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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004



or



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



FOR THE TRANSITION PERIOD FROM  TO



Commission File Number: 000-30681



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DENDREON CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 22-3203193                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



3005 FIRST AVENUE,
SEATTLE, WASHINGTON 98121

(Address of principal executive offices, including zip code)



(206) 256-4545

(Registrants telephone number, including area code)



www.dendreon.com



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Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.    x  Yes ̈No



Indicate by check mark whether the
registrant (1) is an accelerated filer (as defined in Rule 12b-2 of the Act).    x  Yes ̈No



The number of
shares of the registrants common stock, $.001 par value, outstanding as of July 30, 2004 was 58,412,804.



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##### Table of Contents

DENDREON CORPORATION



INDEX



|              |  |                       |  |                                                                                       |  |                                                                                                                    |  |  
|------------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -
|              |  |                       |  | PAGE NO.                                                                             
|PART I.       |  | FINANCIAL INFORMATION |  |                                                                                      
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements                                                                  |  |                                                                                                                   
|              |  |                       |  |                                                                                      
|              |  |                       |  | a)                                                                                    |  | Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003                                  |  | 2
|              |  |                       |  |                                                                                      
|              |  |                       |  | b)                                                                                    |  | Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2004 and 2003 (unaudited) |  | 3
|              |  |                       |  |                                                                                      
|              |  |                       |  | c)                                                                                    |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (unaudited)                  |  | 4
|              |  |                       |  |                                                                                      
|              |  |                       |  | d)                                                                                    |  | Notes to Consolidated Financial Statements (unaudited)                                                             |  | 5
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 9                                                                                                                 
|              |  |                       | 
|              |  | Item 3.               |  | Qualitative and Quantitative Disclosures About Market Risk                            |  | 27                                                                                                                
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                               |  | 27                                                                                                                
|              |  |                      
|PART II.      |  | OTHER INFORMATION     |  |                                                                                      
|              |  |                       | 
|              |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                   |  | 28                                                                                                                
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                      |  | 28                                                                                                                
|              |  |                      
|SIGNATURES    |  |                       |  |                                                                                      
|              |  |                      
|EXHIBIT INDEX |  |                       |  |                                                                                      





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##### Table of Contents

PART IFINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



DENDREON CORPORATION



CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                           |  | June 30,2004 |          |   | December 31,2003 |  
|                                                                                                                                                                           |  | (Unaudited)  |          |   |                  |  
|ASSETS                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                            |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                  |  | $            | 20,253   |   |                  | $ | 44,349   |  
|Short-term investments                                                                                                                                                     |  |              | 164,929  |   |                  |   | 55,692   |  
|Accounts receivable                                                                                                                                                        |  |              | 5,894    |   |                  |   | 5,689    |  
|Other current assets                                                                                                                                                       |  |              | 4,837    |   |                  |   | 2,974    |  
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                       |  |              | 195,913  |   |                  |   | 108,704  |  
|                                                                                                                                                                           |  |             
|Property and equipment, net                                                                                                                                                |  |              | 4,049    |   |                  |   | 5,011    |  
|Long-term investments                                                                                                                                                      |  |              | 40,950   |   |                  |   | 13,150   |  
|Restricted cash                                                                                                                                                            |  |              | 303      |   |                  |   | 303      |  
|Receivable, net of current portion                                                                                                                                         |  |              | 10,402   |   |                  |   | 9,943    |  
|Deposits and other assets                                                                                                                                                  |  |              | 694      |   |                  |   | 734      |  
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                                               |  | $            | 252,311  |   |                  | $ | 137,845  |  
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                       |  |              |          |   |                  |   |          |  
|                                                                                                                                                                           |  |             
|Current liabilities:                                                                                                                                                       |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                           |  | $            | 413      |   |                  | $ | 1,221    |  
|Accrued liabilities                                                                                                                                                        |  |              | 6,950    |   |                  |   | 7,549    |  
|Accrued acquisition - related restructuring liabilities                                                                                                                    |  |              | 2,505    |   |                  |   | 924      |  
|Accrued compensation                                                                                                                                                       |  |              | 2,201    |   |                  |   | 4,976    |  
|Deferred revenue                                                                                                                                                           |  |              | 100      |   |                  |   | 107      |  
|Current portion of capital lease obligations                                                                                                                               |  |              | 1,364    |   |                  |   | 1,463    |  
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                  |  |              | 13,533   |   |                  |   | 16,240   |  
|                                                                                                                                                                           |  |             
|Deferred revenue, less current portion                                                                                                                                     |  |              | 680      |   |                  |   | 725      |  
|Capital lease obligations, less current portion                                                                                                                            |  |              | 1,936    |   |                  |   | 899      |  
|Deferred foreign tax                                                                                                                                                       |  |              |         |   |                  |   | 994      |  
|                                                                                                                                                                           |  |             
|Stockholders equity:                                                                                                                                                      |  |              |          |   |                  |   |          |  
|Preferred stock, $0.001 par value; 10,000,000 shares authorized, no shares issued or outstanding                                                                           |  |              |         |   |                  |   |         |  
|Common stock, $0.001 par value; 80,000,000 shares authorized, 57,895,860 and 44,926,284 shares issued and outstanding at June 30, 2004 and
December 31, 2003, respectively |  |              | 58       |   |                  |   | 45       |  
|Additional paid-in capital                                                                                                                                                 |  |              | 409,684  |   |                  |   | 263,610  |  
|Deferred stock-based compensation                                                                                                                                          |  |              | (204     | ) |                  |   | (651     | )
|Accumulated other comprehensive loss                                                                                                                                       |  |              | (773     | ) |                  |   | (61      | )
|Accumulated deficit                                                                                                                                                        |  |              | (172,603 | ) |                  |   | (143,956 | )
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                 |  |              | 236,162  |   |                  |   | 118,987  |  
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                 |  | $            | 252,311  |   |                  | $ | 137,845  |  
|                                                                                                                                                                           |  |              |          |   |                  |   |          |  



See
accompanying notes



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##### Table of Contents

DENDREON CORPORATION



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                   |  | Three Months EndedJune 30, |         |   | Six Months Ended June 30, |  
|                                                                   |  | 2004                       |         |   | 2003                      |   |        | 2004 |  |   | 2003    |  
|Revenue                                                            |  | $                          | 212     |   |                           | $ | 1,823  |      |  | $ | 4,891   |   |  | $ | 3,599   |  
|                                                                   |  |                            |         |  
|Operating expenses:                                                |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Research and development                                           |  |                            | 13,560  |   |                           |   | 8,209  |      |  |   | 26,105  |   |  |   | 15,971  |  
|General and administrative                                         |  |                            | 4,305   |   |                           |   | 1,772  |      |  |   | 9,602   |   |  |   | 3,490   |  
|Marketing                                                          |  |                            | 560     |   |                           |   | 182    |      |  |   | 808     |   |  |   | 299     |  
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                           |  |                            | 18,425  |   |                           |   | 10,163 |      |  |   | 36,515  |   |  |   | 19,760  |  
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                               |  |                            | (18,213 | ) |                           |   | (8,340 | )    |  |   | (31,624 | ) |  |   | (16,161 | )
|                                                                   |  |                            |         |  
|Interest income                                                    |  |                            | 1,024   |   |                           |   | 164    |      |  |   | 1,875   |   |  |   | 379     |  
|Interest expense                                                   |  |                            | (86     | ) |                           |   | (84    | )    |  |   | (170    | ) |  |   | (185    | )
|Other expense                                                      |  |                            |        |   |                           |   |       |      |  |   | (290    | ) |  |   |        |  
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Loss before income taxes                                           |  |                            | (17,275 | ) |                           |   | (8,260 | )    |  |   | (30,209 | ) |  |   | (15,967 | )
|Foreign tax benefit                                                |  |                            | 1,593   |   |                           |   |       |      |  |   | 1,562   |   |  |   |        |  
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                           |  | $                          | (15,682 | ) |                           | $ | (8,260 | )    |  | $ | (28,647 | ) |  | $ | (15,967 | )
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                               |  | $                          | (0.27   | ) |                           | $ | (0.30  | )    |  | $ | (0.51   | ) |  | $ | (0.59   | )
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Shares used in computation of basic and diluted net loss per share |  |                            | 57,735  |   |                           |   | 27,682 |      |  |   | 55,638  |   |  |   | 27,206  |  
|                                                                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  



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DENDREON CORPORATION



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                           |          |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months Ended June 30, |         
|                                                                            |  | 2004                      |          |   | 2003 |  
|OPERATING ACTIVITIES                                                        |  |                           |          |   |      |   |         |  
|Net loss                                                                    |  | $                         | (28,647  | ) |      | $ | (15,967 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |          |   |      |   |         |  
|Depreciation expense                                                        |  |                           | 1,278    |   |      |   | 960     |  
|Non-cash stock-based compensation expense                                   |  |                           | 726      |   |      |   | 134     |  
|Non-cash stock-based consulting expense                                     |  |                           |         |   |      |   | 116     |  
|Non-cash interest expense                                                   |  |                           | 8        |   |      |   | 11      |  
|Impairment of fixed assets                                                  |  |                           | 689      |   |      |   |        |  
|Changes in current assets and liabilities:                                  |  |                           |          |   |      |   |         |  
|Accounts receivable                                                         |  |                           | (664     | ) |      |   | 1,137   |  
|Other current assets                                                        |  |                           | (1,871   | ) |      |   | (514    | )
|Deposits and other assets                                                   |  |                           | 40       |   |      |   | 8       |  
|Deferred revenue                                                            |  |                           | (52      | ) |      |   | (2,304  | )
|Accounts payable                                                            |  |                           | (808     | ) |      |   | (536    | )
|Accrued liabilities and compensation                                        |  |                           | (2,787   | ) |      |   | (470    | )
|                                                                            |  |                           |          |   |      |   |         |  
|Net cash used in operating activities                                       |  |                           | (32,088  | ) |      |   | (17,425 | )
|                                                                            |  |                           |          |   |      |   |         |  
|INVESTING ACTIVITIES                                                        |  |                           |          |   |      |   |         |  
|Purchases of investments                                                    |  |                           | (209,105 | ) |      |   | (43,366 | )
|Maturities of investments                                                   |  |                           | 71,356   |   |      |   | 28,403  |  
|Proceeds from asset disposals                                               |  |                           | 174      |   |      |   | 500     |  
|Purchases of property and equipment                                         |  |                           | (1,179   | ) |      |   | (510    | )
|Deferred acquisition costs                                                  |  |                           |         |   |      |   | (660    | )
|                                                                            |  |                           |          |   |      |   |         |  
|Net cash used in investing activities                                       |  |                           | (138,754 | ) |      |   | (15,633 | )
|                                                                            |  |                           |          |   |      |   |         |  
|FINANCING ACTIVITIES                                                        |  |                           |          |   |      |   |         |  
|Proceeds from sale-leaseback financing arrangements                         |  |                           | 1,705    |   |      |   | 856     |  
|Payments on capital lease obligations                                       |  |                           | (767     | ) |      |   | (592    | )
|Proceeds from sale of equity securities                                     |  |                           | 140,461  |   |      |   | 30,709  |  
|Proceeds from exercise of stock options                                     |  |                           | 4,722    |   |      |   | 92      |  
|Issuance of common stock under the Employee Stock Purchase Plan             |  |                           | 625      |   |      |   | 285     |  
|                                                                            |  |                           |          |   |      |   |         |  
|Net cash provided by financing activities                                   |  |                           | 146,746  |   |      |   | 31,350  |  
|                                                                            |  |                           |          |   |      |   |         |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |  |                           | (24,096  | ) |      |   | (1,708  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              |  |                           | 44,349   |   |      |   | 11,263  |  
|                                                                            |  |                           |          |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  |  | $                         | 20,253   |   |      | $ | 9,555   |  
|                                                                            |  |                           |          |   |      |   |         |  



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accompanying notes



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##### Table of Contents

DENDREON CORPORATION



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1. BUSINESS, PRINCIPLES
OF CONSOLIDATION AND BASIS OF PRESENTATION



Description of Business



We were founded in 1992 as a Delaware corporation and we
are headquartered in Seattle, Washington. We are a biotechnology company focused on the discovery, development and commercialization of targeted therapies for cancer. Our portfolio includes product candidates to treat a wide range of cancers using
therapeutic vaccines, monoclonal antibodies, and small molecules. Our most advanced product candidate is Provenge, a therapeutic vaccine for the treatment of prostate cancer.



Principles of Consolidation



The consolidated financial statements include the accounts of Dendreon and its wholly owned subsidiary. All material inter-company transactions and
balances have been eliminated in consolidation. On July 30, 2003, we completed the acquisition of Corvas International, Inc., or Corvas (See Note 3  Significant Events). In accordance with Statement of Financial Accounting Standards
(SFAS), No. 141, Business Combinations, we have included the results of operations of Corvas in our consolidated results since the acquisition on July 30, 2003.



Basis of Presentation



The accompanying unaudited financial statements reflect, in the opinion of management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of our financial position, results of operations and cash flows for each period presented in accordance with accounting principles generally accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
have been condensed or omitted from the accompanying statements. These interim financial statements should be read in conjunction with the audited financial statements and related notes thereto, which are included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2003. The accompanying financial information as of December 31, 2003 has been derived from audited financial statements. Operating results for the three-month and six-month periods ended June 30, 2004 are
not necessarily indicative of future results that may be expected for the year ending December 31, 2004. Certain prior year items have been reclassified to conform to the current year presentation, including certain operating expenses aggregating
approximately $1.5 million previously reported as general and administrative expenses that have been reclassified to research and development and marketing expenses for the six months ended June 30, 2003. Items reclassified include certain costs
related to human resources, facilities, information technology, finance and accounting.



2. RECENT ACCOUNTING PRONOUNCEMENTS



In
January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities.This interpretation of Accounting Research Bulleting No. 51, Consolidated Financial Statements, addresses consolidation of business
enterprises of variable interest entities in which: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through
other interest that will absorb some or all of the expected losses of the entity and (2) the equity investors lack one or more of certain essential characteristics of a controlling interest. FIN No. 46 became effective on January 1, 2004. Adoption
of this standard had no material impact on our financial position, results of operations or cash flows.



3. SIGNIFICANT EVENTS



Retirement of
Dr. Henney



On June 10, 2004, we announced the retirement
of the Chairman of our Board of Directors, Christopher S. Henney, Ph.D., D.Sc., effective June 16, 2004. In addition to his role as Chairman, Dr. Henney was our Chief Executive Officer from 1995 to 2002, and was our president from 1998 to 2000.
Richard B. Brewer, formerly Chief Executive Officer and President of Scios, Inc., succeeded Dr. Henney as the Chairman of our Board of Directors on June 16, 2004.



In connection with his retirement, we entered into a retirement agreement with Dr. Henney on May 28, 2004, providing certain
retirement compensation and other benefits in recognition of his services and contributions to us. As a result of this agreement, we recorded cash compensation expense of $323,000 and non-cash compensation expense of $106,000.



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Change of Control Plan



On June 16, 2004, our Board of Directors adopted a Change of Control Executive Severance Plan providing severance benefits for participants in the
event that their employment terminates involuntarily without cause or for good reason within twelve months after a change of control of us. The benefits include accelerated vesting of stock options and payments for salary replacement of 100% to 200%
of base salary, depending upon position, 100% of the maximum target bonus for the position, and outplacement assistance. The Compensation Committee of the Board designated members of our management team at the Vice President level and above as
eligible participants.



Acquisition of Corvas International, Inc.



On February 24, 2003, we agreed to acquire Corvas
pursuant to a merger agreement among Corvas, our wholly-owned subsidiaries, Seahawk Acquisition, Inc. and Dendreon San Diego LLC (formerly known as Charger Project LLC), and us. On July 30, 2003, in accordance with the terms of the merger agreement,
we completed the acquisition of Corvas by merging Seahawk Acquisition, Inc. with and into Corvas, and then merging Corvas with and into Dendreon San Diego LLC. As a result of these transactions, Corvas became a wholly-owned subsidiary of Dendreon
operating as a limited liability company.



On July 30, 2003,
the effective date of the acquisition, each outstanding share of Corvas common stock was converted into the right to receive 0.45 of a share of our common stock, with cash to be paid in lieu of fractional shares. In connection with the acquisition,
we issued a total of 12.4 million shares of our common stock to former Corvas stockholders. In addition, at the effective time of the acquisition, we assumed all stock options outstanding under Corvas existing stock option plans. These
options, as adjusted to reflect the exchange ratio as provided in the merger agreement, were for approximately 1.5 million shares of our common stock subject to the original vesting terms. We recorded deferred stock-based compensation of $511,000
related to the intrinsic value of unvested stock options assumed in the merger.



In connection with the Corvas acquisition, we initiated an integration plan in August 2003 to consolidate and restructure certain functions of Corvas primarily consisting of the termination of certain Corvas
personnel. These costs have been recognized as liabilities assumed in the purchase business combination in accordance with EITF Issue No. 95-3 Recognition of Liabilities in Connection with Purchase Business Combinations. The severance
costs were approximately $2.2 million, of which $2.0 million has been paid through June 30, 2004 and $92,000 has been reversed as a change in estimate as of June 30, 2004, resulting in a remaining accrual of approximately $100,000.



The total value of the acquisition was approximately $69.6 million, including
shares issued valued at $62.9 million, the stock options assumed valued at $4.4 million, and transaction costs of $2.3 million. The value of our shares used in determining the purchase price was $5.06 per share, based on the average of closing
prices of our common stock for a range of seven trading days, consisting of the day of the announcement of the merger, February 25, 2003, and the three days prior and three days subsequent to that announcement. The acquisition is being accounted for
under the purchase method of accounting. The following table summarizes the allocation of the purchase price to the assets acquired, liabilities assumed and other charges at the date of acquisition.



|                                    |  |               |       
|----------------------------------- |  | ------------- | ------
|(in thousands)                      |  | July 30, 2003
|Cash and cash equivalents           |  | $             | 3,334 
|Short-and long-term investments     |  |               | 76,283
|Other current assets                |  |               | 1,906 
|Property, plant and equipment       |  |               | 2,143 
|                                    |  |               |       
|Total assets acquired               |  |               | 83,666
|                                    |  |               |       
|Current liabilities                 |  |               | 2,813 
|Accrued severance                   |  |               | 2,181 
|Long term debts                     |  |               | 12,352
|                                    |  |               |       
|Total liabilities                   |  |               | 17,346
|                                    |  |               |       
|Net assets acquired                 |  |               | 66,320
|Deferred stock compensation         |  |               | 511   
|In-process research and development |  |               | 2,762 
|                                    |  |               |       
|Total purchase price                |  | $             | 69,593
|                                    |  |               |       



Acquired In-process
Research and Development (IPR&D). Approximately $1.8 million of the purchase price was initially allocated to IPR&D related to the Corvas rNapc2 cardiovascular product candidate that, as of the acquisition date, had not reached
technological feasibility and had no alternative future use. In the fourth quarter of 2003, we recorded additional IPR&D of $982,000 due to a change in the estimated fair value of certain acquired assets. Accordingly, $2.8 million was expensed
in the consolidated statement of operations for the twelve months ended December 31, 2003.



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The estimated fair value of the rNAPC2 product candidate was determined based on the use of discounted
cash flow analyses. Estimated after-tax cash flows were probability weighted to take into account the stage of completion and risks surrounding the successful development and commercialization of rNapc2. These cash flows were then discounted to
present value using a discount rate of 20%.



The following
unaudited pro forma information for the three and six months ended June 30, 2004 and 2003 combines operating results of the Company and Corvas as if they had been combined at the beginning of the period. Pro forma data is not necessarily indicative
of future results.



|                                                                   |  |                            |         |   |                          |   |         |          |  |   |             |   |  |   |         |  
|------------------------------------------------------------------ |  | -------------------------- | ------- | - | ------------------------ | - | ------- | -------- |  | - | ----------- | - |  | - | ------- | -
|                                                                   |  | Three months endedJune 30, |         |   | Six months ended June30, |  
|(in thousands, except per share amounts)                           |  | 2004                       |         |   | 2003                     |   |         | 2004     |  |   | 2003        |  
|                                                                   |  | (actual)                   |         |   | (pro forma)              |   |         | (actual) |  |   | (pro forma) |  
|Revenues                                                           |  | $                          | 212     |   |                          | $ | 1,841   |          |  | $ | 4,891       |   |  | $ | 3,655   |  
|Net loss                                                           |  | $                          | (15,682 | ) |                          | $ | (12,559 | )        |  | $ | (28,647     | ) |  | $ | (24,968 | )
|Basic and diluted net loss per share                               |  | $                          | (0.27   | ) |                          | $ | (0.31   | )        |  | $ | (0.51       | ) |  | $ | (0.63   | )
|Shares used in computation of basic and diluted net loss per share |  |                            | 57,735  |   |                          |   | 40,119  |          |  |   | 55,638      |   |  |   | 39,643  |  



The pro forma
financial results also include pro forma adjustments for an increase in deferred stock-based compensation expense related to Corvas unvested stock options assumed by Dendreon as of July 30, 2003. The pro forma financial results do not include
the pro forma effect of the IPR&D charge as this is a non-recurring charge resulting from the acquisition. The pro forma information is not necessarily indicative of results that would have occurred had the acquisition been in effect for the
periods represented or indicative of results that may be achieved in the future.



4. RESTRUCTURING AND IMPAIRMENT OF LONG-LIVED ASSETS



In December 2003, we announced the closure of our San Diego operations acquired through our acquisition of Corvas. The closure was intended to allow us to focus our resources on optimizing the value of key assets and to obtain future
operating efficiencies. To efficiently manage on-going programs located in San Diego, we relocated essential San Diego activities to our headquarters in Seattle and completed the closure of the San Diego facility in June 2004.



We incurred restructuring charges of $989,000 in 2003 for employee severance
and outplacement costs, of which $903,000 has been paid as of June 30, 2004 and $35,000 has been reversed as a change in estimate in the six months ended June 30, 2004 resulting in a remaining accrual of $51,000. In the first six months of 2004 we
incurred additional restructuring charges of approximately $2.7 million including ongoing lease commitment costs related to the San Diego facility, other costs associated with the closure and accretion expense on the accrued restructuring charges of
$90,000. The ongoing lease commitment costs were reduced by estimated sublease rentals and discounted at a rate of 8%. In the second quarter of 2004 we incurred additional restructuring charges of approximately $514,000 due to an anticipated delay
in subleasing the San Diego facility. On the Consolidated Statement of Operations, $3.3 million of these costs are included in general and administrative expense. As of June 30, 2004 we have paid $806,000 of these costs. We expect to incur
additional costs related to this restructuring of approximately $411,000 of which $155,000 has been paid as of June 30, 2004. Actual costs may differ from these estimates.



|                              |  |                    |     |                 |   |              |  |   |             |   |  |       |     |   |  |   |      
|----------------------------- |  | ------------------ | --- | --------------- | - | ------------ |  | - | ----------- | - |  | ----- | --- | - |  | - | -----
|(in thousands)                |  | Beginningliability |     | Incurred in2004 |   | Paid in 2004 |  |   | Adjustments |   |  | Total
|Restructuring charges         |  |                    |     |                 |   |              |  |   |             |   |  |       |     |   |  |   |      
|Employee termination benefits |  | $                  | 924 |                 | $ |             |  | $ | (838        | ) |  | $     | (35 | ) |  | $ | 51   
|Lease obligation              |  |                    |    |                 |   | 2,683        |  |   | (749        | ) |  |       | 514 |   |  |   | 2,448
|Other associated costs        |  |                    |    |                 |   | 63           |  |   | (57         | ) |  |       |    |   |  |   | 6    
|                              |  |                    |     |                 |   |              |  |   |             |   |  |       |     |   |  |   |      
|Total                         |  | $                  | 924 |                 | $ | 2,746        |  | $ | (1,644      | ) |  | $     | 479 |   |  | $ | 2,505
|                              |  |                    |     |                 |   |              |  |   |             |   |  |       |     |   |  |   |      



In accordance with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of those long-lived assets
might not be recoverable. During the quarter ended March 31, 2004, we completed the physical inventory of equipment and other fixed assets at Corvas. We determined that the carrying amount of $689,000 of certain lab equipment, leasehold improvements
and computer equipment was not recoverable and have included this expense in R&D expenses for the six months ended June 30, 2004.



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5. COMPREHENSIVE LOSS



For the three and six months ended June 30, 2004 and June 30, 2003, our comprehensive loss was as follows:



|                                            |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                            |  | Three months endedJune 30, |         |   | Six months ended June 30, |  
|(in thousands)                              |  | 2004                       |         |   | 2003                      |   |        | 2004 |  |   | 2003    |  
|Net loss                                    |  | $                          | (15,682 | ) |                           | $ | (8,260 | )    |  | $ | (28,647 | ) |  | $ | (15,967 | )
|Other comprehensive loss:                   |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Unrealized holding losses during the period |  |                            | (753    | ) |                           |   | (36    | )    |  |   | (712    | ) |  |   | (83     | )
|                                            |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive loss                    |  | $                          | (16,435 | ) |                           | $ | (8,296 | )    |  | $ | (29,359 | ) |  | $ | (16,050 | )
|                                            |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  



6. ACCOUNTING FOR STOCK BASED
COMPENSATION



We have elected to follow Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for employee stock options, rather than the alternative fair value accounting allowed by SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB No. 25, compensation expense related to our employee stock options is measured based on the intrinsic value of the stock option. SFAS No. 123, amended by SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure, requires companies that continue to follow APB No. 25 to provide pro forma disclosure of the impact of applying the fair value method of SFAS No. 123. We recognize compensation
expense for options granted to non-employees in accordance with the provisions of SFAS No. 123 and the Emerging Issues Task Force consensus Issue 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services, which require using a Black-Scholes option pricing model and re-measuring such stock options to the current fair market value as the underlying option vests.



Deferred stock-based compensation consists of amounts recorded when the
exercise price of an option is lower than the subsequently determined fair value of the underlying common stock on the date of grant. Deferred stock-based compensation is amortized over the vesting period of the underlying option using the graded
vesting method.



Pro forma information regarding net loss is
required by SFAS No. 123 and SFAS No. 148 as if we had accounted for our employee stock options under the fair value method. The fair value of our options was estimated at the date of grant using the minimum value method for periods prior to our
initial public offering and the Black-Scholes method for subsequent periods, with the following assumptions for the three months ended June 30, 2004 and 2003: no dividend yields; expected lives of the options of four years; risk-free interest rate
of 2.5% and 2.4%, respectively, and volatility of 91% and 127%, respectively. Because the determination of the fair value of our options is based on assumptions described above, and because additional option grants are expected to be made in future
periods, this pro forma information is not likely to be representative of the pro forma effects on reported net income or loss for future periods. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense
over the options vesting period. The following table illustrates what the net loss would have been had we accounted for our stock options under the provisions of FAS 123.



|                                                                                            |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                            |  | Three months endedJune 30, |         |   | Six months ended June 30, |  
|(in thousands, except per share data)                                                       |  | 2004                       |         |   | 2003                      |   |        | 2004 |  |   | 2003    |  
|Net loss, as reported                                                                       |  | $                          | (15,682 | ) |                           | $ | (8,260 | )    |  | $ | (28,647 | ) |  | $ | (15,967 | )
|Add: stock based employee compensation expense included in reported net loss                |  |                            | 648     |   |                           |   | 59     |      |  |   | 726     |   |  |   | 134     |  
|Deduct: pro forma compensation expense determined based on the fair value method of FAS 123 |  |                            | (2,267  | ) |                           |   | (1,040 | )    |  |   | (3,844  | ) |  |   | (2,231  | )
|                                                                                            |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                          |  | $                          | (17,301 | ) |                           | $ | (9,241 | )    |  | $ | (31,765 | ) |  | $ | (18,064 | )
|                                                                                            |  |                            |         |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share as reported                                            |  | $                          | (0.27   | ) |                           | $ | (0.30  | )    |  | $ | (0.51   | ) |  | $ | (0.59   | )
|                                                                                            |  |                            |         |  
|Pro forma and basic and diluted net loss per share                                          |  | $                          | (0.30   | ) |                           | $ | (0.33  | )    |  | $ | (0.57   | ) |  | $ | (0.66   | )



During the quarter
ended September 30, 2003, we granted members of our management team restricted stock awards that vest 25% upon grant and the balance over a two year period. We recorded a deferred stock-based compensation expense in connection with these awards of
$473,000, of which $115,000 was recognized during the six months ended June 30, 2004, and $177,000 was recognized in 2003.



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During the six months ended June 30, 2004, approximately 728,000 stock options were exercised at a
weighted average price of $6.49 per share.



On June 16, 2004,
in accordance with the Retirement Agreement between Dr. Henney and us, we granted Dr. Henney options to purchase 100,000 shares of our common stock at an exercise price of $10.69 per share, the closing price of our common stock on June 15, 2004.
These options have a ten-year term and were fully vested on the date of grant. We also amended our option agreements with Dr. Henney for options granted on December 14, 2000 and January 5, 2004, respectively, so that each such option remains
exercisable for the remaining term of such option without regard to Dr. Henneys employment status. In addition, we accelerated the vesting of any options granted to Dr. Henney that were unvested. As a result of the foregoing, we recorded
non-cash compensation expense of $104,000.



On May 16, 2004, in
connection with Dr. Timothy Harris resignation from the Board of Directors on that date, we agreed to extend the period of exercise for all options previously granted to Dr. Harris from ninety days to six months following his resignation. As a
result of this extension, we recorded non-cash compensation expense of $490,000.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements concern matters that involve
risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Words such as believe, expects, likely, may and plans
are intended to identify forward-looking statements, although not all forward-looking statements contain these words.



Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after
the date hereof to conform such statements to actual results or to changes in our expectations.



The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this
Quarterly Report on Form 10-Q. In addition, you are urged to carefully review and consider the various disclosures made by us which describe factors which affect our business, including without limitation, Factors That May Affect Our Results
of Operations and Financial Condition set forth in this Form 10-Q, and the audited financial statements and the notes thereto and disclosures made under the caption, Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission.



OVERVIEW



We are a biotechnology company focused on the discovery, development and commercialization of targeted therapies for cancer. Our portfolio of product
candidates includes therapeutic vaccines, monoclonal antibodies, and small molecules to treat a wide range of cancers. The product candidates most advanced in development are therapeutic vaccines designed to stimulate a patients immune system
for the treatment of cancer. Our most advanced product candidate is Provenge, a therapeutic vaccine for the treatment of prostate cancer.



We have incurred significant losses since our inception. As of June 30, 2004, our accumulated deficit was $172.6 million. We have incurred net losses as a
result of research and development expenses, general and administrative expenses in support of our operations, clinical trial expenses and marketing expenses. We anticipate incurring net losses over at least the next several years as we continue our
clinical trials, apply for regulatory approvals, develop our technology, expand our operations and develop the infrastructure to support the commercialization of Provenge.



We anticipate that we will not generate revenue from the sale of commercial therapeutic products for the next several years.
Without revenue generated from commercial sales, we anticipate that we will continue to fund our ongoing research, development and general operations from our available cash resources, and with revenue received from collaborations, and milestone
payments and license fees from our current or future collaborators. The timing and level of funding from our existing or future collaborations will fluctuate based upon the success of our research programs, our ability to meet milestones and receipt
of approvals from government regulators. We expect research and development expenses to increase in the future as a result of increased research and clinical trial activity. Clinical costs may grow at a faster rate compared to research and other
preclinical expenses as we continue our ongoing, pivotal Phase 3 clinical trial of Provenge, D9902B, and advance other potential products in clinical development.



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Provenge



Provenge is our therapeutic vaccine being developed for the treatment of prostate cancer. Prostate cancer is the most common solid tumor malignancy in men
in the United States, with over one million men currently diagnosed with the disease.



We are currently conducting a pivotal, randomized, double blind, placebo-controlled Phase 3 clinical trial of Provenge, D9902B, at approximately 70 centers in the United States. This trial is designed to test the
efficacy of Provenge in men with asymptomatic, metastatic, androgen independent prostate cancer whose cancer has a Gleason score of 7 or less. We have received an agreement under a Special Protocol Assessment, or SPA, from the Food and Drug
Administration, or FDA, for D9902B. We also received Fast Track designation for Provenge from the FDA for metastatic, asymptomatic androgen independent prostate cancer.



Androgen independent prostate cancer, or AIPC, is an advanced stage of prostate cancer in which tumor growth is no longer
regulated by androgens, or male hormones. Currently, there are limited FDA-approved therapeutic treatment options for patients with AIPC. The Gleason score is the most commonly used prostate cancer scoring system and is considered one of the most
important prognostic indicators for prostate cancer. The Gleason score is a measure of the aggressiveness of a patients tumor and ranges in score from 2 to 10. It is widely accepted within the medical community that Gleason scores of 7 or less
suggest a better prognosis than Gleason scores of 8 and higher. Approximately 75% of androgen independent, and approximately 95% of androgen dependent, prostate cancer patients have a Gleason score of 7 and less.



D9902B is designed to confirm the results of our first Phase 3 trial of
Provenge, D9901. Study D9901 enrolled men with asymptomatic, metastatic AIPC aposeonear had Gleason scores above and below 7. The results from this trial did not achieve statistical significance for the overall population. However, for men with
Gleason scores of 7 or less who were treated with Provenge, the results demonstrated a statistically significant benefit in delaying time to disease progression and the onset of disease related pain.



On January 12, 2004, we announced interim survival data from D9901 for men
with Gleason scores of 7 or less. Based on data accumulated as of December 2003, men receiving Provenge whose cancer had a Gleason score of 7 or less had a significant survival advantage, having on average an 89% overall increase in their survival
time as compared to placebo (log rank p = 0.047, hazard ratio = 1.89). This benefit is reflected by a prolongation in the median survival time in these men receiving Provenge by 8.4 months (30.7 months versus 22.3 months). At 30 months from
randomization, the survival rate for men treated with Provenge in this population is 3.7 times higher than for men receiving placebo (53% versus 14%, p-value = 0.001).



If D9902B is successful in meeting its specified endpoints and we otherwise satisfy FDA requirements, we are on track to
obtain approval from the FDA to market Provenge in 2006.



We
are currently in discussions with two potential collaborators for the continued development and commercialization of Provenge.



APC8024



We are conducting Phase 1 clinical trials for APC8024, our investigational immunotherapy for HER2/neu for the treatment of patients with breast, ovarian and other solid tumors. As we announced earlier this year,
updated results from a Phase 1 clinical trial of APC8024 in patients with breast cancer indicate that APC8024 is showing clinical benefit and targeted T-cell mediated immune responses in patients with advanced, metastatic, HER2/neu positive breast
cancer. In June 2004, data from a Phase 1 study of APC8024 in patients with advanced breast, ovarian and colorectal cancers was presented at the American Society of Clinical Oncology (ASCO) annual meeting. The data indicate that APC8024 stimulate a
robust immune response and is well-tolerated. The data also indicates an encouraging survival duration, with half of the patients alive after 8 months. We are presently designing Phase 2 trials of APC8024, and expect to begin a Phase 2 trial in 2004
in metastatic breast cancer.



Preclinical Research and Development Programs



In addition to our other therapeutic vaccines in
preclinical research and development, We have a monoclonal antibody and small material product candidates in preclinical research and development programs underway.



Our collaboration with Genentech targets the development of product candidates directed against trp-p8, a cancer-specific
ion channel. We are currently engaged in discovering, evaluating and developing small molecule therapeutics that modify trp-p8 function.



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As a result of the acquisition of Corvas, we obtained its membrane-bound serine protease inhibitor
preclinical program that focuses primarily on membrane-associated proteases that have been implicated in supporting the growth and progression of several types of solid tumors, including prostate, breast, ovarian and colorectal cancers.



Our collaboration with Abgenix, Inc. is focused on the discovery,
development and commercialization of fully-human monoclonal antibodies against the membrane-bound serine protease, matriptase. Under the terms of the collaboration, Abgenix will use its human antibody technologies to generate and select antibodies
against matriptase. Both companies will have the right to co-develop and commercialize, or, if co-development is not elected, to solely develop and commercialize, any antibody products discovered during the collaboration. Both companies will share
equally in the product development costs and any profits from sales of products successfully commercialized from co-development efforts.



We also are collaborating with Dyax Corp. to discover, develop and commercialize antibody, small protein and peptide inhibitors for two endotheliase
enzymes that Corvas isolated and characterized. Under the terms of this agreement, both companies will jointly develop any inhibitory agents that may be identified and will share commercialization rights and profits, if any, from any marketed
products.



We have a monoclonal antibody program that targets
HLA-DR and the use of antibodies directed to this target to kill cancer cells.



We also obtained Corvas Protease Activated Therapy (PACT) therapeutic platform. PACT involves the design of synthetic molecules composed of a sequence of amino acids that are selectively recognized by a
targeted, cancer-associated serine protease. The peptide moiety is chemically attached to a known cancer chemotherapeutic or cytoxic drug, yielding a pro-drug. This highly targeted approach may reduce damage to normal, healthy tissue through the
activation of the pro-drug only at the location of the tumor by the tumor-specific serine protease.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



Cash, Cash Equivalents, and Investments



We
consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less to be cash equivalents. The amounts are recorded at cost, which approximate fair market value. Our cash equivalents, short- and long-term
investments consist principally of commercial paper, money market securities, corporate bonds/notes and certificates of deposit.



We have classified our entire investment portfolio as available-for-sale. Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of stockholders equity and included in accumulated other comprehensive income. The amortized cost of investments is adjusted for amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion are included in interest income. Interest earned on securities is included in interest income. We consider an investment with a maturity greater than twelve months as long-term and a maturity less than twelve months
short-term.



Impairment of Long-Lived Assets



Statement of Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets required losses from impairment of long-lived assets used in operations to be recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount. We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered.



Revenue Recognition



Substantially all of the revenue we receive is collaborative research revenue and license revenue. We recognize
collaborative research revenues from up-front payments, milestone payments, and personnel-supported research funding. We recognize license revenue from intellectual technology agreements. The payments received under these research collaboration
agreements are contractually not refundable even if the research effort is not successful. Performance under our collaborative agreements is measured by scientific progress, as mutually agreed upon by us and our collaborators.



Up-front Payments: Up-front payments from our research collaborations
include payments for technology transfer and access rights. Non-refundable, up-front payments received in connection with collaborative research and development agreements are deferred and recognized on a straight-line basis over the relevant
periods specified in the agreement, generally the research term. When the research term is not specified in the agreement and instead the agreement specifies the completion or attainment of a particular development goal, an estimate is made of the
time required to achieve that goal considering experience with similar projects, level of effort and the development stage of the project. The basis of the revenue recognition is reviewed and adjusted based on the status of the project against the
estimated timeline as additional information becomes available.



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Milestones: Payments for milestones that are based on the achievement of substantive and at
risk-performance criteria are recognized in full at such time as the specified milestone has been achieved according to the terms of the agreement. When payments are not for substantive and at-risk milestones revenue is recognized as if the payment
was an up-front fee.



Personnel Supported Research
Funding: Under these agreements, research and development activities are performed by designated full-time equivalent personnel (FTE) during a specified funding period. The FTE funding rate is an agreed upon rate comparable to other rates for
similar research and development services. Payments received in advance of the research and development activities performed are deferred and recognized on a straight-line basis over the related funding period. Our performance is on a best
efforts basis with no guarantee of either technological or commercial success.



License Fees: Non-refundable license fees where we have completed all future obligations are recognized as revenue in the period when persuasive evidence of an agreement exists, delivery has occurred,
collectability is reasonably assured and the price is fixed and determinable.



Product Sales: Revenue from product supply agreements is recorded when the product is shipped, title and risk of loss has passed to the customer, amounts are deemed to be collectible and all other obligations
under the agreements are met.



Grant Revenue: Revenue
related to grant agreements is recognized as related research and development expenses are incurred.



Royalty Income: Royalties from licensees are based on reported sales of licensed products and revenues are calculated based on contract terms when
reported sales are reliably measurable and collectability is reasonably assured.



Research and Development Expenses



Pursuant to
SFAS No. 2 Accounting for Research and Development Costs, our research and development costs are expensed as incurred. The value of acquired IPR&D is charged to expense on the date of acquisition. Research and development expenses
include, but are not limited to, payroll and personnel expenses, lab expenses, clinical trial and related clinical manufacturing costs, facilities and overhead costs.



Use of Estimates



Our discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments in certain circumstances that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent liabilities. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due
consideration to materiality. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, investments, income taxes, financing operations, long-term service contracts, and other contingencies. Management bases
its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates.



Fair Value of Financial Instruments



At June 30, 2004, the carrying value of accounts receivable, accounts payable, and accrued liabilities approximates fair value based on the liquidity of
these financial instruments or their short-term nature. The carrying value of capital lease obligations approximates fair value based on the market interest rates available to us for debt of similar risk and maturities.



Income Taxes



We account for income taxes in accordance with the provision of SFAS No. 109, Accounting for Income Taxes. SFAS
109 requires recognition of deferred taxes to provide for temporary differences between financial reporting and tax basis of assets and liabilities. Deferred taxes are measured using enacted tax rates expected to be in effect during the year in
which the basis difference is expected to reverse. We continue to record a valuation allowance for the full amount of deferred income taxes, which would otherwise be recorded for tax benefits relating to operating loss and tax credit carryforwards,
as realization of such deferred tax assets cannot be determined to be more likely than not.



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THREE MONTHS ENDED JUNE 30, 2004 AND 2003



Revenue. Revenue was $212,000 and $1.8 million for the three months ended June 30, 2004 and 2003, respectively.
Revenue in the three months ended June 30, 2004 includes $150,000 of previously reserved revenue associated with an agreement with BioTransplant, Inc. that was terminated in 2002. The decrease in revenue was primarily due to the termination of our
collaboration with Kirin Brewery Co., Ltd in November 2003.



Research and Development Expenses. Research and development expenses increased to $13.6 million for the three months ended June 30, 2004, from $8.2 million for the three months ended June 30, 2003. The increase in research and
development expenses resulted primarily from increased personnel-related costs, clinical expense due to increased patient and other costs associated with the D9902B clinical trial, consulting expenses related to the commercialization of Provenge,
contract research fees, clinical manufacturing to support the D9902B clinical trial and travel costs.



Financial data from our research and development-related activities is compiled and managed by us as follows:



|1) | Clinical programs; and
|-- | ----------------------



|2) | Discovery research.
|-- | -------------------



Our research and development expenses for the quarters ended June 30, 2004 and 2003 were as follows :



|                                       |  |                            |      |      |   |    
|-------------------------------------- |  | -------------------------- | ---- | ---- | - | ---
|                                       |  | Three months endedJune 30,
|(in millions)                          |  | 2004                       |      | 2003
|Clinical programs:                     |  |                            |      |      |   |    
|Cancer                                 |  | $                          | 4.2  |      | $ | 2.1
|Indirect costs                         |  |                            | 5.4  |      |   | 3.1
|                                       |  |                            |      |      |   |    
|Total clinical programs                |  |                            | 9.6  |      |   | 5.2
|                                       |  |                           
|Discovery research                     |  |                            | 4.0  |      |   | 3.0
|                                       |  |                            |      |      |   |    
|Total research and development expense |  | $                          | 13.6 |      | $ | 8.2
|                                       |  |                            |      |      |   |    



Direct research and
development costs associated with our clinical programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, and
materials and supplies used in support of the clinical programs. Indirect costs of our clinical program include wages, payroll taxes, and other employee-related expenses including rent, utilities and other facilities-related maintenance. The costs
in each category may change in the future and new categories may be added. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline. Due to the number of projects and our ability to
utilize resources across several projects, our discovery research program costs are not assigned to specific projects.



The aggregate costs of our research and development collaborative agreements include discovery research and clinical efforts where drug technology is
developed across our vaccine, monoclonal antibody and small molecule technology platforms. Our collaborative partners enjoy the benefit from the discoveries and knowledge generated across these platforms. The majority of our collaborative agreements
involve an exchange of potential rights in the territories and indications or field of science, as defined in the respective agreements, in exchange for cash payments. Our collaborative agreements track deliverables based on measures around
scientific progress to which we and our partners agree on a periodic basis, primarily quarterly.



While we believe our clinical programs are promising, we do not know whether any commercially viable products will result from our research and
development efforts. Due to the unpredictable nature of scientific research and product development, we cannot reasonably estimate:



| | the timeframe over which our projects are likely to be completed;
|- | -----------------------------------------------------------------



| | whether they will be completed;
|- | -------------------------------



| | if they are completed, whether they will provide therapeutic benefit or be approved for sale by the necessary government agencies; or
|- | -------------------------------------------------------------------------------------------------------------------------------------



| | whether, if approved, they will be scalable to meet commercial demand.
|- | ----------------------------------------------------------------------



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We anticipate that we will not generate revenue from the sale of commercial therapeutic products in the
near future. Without revenue generated from commercial sales, we anticipate that we will continue to fund our ongoing research, development and general operations with revenue received from collaborations, milestone payments and license fees from
our current or future collaborators and our available cash resources. The timing and level of funding from our existing or future collaborations will fluctuate based upon the success of our research programs, our ability to meet milestones and
receipt of approvals from government regulators. We expect research and development expenses to increase in the future as a result of increased research and clinical trial activity.



General and Administrative Expenses. General and administrative expenses increased to $4.3 million for the three
months ended June 30, 2004, from $1.8 million for the three months ended June 30, 2003. The increase in general and administrative expenses was primarily due to increased legal fees and costs due to an increase in the patent portfolio as a result of
the Corvas acquisition, legal fees related to commercialization strategies for Provenge, San Diego closure costs of $514,000 due to an anticipated delay in subleasing the facility, non-cash board compensation expenses of $490,000 and a retirement
agreement with a former chairman resulting in cash compensation expense of $323,000 and non-cash compensation expense of $106,000. Our general and administrative expenses consist primarily of personnel costs for executive management, legal, finance,
human resources, facilities and information technology, as well as operating costs and third party professional fees, such as legal and accounting. We expect general and administrative expenses to increase in the future to support the ongoing
development of a commercial infrastructure.



Marketing.
Marketing expenses increased to $560,000 for the three months ended June 30, 2004, from $182,000 for the three months ended June 30, 2003. The increase in marketing expense was primarily due to increased advertising related to the recruiting effort
for the D9902B clinical trial medical education cost, and corporate branding expenses. Our marketing expenses consist primarily of salaries and other personnel-related costs, advertising and consulting expenses. We expect marketing expenses to
increase in the future to support the commercialization of Provenge.



Interest Income. Interest income increased to $1.0 million for the three months ended June 30, 2004, from $164,000 for the three months ended June 30, 2003. The increase was attributable to higher average balances of cash, cash
equivalents, and short- and long-term investments, as well as an increase in interest income related to an outstanding receivable balance.



Interest Expense. Interest expense increased to $86,000 for the three months ended June 30, 2004, from $84,000 for the three months ended June 30,
2003. We expect interest expense to increase in the future as a result of additional financing of capital purchases.



Foreign Tax Benefit. During the quarter ended June 30, 2004, we reversed our foreign income tax liability and recognized a tax benefit of $1.6
million based on a new tax treaty entered into between the United States and Japan on March 30, 2004. The new treaty implemented a zero withholding rate on all royalties, certain interest income and other inter-company dividends.



SIX MONTHS ENDED JUNE 30, 2004 AND 2003



Revenue. Revenue was $4.9 million and $3.6 million for the six months
ended June 30, 2004 and 2003, respectively. The increase was primarily due to revenue recognized of $4.6 million in connection with our license agreement with Nuvelo, Inc. for our novel anticoagulant, recombinant nematode anticoagulant protein c2
(rNAPc2) and all other rNAPc proteins. This increase was partially offset by a decrease in revenue due to the termination of our collaboration with Kirin Brewery Co., Ltd. in November 2003.



Research and Development Expenses. Research and development expenses
increased to $26.1 million for the six months ended June 30, 2004, from $16.0 million for the six months ended June 30, 2003. The increase in research and development expenses resulted primarily from increased personnel-related costs, clinical
expense due to increased patient and other costs associated with the D9902B clinical trial, clinical manufacturing to support the D9902B clinical trial, consulting expense related to the commercialization of Provenge, the impairment of fixed assets
acquired from Corvas, contract research fees and travel costs.



Financial data from our research and development-related activities is compiled and managed by us as follows:



|1) | Clinical programs; and
|-- | ----------------------



|2) | Discovery research.
|-- | -------------------



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Our research and development expenses for the six months ended June 30, 2004 and 2003 were as follows :



|                                       |  |                          |      |      |   |     
|-------------------------------------- |  | ------------------------ | ---- | ---- | - | ----
|                                       |  | Six months endedJune 30,
|(in millions)                          |  | 2004                     |      | 2003
|Clinical programs:                     |  |                          |      |      |   |     
|Cancer                                 |  | $                        | 7.3  |      | $ | 3.9 
|Indirect costs                         |  |                          | 12.8 |      |   | 7.5 
|                                       |  |                          |      |      |   |     
|Total clinical programs                |  |                          | 20.1 |      |   | 11.4
|                                       |  |                         
|Discovery research                     |  |                          | 6.0  |      |   | 4.6 
|                                       |  |                          |      |      |   |     
|Total research and development expense |  | $                        | 26.1 |      | $ | 16.0
|                                       |  |                          |      |      |   |     



Direct research and
development costs associated with our clinical programs include clinical trial site costs, clinical manufacturing costs, costs incurred for consultants and other outside services, such as data management and statistical analysis support, and
materials and supplies used in support of the clinical programs. Indirect costs of our clinical program include wages, payroll taxes, and other employee-related expenses including rent, utilities and other facilities-related maintenance. The costs
in each category may change in the future and new categories may be added. Costs attributable to our discovery research programs represent our efforts to develop and expand our product pipeline. Due to the number of projects and our ability to
utilize resources across several projects, our discovery research program costs are not assigned to specific projects.



The aggregate costs of our research and development collaborative agreements include discovery research and clinical efforts where drug technology is
developed across our vaccine, monoclonal antibody and small molecule technology platforms. Our collaborative partners enjoy the benefit from the discoveries and knowledge generated across these platforms. The majority of our collaborative agreements
involve an exchange of potential rights in the territories and indications or field of science, as defined in the respective agreements, in exchange for cash payments. Our collaborative agreements track deliverables based on measures around
scientific progress to which we and our partners agree on a periodic basis, primarily quarterly.



While we believe our clinical programs are promising, we do not know whether any commercially viable products will result from our research and
development efforts. Due to the unpredictable nature of scientific research and product development, we cannot reasonably estimate:



| | the timeframe over which our projects are likely to be completed;
|- | -----------------------------------------------------------------



| | whether they will be completed;
|- | -------------------------------



| | if they are completed, whether they will provide therapeutic benefit or be approved for sale by the necessary government agencies; or
|- | -------------------------------------------------------------------------------------------------------------------------------------



| | whether, if approved, they will be scalable to meet commercial demand.
|- | ----------------------------------------------------------------------



We anticipate that we will not generate revenue from the sale of commercial therapeutic products in the near future. Without revenue generated from
commercial sales, we anticipate that we will continue to fund our ongoing research, development and general operations with revenue received from collaborations, milestone payments and license fees from our current or future collaborators and our
available cash resources. The timing and level of funding from our existing or future collaborations will fluctuate based upon the success of our research programs, our ability to meet milestones and receipt of approvals from government regulators.
We expect research and development expenses to increase in the future as a result of increased research and clinical trial activity.



General and Administrative Expenses. General and administrative expenses increased to $9.6 million for the six months ended June 30, 2004, from
$3.5 million for the six months ended June 30, 2003. The increase in general and administrative expenses was primarily due to costs associated with the closure of our San Diego facility of $3.3 million, increased patent legal fees and costs due to
an increase in the patent portfolio as a result of the Corvas acquisition, legal fees related to commercialization strategies for Provenge, non-cash board compensation expenses of $490,000 and a retirement agreement with a former chairman resulting
in cash compensation of $323,000 and non-cash compensation of $106,000. Our general and administrative expenses consist primarily of personnel costs for executive management, legal, finance, human resources, facilities and information technology, as
well as operating costs and third party professional fees, such as legal and accounting. We expect general and administrative expenses to increase in the future to support the ongoing development of a commercial infrastructure.



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Marketing. Marketing expenses increased to $808,000 for the six months ended June 30, 2004, from
$299,000 for the six months ended June 30, 2003. The increase in marketing expense was primarily due to increased advertising related to the recruiting effort for the D9902B clinical trial, personnel-related costs, consulting, medical education,
corporate branding and market research. Our marketing expenses consist primarily of salaries and other personnel-related costs, advertising and consulting expenses. We expect marketing expenses to increase in the future to support the
commercialization of Provenge.



Interest Income.
Interest income increased to $1.9 million for the six months ended June 30, 2004, from $379,000 for the six months ended June 30, 2003. The increase was attributable to higher average balances of cash, cash equivalents, and short- and long-term
investments, as well as an increase in interest income related to an outstanding receivable balance.



Interest Expense. Interest expense decreased to $170,000 for the six months ended June 30, 2004, from $185,000 for the six months ended June 30,
2003. The decrease was attributable to a one-time administration fee of $25,000 in the three months ended March 31, 2003 related to the GE Life Sciences and Technology Financings, a division of General Electric, capital lease line. We expect
interest expense to increase in the future as a result of additional financing of capital purchases.



Other Expense.Other expense of $290,000 for the six months ended June 30, 2004 was attributable to a loss on the sale of Nuvelo common stock
during the first quarter of 2004. In February 2004, in connection with the Nuvelo license agreement, we acquired 789,889 shares of Nuvelo stock with a fair value ($5.23 per share at closing) of $4.1 million. By February 29, 2004, the stock had been
liquidated at prices ranging from $4.71 to $5.04, for total cash proceeds of approximately $3.8 million resulting in a loss of $290,000, which was recognized through other expense. The originally negotiated value of the license agreement was $4.0
million ($500,000 cash and common stock valued at $3.5 million). At the time of final closing the value of the common stock had appreciated to $4.1 million. Subsequently all shares of Nuvelo stock were liquidated for $3.8 million.



Foreign Tax Benefit. During the six months ended June 30, 2004, we
reversed our foreign income tax liability and recognized a tax benefit of $1.6 million based on a new tax treaty entered into between the United States and Japan on March 30, 2004. The new treaty implemented a zero withholding rate on all royalties,
certain interest income and other inter-company dividends.



LIQUIDITY AND
CAPITAL RESOURCES



Cash, cash equivalents and short- and
long-term investments were $226.1 million at June 30, 2004. Our working capital at June 30, 2004, was $182.4 million. We have financed our operations since inception through the proceeds from the sale of our equity securities, revenue from
collaboration arrangements, interest income earned, equipment lease line financings and loan facilities. In connection with the July 30, 2003 acquisition of Corvas we acquired $79.6 million of cash, cash equivalents and short- and long-term
investments. We have received net proceeds of $171.2 million from our follow-on public offerings of common stock since January 1, 2003. To date, inflation has not had a material effect on our business.



Net cash used in operating activities for the six months ended June 30, 2004
and 2003 was $32.1 million and $17.4 million, respectively. Expenditures in both periods were a result of research and development expenses, general and administrative expenses in support of our operations, and marketing expenses. We expect net cash
used in operating activities to increase in the future as a result of increased research and clinical trial activity and the ongoing development of a commercial infrastructure to support the commercialization of Provenge.



Since our inception, investing activities, other than purchases and
maturities of investments, have consisted primarily of purchases of property and equipment. At June 30, 2004, our investment in equipment and leasehold improvements was $12.2 million. We have an agreement with Transamerica, a financing company
recently acquired by GE Life Sciences and Technology Financings, or GE, under which we have financed purchases of $4.0 million of leasehold improvements, laboratory, computer and office equipment. The lease terms are from 36 to 48 months and bear
interest at rates ranging from 8.7% to 14.3% per year. Transamerica has a security of interest in all of our assets except our patent portfolio. In January 2003, we entered into a $4.0 million lease line with GE. We have financed $856,000 of
leasehold improvements, laboratory, computer and office equipment under the GE lease line. The lease terms are 36 months and bear interest at rates ranging from 10.5% to 11.9% per year. This GE agreement expired on June 30, 2003. In November 2003,
we entered into a $1.7 million lease line with GE. In June 2004, we increased the amount of this lease line with GE by an additional $2.0 million. As of June 30, 2004, we have financed $2.2 million of leasehold improvements, laboratory, computer and
office equipment under this GE lease line. The lease terms are 48 months and bear interest at rates ranging from 8.2% to 9.4% per year. This GE agreement will expire on December 31, 2004. We had a tenant improvement allowance of $3.5 million from
the lessor of our Seattle, Washington facility. As of June 30, 2004, we had used all of the tenant improvement allowance. The improvement allowance bears interest at the rate of 12.5% per year and is repaid monthly over the length of the original
lease.



On October 22, 2003, we filed a shelf
Registration Statement with the SEC to sell up to $125 million of our common stock from time to time. The SEC declared this registration statement effective on November 5, 2003. On January 26, 2004, we filed an additional shelf
Registration Statement solely to increase the dollar amount of securities registered under our original Registration Statement from $125 million to $150 million of our common stock. In January 2004, we sold 11.8 million shares of our common stock at
a price of $12.75 per share for gross proceeds of $150 million, or $140.5 million, net of underwriting discounts, commissions and other fees.



On January 6, 2003, we filed a shelf Registration Statement with the SEC to sell up to $75 million of our common stock from time to time. The
SEC declared this Registration Statement effective on January 22, 2003. In June 2003, we sold 4.4 million shares of common stock at a price of $7.00 per share for gross proceeds of $30,750,000, or $30,715,000, net of offering costs. As of June 30,
2004, $44,250,000 of common stock can be sold under this Registration Statement.



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In June 2002, we entered into a $25,000,000 equity line financing agreement, or equity line facility,
with BNY Capital Markets, Inc., or CMI, a registered broker dealer. As of June 30, 2004, we had issued a total of 206,097 shares at an average price of $4.98 under the equity line facility for gross proceeds of $1,027,000. Issuance costs, which
include legal and accounting fees, were $255,000. The equity line facility expired on June 11, 2004. Upon expiration of this facility, we paid CMI an additional fee of $209,000 which was recorded as general and administrative expense in the three
months ended June 30, 2004.



We anticipate that our cash on
hand, including our cash equivalents, short- and long-term investments, and cash generated from our collaboration arrangements will be sufficient to enable us to meet our anticipated expenditures for at least the next 24 months, including, among
other things:



| | supporting our pivotal Phase 3 trial of Provenge;
|- | -------------------------------------------------



| | manufacturing scale-up and infrastructure development related to the commercialization of Provenge;
|- | ---------------------------------------------------------------------------------------------------



| | preparation of an FDA application for approval of Provenge; and
|- | ---------------------------------------------------------------



| | continuing internal research and development.
|- | ---------------------------------------------



However, we may need to engage in additional financing prior to that time, or we may decide to engage in additional financing prior to that time to
enhance our cash position. Additional financing may not be available on favorable terms, or at all. If we are unable to raise additional funds through sales of our common stock under our shelf registration statement, or through other means, we may
be required to delay, reduce or eliminate some of our development programs and some of our clinical trials.



FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION



We have a history of operating losses. We expect to continue to incur losses, and we may never become profitable.



As of June 30, 2004, we had an accumulated deficit of $172.6 million. We do
not have any products that generate material revenue from product sales or royalties. Operating losses have resulted principally from costs incurred in research and development programs and from general and administrative expenses in support of
operations, clinical trial expenses and marketing expenses. We do not expect to achieve significant product sales or royalty revenue for several years, and we may never do so. We expect to incur additional operating losses in the future, and these
losses may increase significantly as we continue preclinical research and clinical trials, apply for regulatory approvals, develop our product candidates, expand our operations and develop the infrastructure to support commercialization of Provenge
and our other potential products. These losses, among other things, have caused and may cause our stockholders equity and working capital to decrease. We may not be successful in obtaining regulatory approval and commercializing our product
candidates, and our operations may not be profitable even if any of our product candidates are commercialized.



Our nearer-term prospects are highly dependent on Provenge, our lead product candidate. If we do not successfully complete our current Phase 3 pivotal clinical trial for Provenge, the FDA fails to approve Provenge
for commercialization or, if approved by the FDA, we fail to successfully commercialize Provenge, our business would be harmed and our stock price would likely fall.



Our most advanced product candidate is Provenge, a therapeutic vaccine for the treatment of prostate cancer. Provenge is
currently being tested in a pivotal Phase 3 clinical trial, D9902B. Our first Phase 3 clinical trial for Provenge, D9901, did not meet its main objective of showing a statistically significant delay in the median time to disease progression in the
overall patient population in the study. The trial results did, however, identify a group of patients who benefited by treatment with Provenge. Although we have entered into an agreement under a Special Protocol Assessment with the FDA for our
current pivotal trial and have received Fast Track designation for Provenge from the FDA, our obtaining FDA approval of Provenge depends on, among other things, our successfully completing D9902B with favorable results and in accordance with the
agreed upon protocol. We might fail to complete or experience material delays in completing this pivotal trial. In addition, the data from this pivotal Phase 3 trial might not be sufficient to support approval by the FDA of Provenge or we may not be
successful in meeting other requirements for approval of Provenge by the FDA. Even if we receive FDA approval, we might not be successful in commercializing Provenge. If any of these things occur, our business would be harmed and the price of our
common stock would likely fall.



If we fail to enter into collaboration
agreements for our product candidates, if they are needed, we may be unable to commercialize them effectively or at all.



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To successfully commercialize Provenge, our potential product most advanced in development, we will need
substantial financial resources and we will need to develop or access expertise and physical resources and systems, including cell processing centers, a distribution network, an information technology platform and sales and marketing and other
resources that we currently do not have. We may elect to develop some or all of these physical resources and systems and expertise ourselves or we may seek to collaborate with another biotechnology or pharmaceutical company which will provide some
or all of such physical resources and systems as well as financial resources and expertise.



We are currently in discussions for a possible collaboration with respect to Provenge with pharmaceutical and biotechnology companies who may provide such financial and physical resources, systems and expertise.
Whether we reach a definitive agreement for such a collaboration will depend upon our assessment of the collaborators resources and expertise, the terms and conditions of the proposed collaboration, and the proposed collaborators
evaluation of a number of factors. Those factors may include the results of our first Phase 3 clinical trial of Provenge and the potential results of our current pivotal Phase 3 clinical trial of Provenge, the potential market for Provenge, the
costs and complexities of manufacturing and delivering Provenge to patients, the potential of competing products, and industry and market conditions generally. If we were to determine that a collaboration for Provenge is necessary and were unable to
enter into such a collaboration on acceptable terms, we might elect to delay or scale back the commercialization of Provenge in order to preserve our financial resources or to allow us adequate time to develop the required physical resources,
systems and expertise ourselves.



If we enter into a
collaboration agreement we consider acceptable, the collaboration may not proceed as quickly, smoothly or successfully as we plan. The risks in a collaboration agreement for Provenge include the following:



| | the collaborator may not apply the expected financial resources or required expertise in developing the physical resources and systems or other systems necessary to successfully
commercialize Provenge;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | the collaborator may not invest in the development of a sales and marketing force and the related infrastructure at levels that ensure that sales of Provenge reach their full
potential;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | disputes may arise between us and a collaborator that delay the commercialization of Provenge or adversely affect its sales or profitability; or
|- | ------------------------------------------------------------------------------------------------------------------------------------------------



| | the collaborator may independently develop, or develop with third parties, products that could compete with Provenge.
|- | ---------------------------------------------------------------------------------------------------------------------



The occurrence of any of these events could adversely affect the
commercialization of Provenge by delaying the date on which sales of the product may begin if it is approved by the FDA, by slowing the pace of growth of such sales, by reducing the profitability of the product or by adversely affecting the
reputation of the product in the market. In addition, a collaborator for Provenge may have the right to terminate the collaboration at its discretion. Any termination may require us to seek a new collaborator, which we may not be able to do on a
timely basis, if at all, or require us to delay or scale back the commercialization efforts.



We may choose to enter into collaboration agreements for one or more of our other product candidates. With respect to a collaboration for Provenge or any of our other product candidates, we are dependent on the
success of our collaborators in performing their respective responsibilities and the continued cooperation of our collaborators. Our collaborators may not cooperate with us to perform their obligations under our agreements with them. We cannot
control the amount and timing of our collaborators resources that will be devoted to activities related to our collaborative agreements with them. Our collaborators may choose to pursue existing or alternative technologies in preference to
those being developed in collaboration with us. Disputes may arise between us and our collaborators that delay the development and commercialization of our product candidates. Problems with our collaborators, such as those mentioned above, could
have an adverse effect on our business and stock price.



We
have a collaboration with Genentech for the research, development and commercialization of potential therapies targeting trp-p8. We also have collaborations with Abgenix for the research, development and commercialization of monoclonal antibodies
for two selected antigens from our portfolio of serine proteases, and Dyax for the research, development and commercialization of cancer therapeutics focused on serine protease inhibitors. Each of these collaborations involve potential products that
are at the preclinical stage of development, and we believe the risks described above that are associated with later stage products are less likely to materially impact us if they occur. To date, we have not experienced difficulties with these
collaborations that have had a material negative effect on our business or research and product development efforts, and we have not been negatively affected by consolidations involving potential collaborators. However, it is possible that we could
encounter difficulties with these collaborators in the future that could have a material adverse effect on our business.



We may require additional funding, and our future access to capital is uncertain.



It is expensive to develop and commercialize cancer vaccines, monoclonal antibodies, small molecules and other new products.
We plan to continue to simultaneously conduct clinical trials and preclinical research for a number of product candidates, which is



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costly. Our product development efforts may not lead to commercial products, either because our product candidates fail
to be found safe or effective in clinical trials or because we lack the necessary financial or other resources or relationships to pursue our programs through commercialization. Once commercialized, our products may not achieve revenues that exceed
the costs of producing and selling these products. Our capital and future revenues may not be sufficient to support the expenses of our operations, the development of commercial infrastructure, the costs of sales and the conduct of our clinical
trials and preclinical research. We may need to raise additional capital to:



| | fund operations;
|- | ----------------



| | conduct clinical trials;
|- | ------------------------



| | continue the research and development of our therapeutic product candidates; and
|- | --------------------------------------------------------------------------------



| | commercialize our product candidates.
|- | -------------------------------------



We believe that our cash on hand, including our cash equivalents and short-term investments and cash generated from our collaborative arrangements will be
sufficient to meet our projected operating and capital requirements for at least the next 21 months. However, we may need additional financing within this time frame depending on a number of factors, including the following:



| | the costs of developing the physical resources and systems to support FDA approval of Provenge;
|- | -----------------------------------------------------------------------------------------------



| | the costs of preparing an application for FDA approval of Provenge, if we seek such approval;
|- | ---------------------------------------------------------------------------------------------



| | our timetable for and costs of scaling up manufacturing;
|- | --------------------------------------------------------



| | our timetable and costs for the development of marketing operations and other activities related to the commercialization of Provenge and our other product candidates;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | our degree of success in our Phase 3 trial of Provenge, D9902B, and in clinical trials of our other products;
|- | -------------------------------------------------------------------------------------------------------------



| | the rate of progress and cost of our research and development and clinical trial activities;
|- | --------------------------------------------------------------------------------------------



| | the amount and timing of milestone payments we receive from collaborators;
|- | --------------------------------------------------------------------------



| | the emergence of competing technologies and other adverse market developments; and
|- | ----------------------------------------------------------------------------------



| | changes in or terminations of our existing collaboration and licensing arrangements.
|- | ------------------------------------------------------------------------------------



We may not be able to obtain additional financing on favorable terms or at all. If we are unable to raise additional funds,
we may have to delay, reduce or eliminate our clinical trials and our development programs. If we raise additional funds by issuing equity securities, including pursuant to our shelf registration statement, further dilution to our existing
stockholders will result.



We may take longer to complete our clinical
trials than we project, or we may not be able to complete them at all.



A number of factors, including unexpected delays in the initiation of clinical sites, slower than projected identification of eligible patients, competition with ongoing clinical trials and scheduling conflicts with
participating clinicians, regulatory requirement limits on manufacturing capacity and failure of doses of Provenge to meet required standards may cause significant delays in the completion of our clinical trials. We may not complete our pivotal
clinical trial of Provenge or commence or complete clinical trials involving any of our other product candidates as projected or may not conduct them successfully.



We rely on academic institutions, physician practices and clinical research organizations to conduct, supervise or monitor
some or all aspects of clinical trials involving our product candidates. We have less control over the timing and other aspects of these clinical trials than if we conducted the monitoring and supervision entirely on our own. Third parties may not
perform their responsibilities for our clinical trials on our anticipated schedule or consistent with a clinical trial protocol. We also rely on clinical research organizations to perform much of our data management and analysis. They may not
provide these services as required or in a timely manner.



If
we fail to complete our pivotal Phase 3 trial of Provenge or if we experience material delays in completing that trial as currently planned, or we otherwise fail to commence or complete, or experience delays in, any of our other present or planned
clinical trials, our ability to conduct our business as currently planned could materially suffer. Our development costs will increase if



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we experience any future delays in our clinical trials of Provenge or other potential products or if we need to perform
more or larger clinical trials than we currently plan. If the delays or costs are significant, our financial results and our ability to commercialize our product candidates will be adversely affected.



In April 2002, the FDA placed our D9902A (the predecessor to D9902B) study of
Provenge on partial clinical hold and required us to provide additional information regarding the identity and functionality of the product candidate. We submitted additional information, and the FDA lifted the partial hold in October 2002. During
this period we were permitted to continue treating patients already enrolled in the trial, but could not enroll new patients in D9902A.



If testing of a particular product candidate does not yield successful results, then we will be unable to commercialize that product.



Our product candidates in clinical trials must meet rigorous testing
standards. We must demonstrate the safety and efficacy of our potential products in humans through extensive preclinical and clinical testing. We may experience numerous unforeseen events during, or as a result of, the testing process that could
delay or prevent commercialization of our potential products, including the following:



| | safety and efficacy results from human clinical trials, such as our Provenge trials, may not be replicated in later clinical trials;
|- | ------------------------------------------------------------------------------------------------------------------------------------



| | the results of preclinical studies may be inconclusive, or they may not be indicative of results that will be obtained in human clinical trials;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------



| | after reviewing relevant information, including preclinical testing or human clinical trial results, we or our collaborators may abandon or substantially restructure projects that
we might previously have believed to be promising, including Provenge, APC8024, trp-p8 and our monoclonal antibody programs;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | we, our collaborators or regulators may suspend or terminate clinical trials if the participating patients are being exposed to unacceptable health risks or for other reasons; and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | the effects of our potential products may not be the desired effects or may include undesirable side effects or other characteristics that preclude regulatory approval or limit
their commercial use if approved.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Clinical
testing is very expensive, takes many years, and the outcome is uncertain. D9901, our first Phase 3 clinical trial of Provenge, did not meet its main objective of showing a statistically significant delay in the median time to disease progression in
the overall patient population in the study. Although the analysis identified a group of patients who were benefited by treatment with Provenge, we may not obtain favorable results from the clinical study of more patients in this group in our
pivotal Phase 3 trial, D9902B, or those results may cause the FDA to require additional studies. Data from our clinical trials may not be sufficient to support approval by the FDA of our potential products. The clinical trials of Provenge or our
other product candidates may not continue or be completed as planned, and the FDA may not ultimately approve any of our product candidates for commercial sale. If we fail to demonstrate the safety or efficacy of a product candidate under
development, this will delay or prevent regulatory approval of that product candidate, which could prevent us from achieving profitability.



Administering any of our product candidates to humans may produce undesirable side effects. These side effects could interrupt, delay or cause us or the
FDA to halt clinical trials related to any of our product candidates and could result in the FDA or other regulatory authorities denying approval of our product candidates for any or all target indications. We, our collaborators or the FDA may
suspend or terminate clinical trials at any time, which would adversely affect our business.



Commercialization of our product candidates in the United States requires FDA approval, which may not be granted, and foreign commercialization requires similar approvals.



The FDA can delay, limit or withhold approval of a product candidates for
many reasons, including the following:



| | a product candidate may not demonstrate sufficient safety or efficacy;
|- | ----------------------------------------------------------------------



| | the FDA may interpret data from preclinical testing and clinical trials in different ways than we interpret the data or may require data that is different from what we obtained in
our clinical trials;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | the FDA may require additional information about the safety, purity, stability, identity or functionality of a product candidate;
|- | ---------------------------------------------------------------------------------------------------------------------------------



| | the FDA may not approve our manufacturing processes or facilities, or the processes or facilities of our collaborators; and
|- | ---------------------------------------------------------------------------------------------------------------------------



| | the FDA may change its approval policies or adopt new regulations.
|- | ------------------------------------------------------------------



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The FDA also may approve a product for fewer indications than are requested or may condition approval on
the performance of post-marketing clinical studies. Even if we receive FDA and other regulatory approvals, our products may later exhibit adverse effects that limit or prevent their widespread use or that force us to withdraw those products from the
market. Any product and its manufacturer will continue to be subject to strict regulations after approval. Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including its
withdrawal from the market. The process of obtaining approvals in foreign countries is subject to delay and failure for many of the same reasons. A significant delay in or failure to receive approval for any of our products could materially harm our
business and reduce our stock price.



The process of obtaining
required FDA and other regulatory approvals, including foreign approvals, is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. Provenge and our other investigational
therapeutic products are novel; therefore, regulatory agencies may lack experience with them, which may lengthen the regulatory review process, increase our development costs and delay or prevent commercialization of Provenge and our other vaccine
products under development.



To date, the FDA has not approved
for commercial sale in the United States any cancer vaccine designed to stimulate the bodys immune system cells to kill cancer cells directly. Consequently, there is no precedent for the successful commercialization of products based on our
technologies in this area. In addition, we have had only limited experience in filing and pursuing the applications necessary to gain regulatory approvals for marketing and commercial sale, which may impede our ability to obtain FDA approvals. We
will not be able to commercialize any of our potential products until we obtain FDA approval. Therefore, any delay in obtaining, or inability to obtain, FDA approval could harm our business.



We must comply with extensive regulation, which is costly, time consuming and may subject
us to unanticipated delays. Even if we obtain regulatory approval for the commercial sale of any of our product candidates, those product candidates may still face regulatory difficulties.



Our activities, including preclinical studies, clinical trials, cell
processing and manufacturing, are subject to extensive regulation by the FDA and comparable authorities outside the United States. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy
and safety of a potential product. The FDA regulates preclinical studies under a series of regulations called the current Good Laboratory Practices. If we violate these regulations, the FDA, in some cases, may invalidate the studies and require that
we replicate those studies.



An investigational new drug
application, or IND, must become effective before human clinical trials may commence. The investigational new drug application is automatically effective 30 days after receipt by the FDA unless, before that time, the FDA requests an extension to
review the application, or raises concerns or questions about the design of the trials as described in the application. In the latter case, any outstanding concerns must be resolved with the FDA before clinical trials can proceed. Thus, the
submission of an IND may not result in FDA authorization to commence clinical trials in any given case. After authorization is received, the FDA retains authority to place the IND, and clinical trials under that IND, on clinical hold.



We, and third-parties on whom we rely to assist us with clinical trials, are
subject to extensive regulation by the FDA in the design and conduct of clinical trials. Also, investigational products in clinical trials must be manufactured in accordance with a series of complex regulations called current Good Manufacturing
Practice, or cGMP. Other products used in connection with our clinical trials must be manufactured in accordance with regulations called the Quality Systems Regulations, or QSR. These regulations govern manufacturing processes and procedures and the
implementation and operation of quality systems to control and assure the quality of our investigational products. We and third-parties with whom we contract for manufacturing and cell processing must comply with cGMP or QSR, as applicable. Our
facilities and quality systems and potentially the facilities and quality systems of our third-party contractors must pass a pre-approval inspection for compliance with the applicable regulations as a condition of FDA approval of Provenge or any of
our other potential products. In addition, the FDA may, at any time, audit our clinical trials or audit or inspect a manufacturing or cell processing facility involved with the production of Provenge or our other potential products or the associated
quality systems for compliance with the regulations applicable to the activities being conducted. If any such inspection or audit identifies a failure to comply with applicable regulations, the FDA may require remedial measures that may be costly
and/or time consuming for us or a third-party to implement and that may include the temporary or permanent suspension of a clinical trial or the temporary or permanent closure of a facility. The FDA may also disqualify a clinical trial in whole or
in part from consideration in support of approval of a potential product for commercial sale or otherwise deny approval of that product. Any such remedial measures imposed upon us or third-parties with whom we contract could harm our business.



If we are not in compliance with regulatory requirements at
any stage, including post-marketing approval, we may be subject to criminal prosecution, fined, forced to remove a product from the market and/or experience other adverse consequences, including delays, which could materially harm our financial
results. Additionally, we may not be able to obtain the labeling claims necessary or desirable for the promotion of our products. We may also be required to undertake post-marketing clinical trials. If the results of such



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post-marketing studies are not satisfactory, the FDA may withdraw marketing authorization or may condition continued
marketing on commitments from us that may be expensive and/or time consuming to fulfill. In addition, if we or others identify side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be
withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products and additional marketing applications may be required.



Our competitors may develop and market products that are less expensive, more effective, safer or reach the market sooner, which may
diminish or eliminate the commercial success of any products we may commercialize.



Competition in the cancer therapeutics field is intense and is accentuated by the rapid pace of technological development. We anticipate that we will face increased competition in the future as new companies enter our
markets. Research and discoveries by others may result in breakthroughs that render Provenge or our other potential products obsolete even before they begin to generate any revenue.



There are products currently under development by others that could compete with Provenge or other products that we are
developing. For example, AVI BioPharma, Inc., Cell Genesys, Inc. and Therion Biologics are each developing prostate cancer vaccines that could potentially compete with Provenge. AVI BioPharma and Therion are in Phase 2 clinical trials of their
prostate cancer vaccines. Cell Genesys has completed Phase 2 clinical trials of its prostate cancer vaccine and has initiated Phase 3 trials. Other products such as chemotherapeutics, antisense compounds, angiogenesis inhibitors and gene therapies
for cancer are also under development by a number of companies and could potentially compete with Provenge and our other product candidates. A chemotherapeutic, Taxotere, was recently approved by the FDA for the therapeutic treatment of metastatic
androgen independent prostate cancer, the stage of the disease in which Provenge is being studied in D9902B.



Some of our competitors in the cancer therapeutics field have substantially greater research and development capabilities and manufacturing, marketing,
financial and managerial resources than we do. If our products receive marketing approval, but cannot compete effectively in the marketplace, our profitability and financial position will suffer.



We may not realize all of the anticipated benefits of the acquisition of Corvas.



The success of our acquisition of Corvas will depend, in
part, on our ability to realize the anticipated synergies, cost savings and other opportunities from integrating the business of Corvas with our business.



These opportunities include advancing product candidates through clinical trials, developing new product candidates from preclinical cancer programs and
achieving cost savings to reduce our cash use. In December 2003, we announced the closure of the San Diego operations acquired through the acquisition of Corvas. The closure is intended to allow us to focus our resources on optimizing the value of
key assets and to obtain future operating efficiencies. To efficiently manage the ongoing programs located in San Diego, we re-located essential activities to our headquarters in Seattle. This decision resulted in a reduction in workforce at the San
Diego facility and certain non-recurring expenses in the fourth quarter of 2003 of $989,000 and in the first half of 2004 of $3.3 million.



Difficulties we may face in combining the Corvas operations with ours include retaining and/or recruiting employees with the scientific expertise
necessary to continue Corvas preclinical programs, preserving collaborations and other important relationships, allocating resources to optimize the development of programs with the greatest potential value, and achieving anticipated operating
efficiencies and cost savings, retaining and/or recruiting employees with the scientific expertise necessary to continue preclinical programs that were being pursued at the San Diego facility, preserving licensing, research and development, supply,
collaboration and other important relationships and allocating the resources of the combined operation to optimize the development of programs with the greatest potential value.



It is possible that we will be unable to realize all of the benefits that we expect to result from the acquisition of Corvas
and the combination of our operations in Seattle. Integration of operations may be difficult and may have unintended and undesirable consequences. We may not accomplish this integration as quickly or as smoothly or successfully as we would like. The
diversion of managements attention from our current operations to the integration effort and any difficulties in combining operations could prevent us from realizing the full benefits that we expect to result from the combination and could
adversely affect our existing business.



The acquisition of
Corvas also entails an inherent risk that we could become subject to contingent or other liabilities, including liabilities arising from events or conduct pre-dating our acquisition of Corvas that were not known to us at the time of the acquisition.



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Market acceptance of our product candidates, if any, is uncertain.



Even if our potential products are approved and sold, physicians may not
ultimately use them or may use them only in applications more restricted than we expect. Physicians will only prescribe a product if they determine, based on experience, clinical data, side effect profiles and other factors, that it is beneficial
and preferable to other products then in use. Many other factors influence the adoption of new products, including marketing and distribution restrictions, course of treatment, adverse publicity, product pricing, the views of thought leaders in the
medical community, and reimbursement by third-party payors.



Failure to
retain key personnel could impede our ability to develop our products and to obtain new collaborations or other sources of funding.



We depend, to a significant extent, on the efforts of our key employees, including senior management and senior scientific, clinical, regulatory and other
personnel. The development of new therapeutic products requires expertise from a number of different disciplines, some of which are not widely available. We depend upon our scientific staff to discover new product candidates and to develop and
conduct preclinical studies of those new potential products. Our clinical and regulatory staff is responsible for the design and execution of clinical trials in accordance with FDA requirements and for the advancement of our product candidates
toward FDA approval. The quality and reputation of our scientific, clinical and regulatory staff, especially the senior staff, and their success in performing their responsibilities, may directly influence the success of our product development
programs. In addition, our Chief Executive Officer and other executive officers are involved in a broad range of critical activities, including providing strategic and operational guidance. The loss of these individuals, or our inability to retain
or recruit other key management and scientific, clinical, regulatory and other personnel, may delay or prevent us from achieving our business objectives. We face intense competition for personnel from other companies, universities, public and
private research institutions, government entities and other organizations.



We must expand our operations to commercialize our products, which we may not be able to do.



We will need to expand and effectively manage our operations and facilities to successfully pursue and complete development of Provenge, develop the
necessary commercial infrastructure, and pursue development of our other product candidates. We will need to add manufacturing, quality control, quality assurance, marketing and sales personnel, and personnel in all other areas of our operations and
expand our capabilities, which may strain our existing managerial, operational, financial and other resources. To compete effectively and manage growth in our personnel and capabilities, we must, among other things:



| | recruit, train, manage and motivate our employees;
|- | --------------------------------------------------



| | accurately forecast demand for our product candidates; and
|- | ----------------------------------------------------------



| | expand existing facilities, and operational, financial and management information systems.
|- | ------------------------------------------------------------------------------------------



If we fail to manage our growth effectively, our product development and commercialization efforts could be curtailed or
delayed.



We have no commercial or other large-scale manufacturing
experience and may rely on third-party manufacturers, which will limit our ability to control the availability of, and manufacturing costs for, our products.



To be successful, our products must be capable of being manufactured in sufficient quantities, in compliance with regulatory
requirements and at an acceptable cost. We have no commercial or other large-scale manufacturing experience. We may rely on third-parties for certain aspects of the commercial and clinic trial manufacture of our products. A limited number of
contract manufacturers are capable of manufacturing the components of Provenge. If we cannot contract for large-scale manufacturing capabilities that we require on acceptable terms, or if we encounter delays or difficulties with manufacturers and
cannot manufacture the contracted components ourselves, we may not be able to conduct clinical trials as planned or to market and sell our products.



It may be difficult or impossible to economically manufacture our product candidates on a commercial scale. We have contracted with Diosynth RTP, Inc. to
assist us in the scale-up to commercial level production of the antigen used in the preparation of Provenge. We cannot be certain that this contract will result in our ability to produce the antigen for Provenge on a commercial scale, if Provenge is
approved for commercial sale.



We operate a facility for cell
processing and the manufacture of antigens for our clinical trials. We also contract with third-parties to provide these services. These facilities may not be sufficient to meet our needs for our Provenge and other clinical trials. To manufacture
any of our potential products in commercial quantities ourselves, we will require substantial additional funds and will be required to hire and train a significant number of employees, construct additional facilities and comply with applicable
regulations for these facilities, which are extensive. We may not be able to develop production facilities that both meet regulatory requirements and are sufficient for our clinical trials or for commercial use.



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We are dependent on single source vendors for some of our components.



We currently depend on single-source vendors for some of the components
necessary for our vaccine candidates, including Provenge. There are, in general, relatively few alternative sources of supply for these components. While these vendors have produced our vaccine components with acceptable quality, quantity and cost
in the past, they may be unable or unwilling to meet our future demands. Establishing additional or replacement suppliers for these components could take a substantial amount of time and it may be difficult to establish replacement vendors who meet
regulatory requirements. If we have to switch to a replacement vendor, the manufacture and delivery of our vaccines could be interrupted for an extended period, adversely affecting our business.



If we are unable to protect our proprietary rights or to defend against infringement
claims, we may not be able to compete effectively or operate profitably.



We invent and develop technologies that are the basis for or incorporated in our potential products for which we seek to obtain patent protection. Our issued patents and applications relate to the antigens, serine
proteases, compounds, and other biologic matter around which our product candidates are constructed, as well as the methods and processes for manufacturing those product candidates. Our patent applications are in various stages of processing. We
expect that we will continue to file and prosecute patent applications and that our success depends in part on our ability to establish and defend our proprietary rights in the technologies that are the subject of issued patents and patent
applications.



The fact that we have filed a patent
application, or that a patent has issued, does not ensure that we will have meaningful protection from competition with regard to the underlying technology or product. Others can challenge any patent application that we may file or the validity
and/or scope of any patent issued to us. The patents themselves may relate to inventions that are reasonably easy to design around, and other companies may invent comparable or superior technologies that do not rely on any of our patented
technologies.



Patent law relating to the scope of claims in
the biotechnology field is still evolving and, consequently, patent positions in our industry may not be as strong, or may be subject to greater risk of challenge, with more uncertainty as to the outcome of any such challenge, than would be the case
in more established fields. Because patents are particularly important in the field of medical technology, other companies may have a greater incentive to challenge our patents or to assert that our technologies violate their proprietary rights than
might otherwise be the case.



We are also subject to the risk
of claims, whether meritorious or not, that our therapeutic vaccines or other potential products or processes use proprietary technology of others for which we do not have a valid license. There are patents owned by third-parties, and such a
third-party could assert a claim that our therapeutic vaccines infringe a patent owned by that party. If a lawsuit making any such claims were brought against us, we would assert that the patent at issue is either invalid or not infringed. However,
we may not be able to establish non-infringement, and we may not be able to establish invalidity through clear and convincing evidence sufficient to overcome the presumption that issued patents are valid. If we are found to infringe a valid patent,
we could be required to seek a license or discontinue or delay commercialization of the affected products, and we could be required to pay substantial damages, which could materially harm our business.



Litigation relating to the ownership and use of intellectual property is
expensive, and our position as a relatively small company in an industry dominated by very large companies may cause us to be at a disadvantage in defending our property rights. Even if we are able to defend our positions, the cost of doing so may
adversely affect our profitability. We have not experienced significant patent litigation. However, this may reflect in part the fact that we have not yet commercialized any products. We may be subject to such litigation and may not be able to
protect our intellectual property at a reasonable cost, if such litigation is initiated.



We may collaborate with a pharmaceutical or biotechnology company in the commercialization, marketing and distribution of Provenge in the United States, and may collaborate with other companies in the development and
commercialization of our other potential products. In some cases, we may develop a product candidate in collaboration with other companies in order to share the development risk, to gain access to complementary technologies or facilities or for
other reasons.



The existence of uncertainty with respect to
our ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, could impede our ability to enter into such relationships on an advantageous basis or at all.



We also rely on unpatented technology, trade secrets and confidential
information. Others may independently develop substantially equivalent information and techniques and may obtain patents covering our unpatented technology or trade secrets. Others may gain access to or disclose our technology, trade secrets and
confidential information. We may not be able to effectively protect our rights in unpatented technology, trade secrets and confidential information. Although we require those who work with us to execute confidentiality agreements, these agreements
may not provide effective protection of our information.



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The availability and amount of reimbursement for our potential products and the manner in which government and private
payors may reimburse for our potential products is uncertain; we may face challenges from government or private payors that adversely affect reimbursement for our potential products.



We expect that many of the patients who seek treatment with our products, if those products are approved for marketing, will
be eligible for Medicare benefits. Other patients may be covered by private health plans or uninsured. The application of existing Medicare regulations and interpretive rulings to newly approved products, especially novel products such as ours, is
not certain, and those regulations and interpretive rulings are subject to change. If we are unable to obtain or retain adequate levels of reimbursement from Medicare or from private health plans, our ability to sell our potential products will be
adversely affected. Medicare regulations and interpretive rulings also may determine who may be reimbursed for certain services. This may adversely affect our ability to market or sell our potential products, if approved.



Federal, state and foreign governments continue to propose legislation
designed to contain or reduce health care costs. Legislation and regulations affecting the pricing of products like our potential products may change or be adopted before any of our potential products are approved for marketing. Cost control
initiatives could decrease the price that we receive for any one or all of our potential products or increase patient coinsurance to a level that makes our products under development unaffordable. In addition, government and private health plans
persistently challenge the price and cost-effectiveness of therapeutic products. Accordingly, these third-parties may ultimately not consider any or all of our products under development to be cost-effective, which could result in products not being
covered under their health plans or covered only at a lower price. Any of these initiatives or developments could prevent us from successfully marketing and selling any of our potential products.



We are exposed to potential product liability claims, and insurance against these claims
may not be available to us at a reasonable rate in the future.



Our business exposes us to potential product liability risks which are inherent in the testing, manufacturing, marketing and sale of therapeutic products. We have clinical trial insurance coverage, and we intend to obtain product liability
insurance coverage in the future. However, this insurance coverage may not be adequate to cover claims against us or available to us at an acceptable cost, if at all. Regardless of their merit or eventual outcome, product liability claims may result
in decreased demand for a product, injury to our reputation, withdrawal of clinical trial volunteers and loss of revenues. Thus, whether or not we are insured, a product liability claim or product recall may result in losses that could be material.



We use hazardous materials in our business and must comply with
environmental laws and regulations, which can be expensive.



Our research and development activities will continue to involve the controlled use of hazardous materials, including chemicals and radioactive and biological materials. Our operations also produce hazardous waste products. We are subject
to a variety of federal, state and local regulations relating to the use, handling, storage and disposal of these materials. We generally contract with third-parties for the disposal of such substances, and store our low level radioactive waste at
our facilities until the materials are no longer considered radioactive. We cannot eliminate the risk of accidental contamination or injury from these materials. We may be required to incur substantial costs to comply with current or future
environmental and safety regulations. In the event of an accident or contamination, we would likely incur significant costs associated with civil penalties or criminal fines, lawsuits from regulatory authorities and private parties, and in complying
with environmental laws and regulations.



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



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



We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.



Our business may bring us into conflict with our licensees, licensors or others with whom we have contractual or other business relationships, or with our
competitors or others whose interests differ from ours. If we are unable to resolve those conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against us. That litigation is likely to be
expensive and may require a significant amount of managements time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us that require
us to pay damages, enjoin us from certain activities or otherwise affect our legal or contractual rights, which could have a significant adverse effect on our business.



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Market volatility may affect our stock price, and the value of your investment in our common stock may be subject to
sudden decreases.



The trading price for our common stock
has been, and we expect it to continue to be, volatile. The price at which our common stock trades depends on number of factors, including the following, many of which are beyond our control:



| | our historical and anticipated operating results, including fluctuations in our financial and operating results;
|- | ----------------------------------------------------------------------------------------------------------------



| | preclinical and clinical trial results;
|- | ---------------------------------------



| | market perception of the prospects for biotechnology companies as an industry sector;
|- | -------------------------------------------------------------------------------------



| | general market and economic conditions;
|- | ---------------------------------------



| | changes in government regulations affecting product approvals, reimbursement or other aspects of our or our competitors businesses;
|- | ------------------------------------------------------------------------------------------------------------------------------------



| | FDA review of our product development activities;
|- | -------------------------------------------------



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



| | developments concerning our key personnel and intellectual property rights;
|- | ---------------------------------------------------------------------------



| | announcements regarding significant collaborations or strategic alliances; and
|- | ------------------------------------------------------------------------------



| | publicity regarding actual or potential performance of products under development by us or our competitors.
|- | -----------------------------------------------------------------------------------------------------------



In addition, the stock market has from time to time experienced extreme price
and volume fluctuations. These broad market fluctuations may lower the market price of our common stock and affect the volume of trading in our stock. The high and low intraday prices per share of our common stock on the Nasdaq National Market were
$10.50 and $1.26 respectively in 2002, $10.50 and $4.01 respectively in 2003, and $16.72 and $7.98 respectively in this year through July 30, 2004. The average daily trading volume of our common stock on the Nasdaq National Market was 132,760 shares
in 2002, 669,347 shares in 2003, and 1,354,872 shares this year through July 30, 2004. During periods of stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to their
individual operating performance. Accordingly, our common stock may be subject to greater price volatility than the stock market as a whole.



Anti-takeover provisions in our charter documents and under Delaware law and our stockholders rights plan could make an acquisition of us, which may be
beneficial to our stockholders, more difficult.



Provisions of our certificate of incorporation and bylaws will make it more difficult for a third-party to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts. For
example, our certificate of incorporation authorizes our board of directors to issue up to 10,000,000 shares of preferred stock, of which 1,000,000 shares have been designated as Series A Junior Participating Preferred Stock, and to fix
the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock will be subject to, and may be harmed by, the
rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could reduce the voting power of the holders of our common stock and the likelihood that common stockholders will receive payments upon
liquidation.



In addition, our certificate of incorporation
divides our board of directors into three classes having staggered terms. This may delay any attempt to replace our board of directors. We have also implemented a stockholders rights plan, also called a poison pill, that would substantially
reduce or eliminate the expected economic benefit to an acquirer from acquiring us in a manner or on terms not approved by our board of directors. These and other impediments to a third-party acquisition or change of control could limit the price
investors are willing to pay in the future for shares of our common stock. Our board of directors adopted a Change of Control Executive Severance Plan providing severance benefits for participants in the event that their employment terminates
involuntarily without cause or for good reason within twelve months after a change of control by us. This plan could affect the terms of a third-party acquisition.



We are also subject to provisions of Delaware law that could have the effect of delaying, deferring or preventing a change
in control of our company. One of these provisions prevents us from engaging in a business combination with any interested stockholder for a period of three years from the date the person becomes an interested stockholder, unless specified
conditions are satisfied.



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If registration rights that we have previously granted are exercised, then our stock price may be negatively affected.



We have granted registration rights in connection with
the issuance of our securities to a number of our stockholders and warrant holders. In the aggregate, as of June 30, 2004, these registration rights covered approximately 8,932,218 shares of our common stock which were then outstanding and an
additional 32,384 shares of our common stock which may become outstanding upon the exercise of warrants that were then outstanding. If these registration rights, or similar registration rights that may apply to securities we may issue in the future,
are exercised by the holders, it could result in additional sales of our common stock in the market, which may have an adverse effect on our stock price. We currently have in effect a registration statement relating to 363,263 shares pursuant to
which Artisan Equity, Ltd. may freely resell these shares into the public market at any time or from time to time.



Our issuance of shares pursuant to existing or future collaborations or other agreements or under our shelf registration statement will dilute the equity ownership of
our existing stockholders.



Under our agreement with
Genentech, if a specified milestone relating to trp-p8 is achieved, Genentech is obligated to purchase from us $2.5 million of our common stock at a price based on the average closing price of our stock over the 30 prior trading days.



An agreement between Abgenix, Inc. and Corvas provides that in the event the
parties elect to expand the research program covered by that agreement, Abgenix would be obligated to purchase $5 million of Corvas common stock. In our acquisition of Corvas, our subsidiary, Dendreon San Diego LLC, succeeded to the rights and
obligations of Corvas under this agreement. In the event that the parties elect to expand the research program, we anticipate that the equity investment by Abgenix would be made in exchange for shares of Dendreon common stock.



We are currently in discussions with potential collaborators with respect to
our lead investigational product, Provenge. In connection with any such Provenge collaboration or any other collaboration that we may enter into in the future, we may issue additional shares of common stock or other equity securities, and the value
of the securities issued may be substantial.



We may sell up to
$44.3 million of our common stock under our outstanding shelf registration statement. Future sales under our shelf registration statement will depend primarily on the market price of our common stock, the interest in our company by institutional
investors and our cash needs. In addition, we may register additional shares with the SEC for sale in the future. Each of our issuances of common stock to investors under our registration statements or otherwise will proportionately decrease our
existing stockholders percentage ownership of our total outstanding equity interests and may reduce our stock price.



We do not intend to pay cash dividends on our common stock in the foreseeable future.



We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will
depend upon our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Furthermore, we may become subject to contractual restrictions or prohibitions on the payment
of dividends.



ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK



As of June 30, 2004, we had short- and long-term investments of $205.9 million. The primary objective of our investment activities is to preserve
principal and maintain liquidity, while maximizing the income we receive without significantly increasing risk. To minimize risk, our investment portfolio consists of a variety of interest-bearing instruments, including commercial paper, money
market securities and corporate bonds/notes. Due to the relatively short maturities of our investments, we do not expect interest rate fluctuations to materially affect the aggregate value of our investment portfolio. Our outstanding capital lease
obligations are all at fixed interest rates and therefore have minimal exposure to changes in interest rates.



ITEM 4. CONTROLS AND PROCEDURES



We evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by
this report. Our principal executive and financial officers supervised and participated in the evaluation. Based on the evaluation, our principal executive and financial officers each concluded that, as of the date of the evaluation, our disclosure
controls and procedures were effective in providing reasonable assurance that material information relating to Dendreon and our consolidated subsidiaries is made known to management, including during the period when we prepare our periodic SEC
reports. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.



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PART IIOTHER INFORMATION



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



Our Annual Meeting of Stockholders was held on June 16, 2004 in Seattle, Washington. Of the 54,740,990 shares of common stock outstanding as of the record date, 53,122,150 were present or represented by proxy at the
meeting. The results of the voting on the matters submitted to the stockholders were as follows:



1. To elect three Directors to serve until the 2007 Annual Meeting and until a successor is duly elected and qualified.



|                   |  |            |  |           
|------------------ |  | ---------- |  | ----------
|Name               |  | For        |  | Withheld  
|Gerardo Canet      |  | 41,079,187 |  | 12,042,963
|Bogdan Dziurzynski |  | 52,277,260 |  | 844,890   
|Douglas Watson     |  | 41,344,071 |  | 11,778,079



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits



|              |  |                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                       
|3.1           |  | Amended and Restated Certificate of Incorporation (1)                                                                                             
|              | 
|3.2           |  | Amended and Restated Bylaws                                                                                                                       
|              | 
|4.1           |  | Specimen Common Stock certificate (2)                                                                                                             
|              | 
|4.2           |  | Rights Agreement dated as of September 18, 2002 between Dendreon Corporation and Mellon Investor Services LLC (including the exhibits thereto) (3)
|              | 
|4.3           |  | Dendreon Corporation Certificate of Designation of Series A Junior Participating Preferred Stock (3)                                              
|              | 
|4.4           |  | Form of Right Certificate (3)                                                                                                                     
|              | 
|10.1          |  | Retirement Agreement between Dendreon Corporation and Christopher S. Henney, Ph.D., dated May 28, 2004*                                           
|              | 
|10.2          |  | Dendreon Corporation Change of Control Executive Severance Plan *                                                                                 
|              | 
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer                                                                                 
|              | 
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer                                                                                 
|              | 
|32            |  | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer                                                                 

---

|* | Management compensatory plans and arrangements required to be filed as exhibits to this Report.
|- | -----------------------------------------------------------------------------------------------

|(1) | Incorporated by reference to the registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Registration Statement on Form S-1, File No. 333-31920.
|--- | ------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the registrants Current Report on Form 8-K, as filed with the SEC on September 25, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K



We filed the following Current Report on Form 8-K during the quarterly period
ended June 30, 2004:



| |  | Form 8-K for the event of May 10, 2004, as filed on May 11, 2004, furnishing, under Item 12, a press release reporting the financial results for the first quarter of 2004.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES



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



Dated this 5th day of August, 2004



DENDREON CORPORATIONBy:

/s/    Martin A. SimonettiMartin A. Simonetti Senior Vice President, Finance Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer and Duly Authorized Officer)




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##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                   
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                       
|3.1           |  | Amended and Restated Certificate of Incorporation (1)                                                                                             
|              | 
|3.2           |  | Amended and Restated Bylaws                                                                                                                       
|              | 
|4.1           |  | Specimen Common Stock certificate (2)                                                                                                             
|              | 
|4.2           |  | Rights Agreement dated as of September 18, 2002 between Dendreon Corporation and Mellon Investor Services LLC (including the exhibits thereto) (3)
|              | 
|4.3           |  | Dendreon Corporation Certificate of Designation of Series A Junior Participating Preferred Stock (3)                                              
|              | 
|4.4           |  | Form of Right Certificate (3)                                                                                                                     
|              | 
|10.1          |  | Retirement Agreement between Dendreon Corporation and Christopher S. Henney, Ph.D., dated May 28, 2004 *                                          
|              | 
|10.2          |  | Dendreon Corporation Change of Control Executive Severance Plan *                                                                                 
|              | 
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer                                                                                 
|              | 
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer                                                                                 
|              | 
|32            |  | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer                                                                 

---

|* | Management compensatory plans and arrangements required to be filed as exhibits to this Report.
|- | -----------------------------------------------------------------------------------------------

|(1) | Incorporated by reference to the registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Registration Statement on Form S-1, File No. 333-31920.
|--- | ------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the registrants Current Report on Form 8-K, as filed with the SEC on September 25, 2002.
|--- | ----------------------------------------------------------------------------------------------------------------------



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