. Accordingly, stock options granted to
non-employees are periodically revalued as the options vest and
are recognized to expense over the related service period. In
2003, 2002 and 2001, we granted stock options to purchase 5,341,
1,136 and 12,386 shares, respectively, of our common stock
to non-employees and recognized related expense of $130,557,
$40,685 and $46,845, respectively. The fair value of the options
granted to non-employees was determined using the following
weighted-average assumptions:

|                        |  |              |      |      |  |      |      |   |  |  |      |  
|----------------------- |  | ------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                        |  |             
|                        |  | Years Ended 
|                        |  | December 31,
|                        |  |             
|                        |  | 2003         |      | 2002 |  | 2001
|                        |  |              |      |      |  |     
|Dividend yield          |  |              | 0    | %    |  |      | 0    | % |  |  | 0    | %
|Expected volatility     |  |              | 70   | %    |  |      | 70   | % |  |  | 70   | %
|Risk-free interest rate |  |              | 3.69 | %    |  |      | 4.50 | % |  |  | 5.01 | %
|Expected life in years  |  |              | 8.05 |      |  |      | 8.76 |   |  |  | 9.51 |  



| |                   
| | ------------------
| | Net Loss Per Share

We calculate net loss per share in accordance
with SFAS No. 128, Earnings Per Share. Basic
earnings per share is calculated by dividing net loss by the
weighted average number of common shares outstanding for the
period, reduced by the weighted average unvested common shares
subject to repurchase, without consideration for common stock
equivalents. Diluted earnings per share is computed by dividing
net loss by the weighted average number of common shares
outstanding for the period, reduced by the weighted average
unvested common shares subject to repurchase and increased to
include the potential dilutive effect of our common stock
equivalents, if any, determined using the treasury-stock method.

F-12



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The actual net loss per share amounts for the
year ended December 31, 2003 were computed based on the
shares of common stock outstanding during the year, including
the 6.0 million shares of our common stock issued in our
initial public offering on November 4, 2003 and the
20.1 million shares of our common stock issued upon
conversion of our preferred stock in conjunction with the
initial public offering. As a result of the issuance of these
common shares, there is a lack of comparability in the basic and
diluted net loss per share amounts for the periods presented
below. In order to provide a more relevant measure of our
operating results, the following unaudited pro forma net loss
per share calculation has been included. The shares used to
compute unaudited pro forma basic and diluted net loss per share
represent the weighted average common shares outstanding for the
period, reduced by the weighted average unvested common shares
subject to repurchase, and including the assumed conversion of
all outstanding shares of preferred stock into shares of common
stock using the as-if converted method as of the beginning of
each year presented or the date of issuance, if later.

|                                     |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |         |  
|------------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------------- | ------ | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                     |                                                                                              |                                
|                                     |                                                                                              | Years Ended December 31,       
|                                     |                                                                                              |                                
|                                     |                                                                                              | 2003                            |        | 2002    |   | 2001
|                                     |                                                                                              |                                 |        |         |   |     
|                                     |                                                                                              |                                
|                                     |                                                                                              | (In thousands, except per share
|                                     |                                                                                              | amounts)                       
|Actual:                              |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|Numerator:                           |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|                                     | Net loss, as reported                                                                        |                                 | $      | (37,573 | ) |      | $       | (35,213 | ) |   | $       | (18,582 | )
|                                     | Accretion to redemption value of redeemable
    convertible preferred stock                  |                                 |        | (7,867  | ) |      |         | (7,635  | ) |   |         | (4,105  | )
|                                     | Deemed dividend resulting from beneficial
    conversion feature on Series C preferred stock |                                 |        | (14,775 | ) |      |         |        |   |   |         |        |  
|                                     |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|                                     | Net loss applicable to common stockholders, as
    reported                                  |                                 | $      | (60,215 | ) |      | $       | (42,848 | ) |   | $       | (22,687 | )
|                                     |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|Denominator:                         |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|                                     | Weighted average common shares outstanding                                                   |                                 |        | 4,643   |   |      |         | 469     |   |   |         | 227     |  
|                                     | Weighted average unvested common shares subject
    to repurchase                            |                                 |        | (116    | ) |      |         | (190    | ) |   |         | (142    | )
|                                     |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|                                     | Weighted average common shares used to calculate
    basic and diluted loss per share        |                                 |        | 4,527   |   |      |         | 279     |   |   |         | 85      |  
|                                     |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        
|Basic and diluted net loss per share |                                                                                              | $                               | (13.30 | )       |   | $    | (153.85 | )       |   | $ | (266.02 | )      
|                                     |                                                                                              |                                 |        |         |   |      |         |         |   |   |         |        

F-13



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                               |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |         |  
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------- | ----- | ------- | - | ---- | ----- | ------- | - | - | ----- | ------- | -
|                                               |                                                                                                       |                                
|                                               |                                                                                                       | Years Ended December 31,       
|                                               |                                                                                                       |                                
|                                               |                                                                                                       | 2003                            |       | 2002    |   | 2001
|                                               |                                                                                                       |                                 |       |         |   |     
|                                               |                                                                                                       |                                
|                                               |                                                                                                       | (In thousands, except per share
|                                               |                                                                                                       | amounts)                       
|Pro forma:                                     |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|Numerator:                                     |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|                                               | Net loss, as reported                                                                                 |                                 | $     | (37,573 | ) |      | $     | (35,213 | ) |   | $     | (18,582 | )
|                                               | Deemed dividend resulting from beneficial
    conversion feature on Series C preferred stock          |                                 |       | (14,775 | ) |      |       |        |   |   |       |        |  
|                                               |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|                                               | Pro forma net loss applicable to common
    stockholders                                              |                                 | $     | (52,348 | ) |      | $     | (35,213 | ) |   | $     | (18,582 | )
|                                               |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|Denominator:                                   |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|                                               | Weighted average common shares used to calculate
    basic and diluted loss per share                 |                                 |       | 4,527   |   |      |       | 279     |   |   |       | 85      |  
|                                               | Pro forma adjustments to reflect weighted average
    effect of assumed conversion of preferred stock |                                 |       | 14,098  |   |      |       | 13,132  |   |   |       | 8,849   |  
|                                               |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|                                               | Weighted average shares used to compute pro forma
    basic and diluted net loss per share            |                                 |       | 18,625  |   |      |       | 13,411  |   |   |       | 8,934   |  
|                                               |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        
|Pro forma basic and diluted net loss per share |                                                                                                       | $                               | (2.81 | )       |   | $    | (2.63 | )       |   | $ | (2.08 | )      
|                                               |                                                                                                       |                                 |       |         |   |      |       |         |   |   |       |        

The following securities, representing the
historical amounts and not the common stock equivalent amounts,
were excluded from the calculation of diluted loss per share as
their effect would be antidilutive (in thousands):

|                                     |  |                          |       |      |  |      |        |  |  |  |        | 
|------------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                     |  |                         
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 2003                     |       | 2002 |  | 2001
|                                     |  |                          |       |      |  |     
|Preferred stock                      |  |                          |      |      |  |      | 62,344 |  |  |  | 38,935 | 
|Common stock subject to repurchase   |  |                          | 91    |      |  |      | 150    |  |  |  | 207    | 
|Options to purchase common stock     |  |                          | 2,032 |      |  |      | 1,058  |  |  |  | 738    | 
|Warrants to purchase preferred stock |  |                          | 377   |      |  |      | 292    |  |  |  | 65     | 
|                                     |  |                          |       |      |  |      |        |  |  |  |        | 
|                                     |  |                          | 2,500 |      |  |      | 63,844 |  |  |  | 39,945 | 
|                                     |  |                          |       |      |  |      |        |  |  |  |        | 



| |             
| | ------------
| | Income Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes, using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.



| |                    
| | -------------------
| | Segment Information

We operate in one segment, which is the research,
development and commercialization of novel biological products
for the treatment and control of cancer. The chief operating
decision-makers review our operating results on an aggregate
basis and manage our operations as a single operating segment.



| |                  
| | -----------------
| | Reclassifications

Certain prior year expenses have been
reclassified to conform to the current year presentation.

F-14



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                   
| | ----------------------------------
| | Effect of New Accounting Standards

In May 2003, the FASB issued SFAS
No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. SFAS
No. 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now
be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial
instruments that require or may require the issuer to buy back
some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock.
SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003. The adoption
of SFAS No. 150 did not have a material impact on our
consolidated financial statements.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
SFAS No. 148, which was effective January 1,
2003, is an amendment to SFAS No. 123 providing
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and also provides additional disclosures about the
method of accounting for stock-based employee compensation. We
have chosen not to adopt the voluntary change to the fair value
based method of accounting for stock-based employee
compensation. If we were required to adopt such a method, its
implementation pursuant to SFAS No. 148 would have a
material effect on our consolidated results of operations.



|   |                        
|-- | -----------------------
|2. | Cell-Matrix Acquisition

On January 17, 2002, we acquired all of the
outstanding common shares of Cell-Matrix in a transaction
accounted for as a purchase. Cell-Matrix is developing
anti-angiogenesis technology to treat cancer and other diseases.
The acquisition of Cell-Matrix allowed us to expand existing
product pipelines and technologies to include anti-angiogenesis
product candidates that we believe will complement and enhance
our specific active immunotherapy development platform. The
purchase price of the acquisition was as follows (in thousands):

|                                                                |  |   |       | 
|--------------------------------------------------------------- |  | - | ----- | 
|Issuance of 2,142,853 shares of Acquisition
    preferred stock |  | $ | 5,721 | 
|Cash paid at acquisition                                        |  |   | 118   | 
|Acquisition related costs                                       |  |   | 104   | 
|Assumed contractual obligations due to related
    parties      |  |   | 2,500 | 
|                                                                |  |   |       | 
|                                                                |  | $ | 8,443 | 
|                                                                |  |   |       | 

The 2,142,853 shares of Acquisition
preferred stock issued to acquire Cell-Matrix converted into
approximately 487,000 shares of common stock upon
completion of our initial public offering in November 2003.
In the acquisition, we assumed $2.5 million of notes
payable to certain parties who became our stockholders upon
completion of the acquisition. The notes and accrued interest
thereon were paid in full in January 2004.

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CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The purchase price was allocated to the tangible
and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values at the acquisition
date. The excess of the purchase price over the fair values of
assets and liabilities acquired was allocated to goodwill. The
estimated fair values of the assets acquired and liabilities
assumed as of the acquisition date are as follows (in thousands):

|                                    |  |   |       | 
|----------------------------------- |  | - | ----- | 
|Property and equipment acquired     |  | $ | 222   | 
|In-process research and development |  |   | 2,840 | 
|Goodwill                            |  |   | 5,381 | 
|                                    |  |   |       | 
|                                    |  | $ | 8,443 | 
|                                    |  |   |       | 

The principal technology acquired was monoclonal
antibodies, which were in the process of being developed.
Purchased in-process research and development was expensed upon
acquisition, in accordance with FASB Interpretation No. 4,
Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method, as
ultimate commercialization of the antibodies acquired is
uncertain and the technology has no alternative uses. The fair
value of each of the in-process research and development
projects was based on a cost approach that attempts to estimate
the costs of replicating the technology including outside
contracted services, the level of full time employees and lab
supplies that would be required in the development effort, net
of tax. Management was primarily responsible for the estimates
and assumptions used in determining each of the above factors
and believes that the analysis was performed based on the most
relevant available data. As of December 31, 2003, due to
the inherent uncertainty and lengthy development life of the
underlying antibodies, we cannot estimate with any certainty the
costs that will be incurred, or the anticipated completion
dates, in the continued development of these antibodies. The
$5.4 million of goodwill and $2.8 million of
in-process research and development from the acquisition is not
expected to be deductible for tax purposes.

The accompanying consolidated statements of
operations for 2003 and 2002 include the operating results of
Cell-Matrix since the date of the acquisition. Pro forma
unaudited results of operations for the year ended
December 31, 2002 are not included because the operating
results of Cell-Matrix prior to the January 17, 2002
acquisition date were not material.



|   |                      
|-- | ---------------------
|3. | Balance Sheet Details



| |                              
| | -----------------------------
| | Securities Available-For-Sale

All available-for-sale debt securities have
contractual maturities of 12 months or less as of
December 31, 2003. Securities available-for-sale consists
of the following (in thousands):

|                           |  |                   |       |          |  |            |     |            |  |            |   |  |  |   |   |  |  |   |       | 
|-------------------------- |  | ----------------- | ----- | -------- |  | ---------- | --- | ---------- |  | ---------- | - |  |  | - | - |  |  | - | ----- | 
|                           |  |                  
|                           |  | December 31, 2003
|                           |  |                  
|                           |  |                   |       | Gross    |  | Gross      |     |           
|                           |  | Amortized         |       | Accrued  |  | Unrealized |     | Unrealized |  |           
|                           |  | Cost              |       | Interest |  | Gains      |     | Losses     |  | Fair Value
|                           |  |                   |       |          |  |            |     |            |  |           
|U.S. government securities |  | $                 | 5,011 |          |  | $          | 101 |            |  | $          | 2 |  |  | $ |  |  |  | $ | 5,114 | 
|Corporate debt securities  |  |                   | 293   |          |  |            | 3   |            |  |            | 1 |  |  |   |  |  |  |   | 297   | 
|                           |  |                   |       |          |  |            |     |            |  |            |   |  |  |   |   |  |  |   |       | 
|                           |  | $                 | 5,304 |          |  | $          | 104 |            |  | $          | 3 |  |  | $ |  |  |  | $ | 5,411 | 
|                           |  |                   |       |          |  |            |     |            |  |            |   |  |  |   |   |  |  |   |       | 

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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                           |  |                   |        |          |  |            |     |            |  |            |   |  |  |   |     |   |  |   |        | 
|-------------------------- |  | ----------------- | ------ | -------- |  | ---------- | --- | ---------- |  | ---------- | - |  |  | - | --- | - |  | - | ------ | 
|                           |  |                  
|                           |  | December 31, 2002
|                           |  |                  
|                           |  |                   |        | Gross    |  | Gross      |     |           
|                           |  | Amortized         |        | Accrued  |  | Unrealized |     | Unrealized |  |           
|                           |  | Cost              |        | Interest |  | Gains      |     | Losses     |  | Fair Value
|                           |  |                   |        |          |  |            |     |            |  |           
|U.S. government securities |  | $                 | 7,153  |          |  | $          | 109 |            |  | $          |  |  |  | $ | (33 | ) |  | $ | 7,229  | 
|Corporate debt securities  |  |                   | 2,858  |          |  |            | 41  |            |  |            |  |  |  |   | (10 | ) |  |   | 2,889  | 
|                           |  |                   |        |          |  |            |     |            |  |            |   |  |  |   |     |   |  |   |        | 
|                           |  | $                 | 10,011 |          |  | $          | 150 |            |  | $          |  |  |  | $ | (43 | ) |  | $ | 10,118 | 
|                           |  |                   |        |          |  |            |     |            |  |            |   |  |  |   |     |   |  |   |        | 



| |                       
| | ----------------------
| | Property and Equipment

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

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |        | 2002
|                                               |  |              |        |     
|Leasehold improvements                         |  | $            | 6,450  |      |  | $ | 6,383  |  
|Manufacturing and lab equipment                |  |              | 5,265  |      |  |   | 4,365  |  
|Office equipment and furniture                 |  |              | 1,519  |      |  |   | 1,375  |  
|Computer equipment                             |  |              | 1,053  |      |  |   | 817    |  
|Construction in progress                       |  |              | 226    |      |  |   |       |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 14,513 |      |  |   | 12,940 |  
|Less accumulated depreciation and amortization |  |              | (3,984 | )    |  |   | (2,095 | )
|                                               |  |              |        |      |  |   |        |  
|                                               |  | $            | 10,529 |      |  | $ | 10,845 |  
|                                               |  |              |        |      |  |   |        |  



| |            
| | -----------
| | Intangibles

Intangibles consists of the following (in
thousands):

|                                                       |  |                   |       |                   |  |                |     |              |  |   |     |  |  |   |     | 
|------------------------------------------------------ |  | ----------------- | ----- | ----------------- |  | -------------- | --- | ------------ |  | - | --- |  |  | - | --- | 
|                                                       |  |                   |       |                  
|                                                       |  | December 31, 2003 |       | December 31, 2002
|                                                       |  |                   |       |                  
|                                                       |  | Gross Carrying    |       | Accumulated       |  | Gross Carrying |     | Accumulated 
|                                                       |  | Amount            |       | Amortization      |  | Amount         |     | Amortization
|                                                       |  |                   |       |                   |  |                |     |             
|Cell lines and licensed technology rights
    (Note 4) |  | $                 | 750   |                   |  | $              | 563 |              |  | $ | 750 |  |  | $ | 375 | 
|Patents and patent applications                        |  |                   | 417   |                   |  |                | 85  |              |  |   | 234 |  |  |   | 21  | 
|                                                       |  |                   |       |                   |  |                |     |              |  |   |     |  |  |   |     | 
|                                                       |  | $                 | 1,167 |                   |  | $              | 648 |              |  | $ | 984 |  |  | $ | 396 | 
|                                                       |  |                   |       |                   |  |                |     |              |  |   |     |  |  |   |     | 

We are amortizing our acquired cell lines and
licenses to patent rights and related technology intangible
asset on a straight-line basis over four years. We are
capitalizing the costs associated with the preparation, filing
and maintenance of the patents and patent applications related
to our specific active immunotherapy platform technology and
amortize these costs on a straight-line basis over
14 years, which represents the expected life of the patents
and patent applications. Our intangible assets are reviewed for
impairment in accordance with our policy regarding impairment of
long-lived assets.



| |                
| | ---------------
| | Restricted Cash

Restricted cash relates to two irrevocable
standby letters of credit we entered into in connection with the
operating leases for our corporate headquarters and research and
development facility and our manufacturing facility. The amount
of the letter of credit related to the operating lease for our
corporate headquarters and research and development facility is
$1.4 million, varying up to a maximum of $1.9 million
based on our cash position. The amount of the letter of credit
related to the operating lease

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CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

for our manufacturing facility is
$0.6 million, decreasing through the end of the lease term.
At December 31, 2003 and 2002, the amounts of the letters
of credit totaled $2.0 million and $1.6 million,
respectively. To secure the letters of credit, we pledged
twelve-month certificates of deposit for similar amounts as of
December 31, 2003 and 2002 which have been classified as
restricted cash. Subsequent to December 31, 2003, the
amount of the letter of credit related to the operating lease
for our corporate headquarters and research and development
facility decreased from $1.4 million to $0.4 million
based on our cash position as of December 31, 2003.



| |                                             
| | --------------------------------------------
| | Accounts Payable and Accrued
    Liabilities

Accounts payable and accrued liabilities consists
of the following (in thousands):

|                                     |  |              |       |      |  |   |       | 
|------------------------------------ |  | ------------ | ----- | ---- |  | - | ----- | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2003         |       | 2002
|                                     |  |              |       |     
|Accounts payable                     |  | $            | 2,445 |      |  | $ | 2,238 | 
|Accrued employee benefits            |  |              | 1,844 |      |  |   | 961   | 
|Accrued clinical trial patient costs |  |              | 591   |      |  |   | 194   | 
|Other accrued liabilities            |  |              | 770   |      |  |   | 515   | 
|                                     |  |              |       |      |  |   |       | 
|                                     |  | $            | 5,650 |      |  | $ | 3,908 | 
|                                     |  |              |       |      |  |   |       | 



|   |                           
|-- | --------------------------
|4. | Related Party Transactions

We were founded in 1998 by Donald L.
Morton, M.D., who is currently Medical Director and
Surgeon-in-Chief and a member of the board of directors of the
John Wayne Cancer Institute, or JWCI, a cancer research
institute located in Santa Monica, California. Dr. Morton
is a member of our board of directors and a significant
stockholder. Since our inception in 1998, we have entered into
various transactions with Dr. Morton and entities
affiliated with Dr. Morton, including JWCI.

In July 2000, we entered into an agreement with
OncoVac, Inc., an entity owned by Dr. Morton, under
which we were assigned the rights to certain patents and patent
applications, cell banks and manufacturing know-how related to
Canvaxin that were originally cross-licensed from JWCI by
OncoVac. In exchange for the cross-license, we issued
284,090 shares of our common stock to JWCI and agreed to
pay an aggregate of $1,250,000 to JWCI, of which $500,000 was
paid upfront and the remainder is due in annual installments of
$125,000 through June 2006. Of the total amount, $375,000
remains unpaid as of December 31, 2003 (Note 5). Under
the cross-license agreement, we are also obligated to pay to
JWCI 50% of the initial net royalties we receive on sales of
Canvaxin, if any, by our sublicensees, up to $3.5 million.
Subsequently, we are obligated to pay to JWCI a 1% royalty on
net sales, if any, of Canvaxin to third parties by us, our
sublicensees and affiliates. In accordance with Securities and
Exchange Commission Staff Accounting Bulletin, or SAB,
No. 48, Transfer of Nonmonetary Assets by Promoters or
Shareholders, JWCI, Dr. Morton and entities owned by
Dr. Morton are considered to be founders or promoters and
therefore no value has been ascribed to the technology acquired
by us upon our formation in 1998, the assignment of the
cross-license agreement to us during 2000 or the
284,090 shares issued to JWCI as the carrying value of the
assets acquired was zero. Additionally, the $1,250,000 due to
JWCI was recorded as research and development expense in 2000 as
ultimate commercialization of Canvaxin was uncertain and the
technology had no alternative uses.

In July 2000, we entered into three agreements
with OncoVac, whereby we issued 408,163 shares of
Series A preferred stock in December 2000, for the
assignment of the cross license agreement with JWCI, the
assignment of a supply agreement with Organon Teknika
Corporation and a trademark assignment. In

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CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

accordance with SAB No. 48, no value was
assigned to the assets acquired or the shares of Series A
preferred stock issued because the carrying value of the assets
acquired was zero.

In July 2000, we entered into an agreement with
Cancer Diagnostics Laboratories, Inc., or CDL, which is
also controlled by Dr. Morton, under which we obtained 20
cell lines and licenses to patent rights and related technology
in exchange for $750,000. We capitalized the acquired cell
lines, patents and technology as an intangible asset because we
intend to use this acquired technology in research and
development related to new biological product candidates for the
treatment of cancer (Note 3). We also assumed CDLs
obligation to the party from whom CDL originally acquired the
cell lines to pay a royalty of up to 2% of net sales of any
products that include the cell lines that we acquired.

In December 2000, we entered into a contribution
of technology and exchange agreement with Dr. Morton, under
which we acquired three cell lines that comprise Canvaxin in
exchange for a cash payment of $550,000. We recorded the
$550,000 payment to Dr. Morton as research and development
expense in 2000 because the acquired assets are being used in
our principal research activities associated with Canvaxin and
the acquired assets have no alternative uses. In addition, we
acquired patent rights and other property, for which
3,673,469 shares of Junior preferred stock held by
Dr. Morton were converted into 3,673,469 shares of
Series A preferred stock. No value was assigned to the
conversion of shares because the transaction involved our
majority stockholder and did not result in a change in his
relative control of us.

In December 2000, we entered into a consulting
and non-compete agreement with Dr. Morton that expires in
December 2004. Under the terms of the agreement, we are
obligated to pay Dr. Morton $150,000 per year.
Dr. Morton is required to provide consulting services to
develop and commercialize Canvaxin and other product candidates
as well as consult on medical and technical matters as
requested. Dr. Morton is not required to devote more
than 33 business days to his services under the agreement
in any 12-month period.

In July 2001, we entered into a clinical trial
services agreement with JWCI, under which we agreed to reimburse
JWCI for all approved payments to clinical trial study sites
which were not covered by National Cancer Institute, or NCI,
grants. In addition, we agreed to reimburse JWCI for expenses
and disbursements actually incurred up to $5,000 per month,
plus a 25% administrative fee on specified expenses. We also
agreed to pay JWCI $25,000 per year during the time period
when payments to the clinical trial study sites are covered by
the NCI grants and $50,000 per year thereafter, or such
greater amounts incurred by JWCI in connection with the
Phase 3 clinical trials. In July 2002, the service
agreement was amended, pursuant to which we became obligated to
directly reimburse the clinical trial study sites, instead of
reimbursing JWCI, for all approved payments which are not
covered by NCI grants. JWCI remains obligated to reimburse the
clinical trial study sites for all approved payments for which
NCI grants are available. We are responsible for compliance with
the payment terms of the agreements with the various clinical
trial study sites regardless of the amount of NCI grant funds
available. Reimbursements to JWCI by us under the service
agreement amounted to $0.1 million, $0.2 million and
$0.4 million for the years ended December 31, 2003,
2002 and 2001, respectively. Reimbursements to the clinical
trial study sites by JWCI under the service agreement amounted
to $0.2 million, $0.5 million and $1.6 million
for the years ended December 31, 2003, 2002 and 2001,
respectively. Included in accounts payable and accrued
liabilities as of December 31, 2003 is $0.1 million
for current approved payments owed to the clinical trial study
sites of which $19,000 will be reimbursed by JWCI.

For the years ended December 31, 2003, 2002
and 2001, we also paid to JWCI $0.4 million,
$0.3 million and $0.6 million, respectively, as
reimbursement for rent, assays, employee salaries and equipment
purchases as well as payments on our installation obligation to
JWCI and recorded such amounts as operating expenses, property
and equipment, or as a reduction of our installment obligation,
as appropriate. Included in accounts payable and accrued
liabilities as of December 31, 2003, 2002 and 2001

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CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

is $21,000, $0.1 million and
$0.2 million, respectively, representing amounts owed to
JWCI for reimbursements.



|   |     
|-- | ----
|5. | Debt

Debt consists of the following (in thousands):

|                                               |  |              |        |      |  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2003         |        | 2002
|                                               |  |              |        |     
|Equipment and tenant improvement notes payable |  | $            | 4,802  |      |  | $ | 7,216  |  
|Notes payable to related parties (Note 2)      |  |              | 2,725  |      |  |   | 2,616  |  
|Installment obligations due to JWCI (Note 4)   |  |              | 375    |      |  |   | 500    |  
|Capital lease obligations                      |  |              |       |      |  |   | 7      |  
|                                               |  |              |        |      |  |   |        |  
|                                               |  |              | 7,902  |      |  |   | 10,339 |  
|Current portion of debt                        |  |              | (6,091 | )    |  |   | (2,960 | )
|                                               |  |              |        |      |  |   |        |  
|Long-term debt, less current portion           |  | $            | 1,811  |      |  | $ | 7,379  |  
|                                               |  |              |        |      |  |   |        |  

During 2001, we entered into a $4.0 million
loan and security agreement with a financing institution
pursuant to which we drew down the entire line of
$4.0 million to make certain capital expenditures. As the
credit facility was utilized, separate promissory notes were
executed. Each promissory note has monthly payments ranging from
36 to 42 months with the interest rate being fixed at the
funding date of each promissory note (9.34% to 10.41%). Each
promissory note is collateralized by the related equipment
acquired with the loan. We issued warrants in connection with
this loan as discussed more fully in Note 7.

During 2002, we entered into a $6.0 million
loan and security agreement with a financing institution to
finance eligible equipment and tenant improvements. As of
December 31, 2003 and 2002, outstanding borrowings under
the credit facility were $5.1 million and
$4.9 million, respectively. As the credit facility was
utilized, separate promissory notes were executed. Each
promissory note has payments ranging from 30 to 38 months
with the interest rate being fixed at the funding date of each
promissory note (13.69% to 14.04%). Each promissory note is
collateralized by the related equipment or tenant improvements.
As of September 30, 2003, no further draws may be made
under the credit facility. We issued warrants in connection with
this loan as discussed more fully in Note 7.

As of December 31, 2003, annual principal
payments due on our equipment and tenant improvement notes
payable are $3.2 million in 2004, $1.4 million in 2005
and $0.2 million in 2006.



|   |            
|-- | -----------
|6. | Commitments



| |       
| | ------
| | Leases

We lease our manufacturing facility under an
operating lease which expires in August 2011 with options to
renew under varying terms. We also have a ten-year lease for our
corporate headquarters and research and development facility
that commenced in July 2002 and has two renewal options for five
years each. For financial reporting purposes, we recognize rent
expense on a straight-line basis over the term of the related
operating leases. Rent expense recognized in excess of rent paid
is reflected as a deferred rent liability in accompanying
consolidated balance sheets. Rent expense was $3.0 million,
$2.1 million and $1.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively. We issued
warrants in connection with the lease agreement for our
corporate headquarters and research and development facility as
discussed more fully in Note 7.

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CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                  
| | ---------------------------------
| | Licensing and Research Agreements

We have license agreements with the University of
Southern California, or USC, and with The Scripps Research
Institute for certain anti-angiogenesis technology which we
assumed in the Cell-Matrix acquisition. In consideration for the
technology licenses granted under these agreements, up-front
license fees were paid to USC and Scripps by Cell-Matrix and we
are obligated to pay USC and Scripps royalties on future net
sales of products relating to these licenses, subject to a
minimum annual royalty payment commencing on the third
anniversary of the agreements. In addition, we are obligated to
pay Scripps milestone payments based on meeting certain
regulatory and clinical milestones. Since we assumed these
agreements through December 31, 2003, we have incurred a
total of $25,000 under the USC agreements, which has been
recorded as research and development expense, and no amounts
under the Scripps agreement. The USC license agreements
terminate upon the later of the expiration of the last of any
patent rights to licensed products that are developed under the
applicable agreement or 15 years from the effective date of
the applicable agreement. We may terminate the USC license
agreements for any reason following 30 days written
notice to USC. The Scripps license agreement terminates upon the
later of the expiration of the last of any patent rights to
licensed products that are developed under the agreement or
15 years after the date of the first commercial sale of the
last product licensed or developed under the agreement.

In October 2002, we acquired the exclusive
worldwide commercialization rights from M-Tech Therapeutics to
three human monoclonal antibodies that appear to target
tumor-associated antigens that are expressed in a variety of
solid tumor cancers. Pursuant to the licensing arrangement, we
paid M-Tech upfront payments and are obligated to pay future
license fees, milestone payments based on meeting certain
regulatory and clinical milestones and royalties. Through
December 31, 2003, we have incurred a total of
$0.3 million under the agreement, which has been recognized
as research and development expense. The agreement terminates
upon the later of the expiration of the last of any patent
rights to licensed products that are developed under this
agreement or 15 years after the date of the first
commercial sale of the last product licensed or developed under
the agreement. M-Tech may terminate, on an individual basis, the
licenses granted under the agreement to the three human
monoclonal antibodies if we determine not to file and obtain
approval of an Investigational New Drug, or IND, application for
a licensed product by a specified date and conduct clinical
trials for such product, or if we determine not to file an IND
application for a licensed product by a specified date because
of negative preclinical results. In either event, we would be
subject to specified termination fees.

In June 2003, we licensed from New York
University, or NYU, the exclusive worldwide commercial rights to
several peptides related to angiogenesis. Pursuant to the
licensing arrangement, we made an upfront payment to NYU and are
obligated to pay future anniversary payments, milestone payments
based on regulatory and clinical milestones and royalties on
both future net sales of products relating to the licenses and
payments received as consideration for the grant of a
sublicense, if any. Through December 31, 2003, we have
incurred a total of $0.1 million under the agreement, which
has been recognized as research and development expense. The
agreement terminates upon the later of the expiration of the
last of any patent rights to licensed products that are
developed under this agreement, or 15 years after the date
of the first commercial sale of the last product licensed or
developed under the agreement. We may terminate the agreement
for any reason following 180 days written notice to NYU.
This agreement may be terminated by NYU if we fail to meet
specified commercial development obligations under the agreement
and we do not materially cure this failure in one year.

Additionally, we have entered into various
licensing and research and development arrangements under which
we may be obligated to make future milestone payments upon the
achievement of certain success-based objectives and royalties on
sales of commercialized products, if any.

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CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In connection with our research and licensing
agreements, we recognized research and development expenses of
$0.2 million and $0.3 million, respectively, in 2003
and 2002. No amounts were recognized in 2001.

Annual future minimum payments under our
commitments are as follows at December 31, 2003 (in
thousands):

|           |  |           |        |            |  |   |       | 
|---------- |  | --------- | ------ | ---------- |  | - | ----- | 
|           |  |           |        | Licensing 
|           |  |           |        | and       
|           |  | Operating |        | Research  
|           |  | Leases    |        | Agreements
|           |  |           |        |           
|2004       |  | $         | 2,309  |            |  | $ | 274   | 
|2005       |  |           | 2,373  |            |  |   | 278   | 
|2006       |  |           | 2,423  |            |  |   | 75    | 
|2007       |  |           | 2,505  |            |  |   | 75    | 
|2008       |  |           | 2,598  |            |  |   | 75    | 
|Thereafter |  |           | 8,957  |            |  |   | 500   | 
|           |  |           |        |            |  |   |       | 
|           |  | $         | 21,165 |            |  | $ | 1,277 | 
|           |  |           |        |            |  |   |       | 



| |           
| | ----------
| | Guarantees

In November 2002, the FASB issued FASB
Interpretation, or FIN, No. 45, Guarantors
Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness
of Others. FIN No. 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that
it has issued. It also requires that a guarantor recognize, at
the inception of a guarantee, a liability for the fair value of
certain guarantees. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after
December 31, 2002.

In the ordinary course of our business, we enter
into agreements with third parties, including corporate
partners, contractors and clinical sites, which contain standard
indemnification provisions. Under these provisions, we generally
indemnify and hold harmless the indemnified party for losses
suffered or incurred by the indemnified party as a result of our
activities. Although the maximum potential amount of future
payments we could be required to make under these
indemnification provisions is unlimited, to date we have not
incurred material costs to defend lawsuits or settle claims
related to these indemnification provisions. Additionally, we
have insurance policies that, in most cases, would limit our
exposure and enable us to recover a portion of any amounts paid.
Therefore, we believe the estimated fair value of these
agreements is minimal and accordingly, we have not accrued any
liabilities for these agreements as of December 31, 2003.



|   |                                                                              
|-- | -----------------------------------------------------------------------------
|7. | Redeemable Convertible Preferred Stock and
    Stockholders Equity (Deficit)



| |                    
| | -------------------
| | Reverse Stock Split

On October 9, 2003, our stockholders
approved a 1-for-4.4 reverse stock split of the then-outstanding
common stock, effective upon completion of our initial public
offering. The accompanying consolidated financial statements
give retroactive effect to the reverse stock split for all
periods presented.



| |                        
| | -----------------------
| | Initial Public Offering

On November 4, 2003, we completed an initial
public offering, or IPO, of 6.0 million shares of common
stock for proceeds of $65.1 million, net of underwriting
discounts and offering expenses.

F-22



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                
| | ---------------
| | Preferred Stock

Since our inception, we have issued shares of our
preferred stock, including Series A, Series B and
Series C redeemable convertible preferred stock and
Series A, Acquisition and Junior convertible preferred
stock, to various investors and related parties in exchange for
cash and technology rights and in the Cell-Matrix acquisition.
The following lists the preferred shares issued since our
inception. Upon completion of the IPO, all outstanding shares of
our preferred stock automatically converted into an aggregate of
20.1 million shares of common stock.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2003, we issued 20.6 million shares of
    Series C redeemable convertible preferred stock as
    discussed further below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | In 2002, we issued 0.4 million shares of
    Series A redeemable convertible preferred stock and
    20.9 million shares of Series B redeemable convertible
    preferred stock. Additionally, we issued 2.1 million shares
    of Acquisition preferred stock in the Cell-Matrix acquisition as
    previously discussed in Note 2.                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | In 2001, ownership in 1.6 million shares of
    the Series A convertible preferred stock previously held by
    Dr. Morton were transferred to third parties and
    accordingly we reclassified these shares to Series A
    redeemable convertible preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In 2000, we effected a reorganization and our
    outstanding common stock was exchanged for 26.3 million
    shares of Junior preferred stock. Additionally, we issued and
    sold 12.2 million shares of Series A redeemable
    convertible preferred stock for cash. In connection with this
    financing, we issued 0.4 million shares of Series A
    convertible preferred stock to an entity controlled by
    Dr. Morton in exchange for technology. We also exchanged
    3.7 million shares of Dr. Mortons Junior
    preferred stock for 3.7 million shares of Series A
    convertible preferred stock pursuant to the terms of a
    contribution of technology and exchange agreement.

We were accruing the dividends due on our
Series A and Series B redeemable convertible preferred
stock and accreting up the difference between the carrying value
and redemption value of the Series A and Series B
redeemable convertible preferred stock through the first
redemption date of December 15, 2005. Upon the conversion
of the redeemable convertible preferred stock, we ceased
accruing dividends and accreting the redemption value. The
accrued dividends and the accretion increased the net loss
applicable to common stockholders in the calculation of basic
and diluted net loss per common share and decreased total
stockholders equity (deficit). Because we did not close a
public offering of our common stock prior to June 30, 2003
and as a result of the issuance of the Series C redeemable
convertible preferred stock, the Series A and Series B
redeemable convertible preferred stock per share conversion
prices were automatically adjusted. In accordance with EITF
Issue No. 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the conversion price
adjustments did not have an impact on the financial statements
because the revised conversion price was not less than the
estimated fair value of the underlying security on the date of
issuance.

In August 2003, we sold 20.6 million shares
of Series C redeemable convertible preferred stock at a
purchase price of $2.01 per share for proceeds of
$41.2 million, net of offering costs. The conversion price
of the Series C redeemable convertible preferred stock,
after giving effect to the 1-for-4.4 reverse stock split, is
$8.84 per share. Because this conversion price is less than
the fair value of the common stock into which the Series C
redeemable convertible preferred stock is convertible into, the
Series C redeemable convertible preferred stock is
considered to have been issued with a beneficial conversion
feature. Accordingly, pursuant to EITF Issue No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features, we recorded a non-cash deemed dividend
on the Series C redeemable convertible preferred stock of
$14.8 million, which is equal to the number of shares of
Series C redeemable convertible preferred stock on an
if-converted basis multiplied by the difference between the
initial public

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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

offering price and the Series C redeemable
convertible preferred stock conversion price per share. The
deemed dividend increased the net loss applicable to common
stockholders in the calculation of basic and diluted net loss
per common share but did not have any effect on total
stockholders equity (deficit).



| |         
| | --------
| | Warrants

In 2001, we issued warrants to purchase an
aggregate of 65,306 shares of preferred stock with an
exercise price of $2.45 per share in connection with a
secured equipment financing. The warrants were exercised in full
in November 2003 resulting in the issuance of 2,086 shares
of common stock. Using the Black-Scholes option pricing model,
we determined that the fair value of the warrants was
$0.1 million which we are recording as interest expense
over the term of the related notes payable.

In February 2002, we issued a warrant to purchase
75,000 shares of preferred stock with an exercise price of
$2.45 per share in connection with the signing of the lease
related to our corporate headquarters and research and
development facility. The cash exercise of the warrant will
result in the issuance of approximately 17,000 shares of
our common stock and no issuance of preferred stock. The warrant
is fully exercisable and will expire on November 4, 2006.
The warrant provides the holder with the option to exercise the
warrant with a (i) cash payment; (ii) cancellation of
our indebtedness to the holder; or (iii) net issuance
exercise based on the fair market value of our common stock on
the date of exercise. Using the Black-Scholes option pricing
model, we determined that the fair value of the warrant was
$0.1 million which we are recording as rent expense over
the term of the lease.

In September 2002, we issued a warrant to
purchase 151,685 shares of preferred stock with an exercise
price of $2.67 per share in connection with a secured loan.
The cash exercise of the warrant will result in the issuance of
approximately 34,000 shares of our common stock and no
issuance of preferred stock. The warrant is fully exercisable
and will expire on June 30, 2013. The warrant provides the
holder with the option to exercise the warrant with a
(i) cash payment; (ii) cancellation of our
indebtedness to the holder; or (iii) net issuance exercise
based on the fair market value of our common stock on the date
of exercise. Using the Black-Scholes option pricing model, we
determined that the fair value of the warrant was
$0.2 million which we are recording as interest expense
over the term of the notes payable.

In February 2003, we issued a warrant to purchase
150,000 shares of preferred stock with an exercise price of
$2.45 per share in connection with the signing of a
consulting agreement with a research company. The cash exercise
of the warrant will result in the issuance of approximately
34,000 shares of our common stock and no issuance of
preferred stock. The warrant is fully exercisable and will
expire on the seventh anniversary of the date of issuance. The
warrant provides the holder with the option to exercise the
warrant with a (i) cash payment; (ii) cancellation of
our indebtedness to the holder; or (iii) net issuance
exercise based on the fair market value of our common stock on
the date of exercise. Using the Black-Scholes option pricing
model, we determined that the fair value of the warrant was
$0.2 million which we are recording as research and
development expense over the term of the consulting agreement.

The fair value of the warrants was determined
using the Black-Scholes option pricing model using the following
assumptions:

|                        |  |                          |       |      |  |      |            |  |  |  |         | 
|----------------------- |  | ------------------------ | ----- | ---- |  | ---- | ---------- |  |  |  | ------- | 
|                        |  |                         
|                        |  | Years Ended December 31,
|                        |  |                         
|                        |  | 2003                     |       | 2002 |  | 2001
|                        |  |                          |       |      |  |     
|Dividend yield          |  |                          | 0%    |      |  |      | 0%         |  |  |  | 0%      | 
|Expected volatility     |  |                          | 70%   |      |  |      | 70%        |  |  |  | 70%     | 
|Risk-free interest rate |  |                          | 3.45% |      |  |      | 2.42-4.71% |  |  |  | 4.55-5% | 
|Expected life in years  |  |                          | 7     |      |  |      | 7-10       |  |  |  | 7       | 

F-24



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Equity Compensation Plans

We have three equity compensation plans for our
employees, nonemployee directors and consultants: the 2000 Stock
Incentive Plan, as amended, or the 2000 Amended Plan, the 2003
Equity Incentive Award Plan, or the 2003 Plan, and the Employee
Stock Purchase Plan, or the Purchase Plan. All three equity
compensation plans have been approved by our stockholders. The
2000 Amended Plan allows for the grant of incentive and
nonstatutory stock options to purchase up to 2.5 million
shares of our common stock to employees, directors, and third
parties. Options granted under the 2000 Amended Plan generally
expire no later than ten years from the date of grant and vest
over a period of four years. The 2000 Amended Plan allows for
certain options to be exercised prior to the time such options
are vested and all unvested shares of common stock are subject
to repurchase at the exercise price paid for such shares. At
December 31, 2003, 2002 and 2001, 91,403, 149,544 and
207,378 shares, respectively, of common stock were subject
to repurchase. At December 31, 2003, options to purchase
7,995 shares of our common stock remain available for grant
under the 2000 Amended Plan.

The 2003 Plan allows for the grant of equity
awards to purchase up to 2.5 million shares of our common
stock. Under the 2003 Plan, potential types of awards include:
stock options, restricted stock, stock appreciation rights,
performance-based awards, dividend equivalents, stock payments
and deferred stock. The terms and conditions of specific awards
are set at the discretion of the Board of Directors although
generally awards expire no later than ten years from the date of
grant and do not have exercise prices less than the fair market
value of the underlying common stock. To date, only stock
options have been granted under the 2003 Plan. At
December 31, 2003, awards to purchase 2.3 million
shares of our common stock remain available for grant under the
2003 Plan.

The Purchase Plan allows for the issuance of up
to 0.3 million shares of our common stock. Under the terms
of the Purchase Plan, employees can elect to have up to twenty
percent of their annual compensation withheld to purchase shares
of our common stock. The purchase price of the common stock is
equal to 85 percent of the lower of the fair market value
per share of the common stock on the enrollment date or the date
on which the shares are purchased. No shares were purchased
under the Purchase Plan in 2003.

F-25



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of stock option activity under the 2000
Amended Plan and the 2003 Plan is as follows (shares in
thousands):

|                                 |                                   |                                     |       |                |     |   |      |      |       | 
|-------------------------------- | --------------------------------- | ----------------------------------- | ----- | -------------- | --- | - | ---- | ---- | ----- | 
|                                 |                                   |                                     |       | Weighted      
|                                 |                                   | Options                             |       | Average       
|                                 |                                   | Outstanding                         |       | Exercise Price
|                                 |                                   |                                     |       |               
|Outstanding at December 31, 2000 |                                   |                                     | 769   |                |     | $ | 1.08 |     
|                                 | Granted (all equal to fair value) |                                     |       | 344            |     |   |      | 1.53 |      
|                                 | Exercised                         |                                     |       | (358           | )   |   |      | 1.12 |      
|                                 | Cancelled                         |                                     |       | (17            | )   |   |      | 1.67 |      
|                                 |                                   |                                     |       |                |     |   |      |     
|Outstanding at December 31, 2001 |                                   |                                     | 738   |                |     |   | 1.25 |     
|                                 | Granted:                          |                                     |       |                |     |   |      |      |      
|                                 |                                   | Exercise prices below fair value    |       |                | 377 |   |      |      | 3.30  | 
|                                 |                                   | Exercise prices equal to fair value |       |                | 118 |   |      |      | 2.95  | 
|                                 | Exercised                         |                                     |       | (146           | )   |   |      | 1.37 |      
|                                 | Cancelled                         |                                     |       | (29            | )   |   |      | 2.50 |      
|                                 |                                   |                                     |       |                |     |   |      |     
|Outstanding at December 31, 2002 |                                   |                                     | 1,058 |                |     |   | 2.12 |     
|                                 | Granted:                          |                                     |       |                |     |   |      |      |      
|                                 |                                   | Exercise prices below fair value    |       |                | 895 |   |      |      | 3.45  | 
|                                 |                                   | Exercise prices equal to fair value |       |                | 301 |   |      |      | 10.76 | 
|                                 | Exercised                         |                                     |       | (131           | )   |   |      | 2.00 |      
|                                 | Cancelled                         |                                     |       | (91            | )   |   |      | 2.44 |      
|                                 |                                   |                                     |       |                |     |   |      |     
|Outstanding at December 31, 2003 |                                   |                                     | 2,032 |                |     | $ | 3.98 |     
|                                 |                                   |                                     |       |                |     |   |      |     

The following table summarizes information about
stock options outstanding under the 2000 Amended Plan and 2003
Plan at December 31, 2003 (shares in thousands):

|                    |  |                     |       |                  |  |          |      |             |  |          |       |  |  |  |       |  |  |   |      | 
|------------------- |  | ------------------- | ----- | ---------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ---- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  | Weighted            |       | Weighted         |  |          |      | Weighted   
|Range of            |  |                     |       | Average          |  | Average  |      |             |  | Average 
|Exercise            |  | Number              |       | Remaining        |  | Exercise |      | Number      |  | Exercise
|Prices              |  | Outstanding         |       | Contractual Life |  | Price    |      | Exercisable |  | Price   
|                    |  |                     |       |                  |  |          |      |             |  |         
|$1.08               |  |                     | 397   |                  |  |          | 6.99 |             |  | $        | 1.08  |  |  |  | 302   |  |  | $ | 1.08 | 
|2.16                |  |                     | 90    |                  |  |          | 7.82 |             |  |          | 2.16  |  |  |  | 78    |  |  |   | 2.16 | 
|3.30                |  |                     | 1,227 |                  |  |          | 9.05 |             |  |          | 3.30  |  |  |  | 1,085 |  |  |   | 3.30 | 
|6.60-9.19           |  |                     | 122   |                  |  |          | 9.83 |             |  |          | 8.30  |  |  |  | 53    |  |  |   | 8.05 | 
|9.60-10.50          |  |                     | 34    |                  |  |          | 9.88 |             |  |          | 9.89  |  |  |  | 22    |  |  |   | 9.60 | 
|12.00-12.87         |  |                     | 162   |                  |  |          | 9.83 |             |  |          | 12.81 |  |  |  |      |  |  |   |     | 
|                    |  |                     |       |                  |  |          |      |             |  |          |       |  |  |  |       |  |  |   |      | 
|$1.08-12.87         |  |                     | 2,032 |                  |  |          | 8.71 |             |  | $        | 3.98  |  |  |  | 1,540 |  |  | $ | 3.06 | 
|                    |  |                     |       |                  |  |          |      |             |  |          |       |  |  |  |       |  |  |   |      | 

At December 31, 2003, 2002 and 2001, options
to purchase 1.5 million, 0.9 million and
0.6 million shares, respectively, were exercisable at
weighted average exercise prices of $3.06, $2.06 and
$1.19 per share, respectively.

F-26



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | Shares Reserved For Future Issuance

At December 31, 2003, we have
4.6 million common shares reserved for issuance under our
equity compensation plans and 0.1 million common shares
reserved for issuance upon the exercise of outstanding preferred
stock warrants.

8.     Development
and Sublicensing Agreement

We have a collaboration agreement with Eyetech
Pharmaceuticals, Inc. pursuant to which certain antibodies
and related technology was sublicensed to Eyetech for
development in ophthalmic indications. We assumed this agreement
in our acquisition of Cell-Matrix. Under the agreement, Eyetech
paid Cell-Matrix a signing fee and is obligated to pay us
milestone payments based upon meeting specified regulatory and
clinical milestones and royalties on future net sales of
products, if any. The agreement terminates upon the later of the
expiration of the last of any patent rights to licensed products
that are developed under the agreement or 10 years after
the date of the first commercial sale of the last product
licensed or developed under the agreement. Either party may
terminate this agreement for any reason following 90 days
written notice to the other party.



|   |             
|-- | ------------
|9. | Income Taxes

There was no income tax benefit attributable to
net losses for 2003, 2002 and 2001. The difference between taxes
computed by applying the U.S. federal corporate tax rate of
35% and the actual income tax provision in 2003, 2002 and 2001
is primarily the result of establishing a valuation allowance on
our deferred tax assets. The tax effects of temporary
differences and tax loss and credit carryforwards that give rise
to significant portions of deferred tax assets and liabilities
are comprised of the following (in thousands):

|                     |                                                                   |              |   |         |   |   |   |         |  
|-------------------- | ----------------------------------------------------------------- | ------------ | - | ------- | - | - | - | ------- | -
|                     |                                                                   |             
|                     |                                                                   | December 31,
|                     |                                                                   |             
|                     |                                                                   | 2003         |   | 2002   
|                     |                                                                   |              |   |        
|Deferred tax assets: |                                                                   |              |   |         |   |   |   |        
|                     | Net operating loss carryforwards                                  |              | $ | 27,579  |   |   | $ | 16,410  |  
|                     | Orphan drug and research and development credit
    carryforwards |              |   | 24,822  |   |   |   | 15,722  |  
|                     | Depreciation and amortization                                     |              |   | 884     |   |   |   | 974     |  
|                     | Accrued liabilities and deferred rent                             |              |   | 1,057   |   |   |   | 475     |  
|                     | Other, net                                                        |              |   | 851     |   |   |   | 329     |  
|                     |                                                                   |              |   |         |   |   |   |        
|                     | Total net deferred tax assets                                     |              |   | 55,193  |   |   |   | 33,910  |  
|                     | Valuation allowance for deferred tax assets                       |              |   | (55,193 | ) |   |   | (33,910 | )
|                     |                                                                   |              |   |         |   |   |   |        
|Net deferred taxes   |                                                                   | $            |  |         |   | $ |  |        
|                     |                                                                   |              |   |         |   |   |   |        

The increase in the valuation allowance for
deferred tax assets in 2003 and 2002 of $21.3 million and
$20.7 million, respectively, was due primarily to the
inability to utilize net operating loss, orphan drug and
research and development credits.

At December 31, 2003, we had net operating
loss carryforwards for federal and state income tax purposes of
approximately $64.6 million and $86.8 million,
respectively, which expire beginning in 2018 and 2010,
respectively, unless previously utilized. We also had orphan
drug credit carryforwards and research and development credit
carryforwards for federal income tax purposes of approximately
$22.8 million and $0.2 million, respectively, which
expire beginning in 2019 unless previously utilized. In
addition, we had research and development credit carryforwards
for state income tax purposes of approximately
$2.7 million, which are not expected to expire.

F-27



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##### Table of Contents



CANCERVAX CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As previously discussed in Note 2, we
acquired Cell-Matrix in January 2002. As of the acquisition
date, Cell-Matrix had approximately $1.8 million of net
deferred tax assets consisting principally of federal and state
net operating loss carryforwards, federal and state research and
development credit carryforwards and tax basis in depreciable
and amortizable assets. Due to the uncertainty over the
realization of these assets, a valuation allowance has been
recorded against the net deferred tax assets acquired.
Subsequent tax benefits resulting from realization of these
deferred tax assets will be applied to reduce the valuation
allowance and goodwill related to the Cell-Matrix acquisition.
As a result of the change in control for Cell-Matrix, the
utilization of the acquired net operating loss and tax credit
carryforwards will be subject to annual limitations in
accordance with Internal Revenue Code, or IRC, Sections 382
and 383.

Pursuant to IRC Sections 382 and 383, use of
our net operating loss and tax credit carryforwards may be
limited if a cumulative change in ownership of more than 50%
occurs within a three-year period.



|    |                 
|--- | ----------------
|10. | Subsequent Event

On March 10, 2004, we signed an agreement
with SemaCo, Inc. whereby we obtained an exclusive,
worldwide sublicense from SemaCo to develop novel technology
utilizing T-oligonucleotides for the potential treatment or
prevention of cancer. In exchange, we made upfront payments
totaling $0.5 million for the acquisition of the technology
rights and a $0.3 million payment for the reimbursement of
certain patent costs. Additionally, research support payments
totaling $1.2 million will be payable over the three-year
period commencing on the effective date of the agreement. We are
also obligated to make future milestone payments upon meeting
certain regulatory and clinical objectives and royalties on
sales of commercial products, if any. The agreement terminates
upon the later of the expiration of the last of any patent
rights to licensed products that are developed under the
agreement or 15 years after the date of the first
commercial sale of the last product licensed or developed under
the agreement. We may terminate the agreement for any reason
following 60 days written notice to SemaCo.

F-28