As of March 12, 2001, there were 46,745,069 shares of the registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

We believe that we are a leader in the discovery and validation of high- quality novel targets for several major human diseases, and a leader in the discovery of potential new drug therapies, specifically for cancer and other proliferative diseases. Our mission is to develop proprietary cancer products by leveraging our integrated discovery platform to increase the speed, efficiency and quality of pharmaceutical and agricultural product discovery and development.

Through our expertise in comparative genomics and model system genetics, we are able to find new drug targets that we believe would be difficult or impossible to uncover using other experimental approaches. Our research is designed to identify novel genes and proteins expressed by those genes that, when changed, either decrease or increase the activity in a specific disease pathway in a therapeutically relevant manner. These genes and proteins then represent either potential product targets or drugs that may treat disease, or prevent disease initiation or progression.

Specifically in cancer, the remarkable evolutionary conservation of the biochemical pathways strongly supports the use of simple model systems, such as fruit flies, nematode worms, zebrafish and mice to identify key members of critical cancer pathways that can then be targeted for drug discovery. We expect to develop new cancer drugs by exploiting the underlying "genetic liabilities" of tumor cells to provide specificity in targeting these cells for destruction, while leaving normal cells unharmed. We have discovered and are further developing a number of small molecule drug targets in addition to monoclonal antibody drug targets. Molecules developed against these targets may selectively kill cancer cells while leaving normal cells unharmed, and may provide alternatives to current cancer therapies.

While our proprietary programs focus on drug discovery and development, we believe that our proprietary technologies are valuable to all other industries whose products can be enhanced by an understanding of DNA or proteins, including the agrochemical, agricultural and diagnostic industries. Many of these industries have shorter product development cycles and lower risk than the pharmaceutical industry, while at the same time generating significant sales with double-digit product margins. By partnering with leading companies in multiple industries, we are able to diversify our business risk, while at the same time maximizing our future revenue stream.

We have established commercial collaborations with Aventis CropScience LLC, Bayer Corporation, Bristol-Myers Squibb Company, Dow AgroSciences and Pharmacia Corporation, which provide us with substantial funding, including licensing fees, research funding, milestone payments when specific objectives are met and royalties if our partners successfully develop and commercialize products. In addition, many of these collaborations have included the acquisition of strategic technologies. Committed funding, which does not include milestone payments or royalties, from these collaborations totals over $200 million.

In addition to our commercial collaborations, we have relationships with biotechnology companies, academic institutions and universities access to specific technology or intellectual property for the enhancement of our business.

Conventional chemical drug discovery involves a series of steps, many years of work and substantial resources. Initially, scientists identify potential molecular targets for therapeutic intervention. These targets must then be validated, or demonstrated to be able to affect the disease biochemistry. Next, the validated target is put through a series of assays, or tests, to identify chemical compounds that would modulate the activity of the target. Once chemical compounds that modify the activity of the target are identified, they must then be iteratively optimized through synthetic chemistry processes. After several iterations, the resulting compounds are tested in animal models of disease, and selected lead compounds are then considered for preclinical development.

Many of the principal products of the pharmaceutical, biotechnology, agrochemical, agricultural and diagnostic industries were developed without knowledge about the underlying genetic and biochemical causes of disease, or without knowledge of how the drug works in the body. This limited knowledge about the target or mechanism of action of the product can lead to somewhat random and/or suboptimal product candidates. As a result, product development in these industries is costly, time consuming and inefficient and is characterized by high failure rates. Many companies have turned to genomics technologies, primarily for DNA sequence information, to help address these problems with respect to the selection of molecular or gene-based targets.

Despite significant investment in genomics to date and the recent availability of the human genome sequence, there has not been appreciable improvement in selecting high quality molecular targets. Notwithstanding the tremendous advances in providing genomic data, it is clear that a rational selection of molecular targets requires more detailed or specific knowledge about the function of genes and their encoded proteins as well as their interaction with other components of signaling networks, or biochemical pathways. Since the complete human sequence as well as the sequence of other commercially important genomes are now available, we believe that the competitive advantage for companies going forward will be the ability to identify the small number of significant gene targets, within the very large number of genes, whose modulation will result in a commercially valuable outcome. By integrating our superior biological targets with a state-of-the-art drug discovery platform, we expect our platform and biological insights to produce novel targets and potentially innovative products.

Our business strategy is to leverage our biological expertise and integrated discovery capabilities to improve the speed, efficiency and quality of the discovery, development and commercialization process for products, and includes the following key elements:

MAINTAIN AND AUGMENT BIOLOGICAL EXPERTISE: Our biological expertise is a key competitive advantage that we believe applies throughout all aspects of collaborative relationships and our drug discovery efforts. We are committed to continually enhancing our technology platform through building, in-licensing or acquiring technologies that complement our fundamental knowledge and capabilities as well as protecting our proprietary technologies with patents and trade secrets.

SELECTIVELY DEVELOP THERAPEUTIC PRODUCTS: We have invested and plan to continue to invest significant funds in discovering and developing proprietary products, particularly in the area of cancer. We have committed substantial resources to building a world-class drug discovery effort that is integrated with our unique understanding of the biological basis of disease, and expect to generate a pipeline of function-derived, novel drugs to move into clinical trials.

LEVERAGE STRATEGIC COLLABORATIONS: We have established several key partnerships with major pharmaceutical and agrochemical companies based on the strength of our technologies and biological expertise and capabilities. We intend to establish additional collaborations with leading companies in their respective fields in order to support additional development of or identify new ways of developing proprietary products. These collaborations provide us with a committed revenue stream in addition to the opportunity to receive significant future payments, if our collaborators successfully develop and market products that result from our collaborative work. In addition, many of our collaborations have been structured strategically so that we gain access to technology to more rapidly advance our internal programs, saving both time and money, while at the same time retaining rights to use the same information in different industries. Our collaborations with leading companies in the agrochemical industries allow us to continue to expand our internal development capabilities while providing our partners with novel targets. Since we believe that agricultural products often have shorter development time and lower risk than pharmaceutical products, we attempt to maximize our potential future revenue stream by pursuing partnerships in multiple industries.

OPPORTUNISTIC ACQUISITION OF PRODUCTS AND TECHNOLOGIES: We continually evaluate opportunities that may provide us with key intellectual property, technologies and products that will enhance our development capabilities. We believe that through the acquisition of strategic products and technologies we will be able to create additional value in our internal and collaborative programs. In addition, we believe that many of these strategic relationships will permit us to obtain co-development or other rights to products identified or developed in such collaborative relationships as a result of our efforts.

We have developed an integrated discovery platform, which includes proprietary technologies and know-how. This includes comparative genomics and model system genetics, libraries of modified model organisms, specialized reagents, assay biology, informatics databases and software, mechanism of action technology, automated high throughput screening, a compound library in excess of 1,000,000 small molecule compounds and extensive medicinal/combinatorial chemistry capabilities. Using this integrated platform, we are able to effectively and rapidly identify novel targets and develop proprietary compounds. We believe that one of our key competitive advantages lies in the breadth of the platform that we have established, as well as in our ability to apply the tools of modern biology and chemistry to commercially relevant questions.

We have adapted these systems from the academic community and have industrialized them by developing a suite of proprietary tools and reagents that allow us to perform systematic genetic analyses at a larger scale and substantially faster than otherwise is currently available. Among other proprietary tools, we have exclusively licensed the U.S. patent covering P- element, which is a genetic element essential for performing modern fruit fly genetics.

Comparative genomics is the use of data learned from one biological system applied to another system. For example, the use of the angiogenesis pathway data learned from a zebrafish can be readily applied to studying human angiogenesis. Application of comparative genomics relies on the use of our extensive libraries of model organisms in addition to the proprietary databases of information and informatic methods generated by our scientists. Each of our model systems has unique advantages that can be applied in different ways to address commercially relevant questions in a rapid manner. Our expertise allows us to leverage knowledge across species and to select the best model systems for a particular commercial application.

Genetic assays are used to measure the ability of a particular gene or protein to change or regulate the disease pathway of interest, which leads to the identification of disease pathway genes as well as those genes that may be product targets. The development of biochemical assays requires the production of target gene products (proteins) in sufficient quantity to support hundreds of thousands of individual measurements. Cell-based assays may also require genetically engineered cells that over-express the target gene of interest.

An integral part of our strategy is to focus on strategic collaborations within different market segments. Based on the belief that our integrated discovery program can be applied to address opportunities in any market whose products can be enhanced by an understanding of DNA or proteins, we are able to address a variety of markets, including pharmaceutical, agrochemical, diagnostic, biotechnology, animal health, pesticides, crop improvement, livestock improvement and industrial enzyme products.

Many of these industries have shorter product development cycles and lower risk than the pharmaceutical industry, while at the same time generating significant sales with double-digit product margins. By addressing these markets in combination with our partners, we are able to establish a substantial revenue stream through both committed research funding and milestone payments, while at the same time reducing the potential time to market for royalty-bearing products. In addition, because the product cycles and development risks are different, we are able to minimize our overall risk exposure in any particular industry or market.

ALZHEIMER'S DISEASE. Alzheimer's disease is a progressive neurological disease that results in the loss of cognitive functions, including memory. In collaboration with Pharmacia, we are applying our genetics technologies to understand the causes of Alzheimer's disease and to determine how to stop or reverse the progression of the disease. As a result of genetic screens performed to date, Pharmacia has accepted a number of targets for which we have received milestone payments, including a particular target that may reduce the formation of structural abnormalities that are associated with Alzheimer's disease. This research is exclusively partnered with Pharmacia under the terms of our agreement with Pharmacia. We remain free to conduct independent research or collaborate with third parties in other areas of central nervous system and cognitive disorders, such as Parkinson's disease, depression and schizophrenia.

METABOLIC SYNDROME. Metabolic syndrome is a condition that underlies many human diseases, including coronary artery disease, diabetes and obesity. This condition results in the inability of individuals to maintain essential elements of blood chemistry, such as cholesterol and blood sugar, within desirable ranges. In our collaboration with Pharmacia, we have identified and received milestone payments for several targets that may be useful in developing products to optimize the levels of both cholesterol and fat in the bloodstream. We have also identified several targets that may be useful in developing products to control Type II diabetes. This research is exclusively partnered with Pharmacia under the terms of our agreement with Pharmacia. We remain free to conduct independent research or collaborate with third parties in other areas of cardiovascular disease, including hypertension and control of heart rate, rhythm and contraction.

MECHANISM OF ACTION PROGRAMS. Bristol-Myers Squibb and Pharmacia have provided us with a number of pharmaceutical compounds, which have interesting biological activity but whose molecular target is unknown. We have identified the mechanism of action for many of these compounds, both for Bristol-Myers Squibb and Pharmacia, and have submitted them to our partners for further development. The targets are identified through the analysis of model organisms that are either resistant or hypersensitive to the biological activity produced by the compound. Following identification, the targets are confirmed using biochemical assays. Targets and other components of the signaling pathways are then identified as candidates for further compound development. The information regarding these targets provided by our platform strongly supports a conclusion that modulating these targets leads to desirable biological activity. As a result, we believe that our partners may actively pursue many of the targets without further validation. Additionally, since many of the initial compounds can be used as the basis for developing potentially superior compounds, we believe that this approach can save as much as two years in "time to market" as compared to more traditional approaches.

FUNGICIDES. Farmers experience significant crop losses due to fungal disease, which can destroy or prevent the normal growth of crop plants. We are developing fungal model systems, which we intend to use to identify targets that will potentially lead to the development of new, more effective fungicides. We have entered into a Mechanism of Action agreement with Dow AgroSciences pursuant to which we identify targets for specific fungicide compounds with unknown molecular targets. In consideration for research funding, milestone payments and royalties, if the compounds are successfully developed, Dow AgroSciences will receive a non-exclusive license to the targets identified by Exelixis.

HERBICIDES. Farmers experience significant reductions in crop yields due to weeds, which compete with crops for nutrients. We are developing plant model systems, which we intend to use to identify targets that will lead to the development of new, more effective herbicides. The typical product cycle for herbicides, from initial research to commercialization, is shorter than the typical product cycle for the pharmaceutical industry. We are also currently working with Dow AgroSciences under the existing Mechanism of Action agreement to identify the molecular targets of herbicide compounds with proven activity.

INSECTICIDES. Farmers experience significant crop losses due to damage from insects. In the past, insecticides have been a low-margin business, with limited diversity in molecular action. The product development cycle of insecticides is two to three times shorter than the typical pharmacuetical product development cycle. Recently, the market opportunity for insecticides has grown tremendously, with the most recent introduction of broad-spectrum insecticides for all uses selling $700 million to $1 billion each year, with pharmaceutical-like margins. In collaboration with Bayer, we are applying our genetics technologies to identify unique targets that may be used to develop new, more effective, broad-spectrum insecticides. As a result of genetic screens performed to date, we have identified numerous targets that may be useful in identifying new insecticides, and we has received milestone payments for delivering these targets. In addition, we have received milestone payments for the delivery of high-throughput screening assays that Bayer is using to identify and develop the active components of new insecticides. Under our collaborative arrangement, Bayer retains exclusive rights to insecticides and nematicides for crop protection. We remain free to conduct research in pesticides other than insecticides or nematicides, as well as in the development of pest-resistant crops.

NEMATICIDES. Farmers experience significant crop losses due to damage from nematodes, small worms that infest plants. Currently, there are no products that effectively and safely control nematodes. In collaboration with Bayer, we are applying our platform technologies to identify targets that may be used to develop safer, more effective nematicides.

PLANT TRAIT DISCOVERY. Farmers rely on seed companies to develop products that will enable them to produce their crops or livestock at a competitive cost. We have developed plant model systems to identify targets that may be used to develop crops with superior yield and improved nutritional profiles. We are working with Aventis CropScience to research, develop and commercialize novel genes found through the proprietary ACTTAGÔ gene expression technology in Arabidopsis, a plant whose genome has been fully sequenced. ACCTAG technology represents a method of identifying genes associated with gain- of-function and loss-of-function phenotypes. We are screening an extensive ACCTAG-derived Arabidopsis gene collection for specific genes that can confer disease resistance, insect resistance, new morphologies, abiotic stress tolerance, improved flowering characteristics, herbicide targets, herbicide tolerance and improved nutritional qualities. In collaboration with Aventis through an equally-owned subsidiary, Agrinomics, we are working to capitalize on the use of ACTTAG in Arabidopsis.

AGRICULTURAL MECHANISM OF ACTION PROGRAMS. Bayer and Dow AgroSciences have provided us with a number of agrochemical compounds, which have interesting biological activity but whose molecular target is unknown. We have identified the mechanisms of action for many of these compounds, and have submitted these targets to our partners for further development. The targets are identified through the analysis of model organisms that are either resistant or hypersensitive to the biological activity produced by the compound. Following identification, the targets are confirmed using biochemical assays. Targets and other components of the signaling pathways are then identified as candidates for further compound development. The information regarding these targets provided by our technology platform, indicates that modulating these targets may lead to desirable biological activity. As a result, we believe that our partners may actively pursue many of the targets without further validation.

Proprietary Programs

ANGIOGENESIS. Angiogenesis is the formation of blood vessels. The ability to block the formation of new blood vessels could be used to kill cancer cells by depriving them of nutrients. Similarly, anti-angiogenic agents can be used to treat or prevent diabetic retinopathy, macular degeneration and psoriasis. Products that promote angiogenesis could be used to treat coronary heart disease and stroke. We have an active program, in combination with Artemis Pharmaceuticals GmbH, to identify key angiogenic and anti-angiogenic gene targets and proteins which may lead to potential therapeutic products. Zebrafish are ideal models for angiogenesis because the embryos develop outside the womb in a period of five days, the embryos are clear, allowing scientists to visually inspect organogenesis at each stage, and the embryos are able to survive without blood vessels for a period of time, as long as they are kept in highly oxygenated water. In addition, we have identified proprietary angiogenesis targets in Drosphila by studying the development of its tracheal system, which is an analogous structure to a closed circulatory system.

CANCER. Cancer is a leading cause of death in developed countries. Cancer is caused by a number of genetic defects in cells resulting in unregulated cell growth. We have discovered and are further developing a number of small molecule drug targets, in addition to monoclonal antibody drug targets, that may selectively kill cancer cells while leaving normal cells unharmed, and may provide alternatives to current cancer therapies. By exploiting the underlying "genetic liabilities" of tumor cells, we have identified numerous targets within specific cell growth and proliferation regulatory pathways and are in the process of validating them in cell-based assays. We currently have six targets in screening.

INFLAMMATION. Our inflammation program focuses on the role of the innate immune system, especially macrophages, in mediating the inflammatory response.  Misregulation of the innate immune system is of central importance in diseases of inflammation, such as asthma and arthritis.   Drosophila display a robust innate immune response, and their macrophages are regulated by the same effector molecules and pathways that regulate human macrophages.  Unlike vertebrates, however, they lack an adaptive immune system, which allows for more straightforward analysis of the innate response.  Drosophila is therefore useful for rapidly identifying prospective targets for treating immunological disease.  Novel targets can be validated in zebrafish, which has all the immune cell types of mammals, with the advantage of more rapid analysis.  We are working in collaboration with universities to identify targets that control inflammation, and have identified several targets to date.

ANIMAL HEALTH. Livestock producers experience significant losses due to disease, and incur significant costs to control insects, parasites and other pests. Companion animals also represent a significant opportunity for products that control pests such as fleas, ticks and heartworms. During the course of conducting research in the area of insecticides and nematicides in our collaboration with Bayer, we have identified and will continue to identify targets that may be used to develop animal health products. Under the terms of our collaboration with Bayer, we remain free to use the technology developed to pursue animal health opportunities independently or in collaboration with third parties.

PLANT TRAITS. Farmers rely on seed companies to develop products that will enable them to produce their crops at a competitive cost. We have developed plant genetic model systems enabling us to identify genetic targets to create crops with superior yield and improved nutritional profiles.

NUTRACEUTICALS. Nutraceuticals are nutrients in foods that may provide health benefits and prevent or treat diseases. Our micro-tomato model system program allows us to rapidly identify specific genes that regulate the levels of phytochemicals, including carotenoids, flavonoids and other compounds that have positive health benefits. We have filed patent applications on the use of activation tagging technology in tomatoes and have already produced a collection of more than 5,000 lines that we are currently using for nutraceutical analyses. In addition to screening for increased levels of nutraceuticals, the collection can be used to screen for new therapeutics, antimicrobial compounds, colorants and metabolites of interest to the cosmetic industry, as well as high-throughput screening for new drugs of interest to the pharmaceutical industry.

It is part of our strategy to establish collaborations with major pharmaceutical and agrochemical companies based on the strength of our technologies and biological expertise and capabilities. We intend to establish additional collaborations with leading companies in their respective fields in order to support additional development of our proprietary products. Through these collaborations, we obtain license fees and research funding, together with the opportunity to receive milestone payments and royalties from research results and subsequent product development. In addition, many of our collaborations have been structured strategically to provide us access to technology to advance our internal programs, saving both time and money, while at the same time retaining rights to use the same information in different industries. Our collaborations with leading companies in the agrochemical industries allow us to continue to expand our internal development capabilities while providing our partners with novel targets and assays. Since we believe that agrochemical products have reduced development time and lower risk, we expect to be able to maximize our potential future revenue stream through partnering in multiple industries.

In 2000, Bayer accounted for approximately 53% of our revenues, and Pharmacia accounted for approximately 36% of our revenues. The loss of revenues from these agreements would have a material adverse effect on our business, financial condition and results of operations.

In December 1999, we established Genoptera LLC, a Delaware limited liability company, with Bayer Corporation to develop insecticides and nematicides for crop protection. As part of the formation of this joint venture, Bayer has paid us, through Genoptera, license fees and research commitment fees of $20.0 million and will provide eight years of research funding through 2007 at a minimum level of $10.0 million per year (for a total of $100 million of committed fees and research support). Bayer owns 60% of Genoptera and we own the remaining 40%. The formation of this joint venture is an outgrowth of, and replaces, the contractual collaboration first established with Bayer AG (the corporate parent of Bayer Corporation) in May 1998. Bayer will pay Genoptera milestones and royalties on products developed by it resulting from the Genoptera research, and we will pay Genoptera royalties on certain uses of technology arising from such research.

Either Bayer or Exelixis may terminate the Genoptera research efforts after eight years. In addition, Bayer may terminate the joint venture or buy out our interest in the joint venture under specified conditions, including, by way of example, failure to agree on key strategic issues after a period of years, the acquisition of our Company by another company or the loss of key personnel that we are unable to replace with individuals acceptable to Bayer.

In February 1999, we established a five-year collaboration with Pharmacia Corporation to identify targets in the fields of Alzheimer's disease, Type II diabetes and associated complications of metabolic syndrome, a condition that comprises much of diabetes, obesity and portions of cardiovascular disease. In October 1999, this collaboration was expanded to include mechanism of action work designed to identify biological targets of agents already identified by Pharmacia as having activity in these fields. Under this agreement, Pharmacia paid us a license fee and provides ongoing research support. Pharmacia will also pay us milestone payments based on target selection and royalties in the event that products result from the targets that we identify.

Pharmacia has advised us that certain of its research operations will become the basis for a new European enterprise. This new enterprise will have the exclusive right to certain of the research work currently being conducted under our agreement with Pharmacia, including the development and commercialization of products from those efforts. We are currently negotiating an amendment to our existing agreement to assign the research work and funding commitments in this research area to this new enterprise that will continue funding through at least the first quarter of 2002. Although our current negotiations include the possibility of our obtaining certain product rights from our research efforts to be conducted for the new enterprise, there can be no assurance that we will successfully conclude an agreement including such terms or that funding, if any, for the assigned portion of the research program will be maintained at the levels currently being funded beyond the first quarter of 2002. Either party may terminate the research at the end of the third year of the collaboration, the fifth year or any subsequent year. Pharmacia may terminate the research at any time with advance written notice in the event of our failure to find an acceptable replacement for a particular key employee or in the event of conflicting material third-party intellectual property rights.

In conjunction with the establishment of our research collaboration, Pharmacia purchased 1,875,000 shares (adjusted for a 4-to-3 reverse stock split) of Exelixis Series D preferred stock for a purchase price of $7.5 million, and also made us an interest-free loan of $7.5 million. The loan was evidenced by a promissory note that was convertible into shares of Exelixis common stock at a price per share equal to 120% of the initial public offering price of $13.00 per share. Pharmacia converted the promissory note into 480,769 shares of Exelixis common stock in July 2000.

In July 1999, Exelixis Plant Sciences, formerly Agritope, and Aventis CropScience formed Agrinomics LLC to focus on research, development and commercialization of products in the field of agricultural functional genomics. Exelixis Plant Sciences owns a 50% interest in Agrinomics, and Aventis CropScience owns the remaining 50% interest.

Under the terms of the Agrinomics agreement, Aventis has agreed to make capital contributions in cash totaling $20 million over a five-year period. To date, a total of $11.0 million has been made to support the first 18 months of Agrinomics' operations. Exelixis Plant Sciences contributed the ACTTAG technology, a collection of seeds generated using the ACTTAG techniques and expertise in molecular and cell biology. In addition, Exelixis Plant Sciences will perform research work at its Oregon research facility, greenhouses and farm. Aventis CropScience will provide high-throughput screening, robotics, microarray and bioinformatics technologies and support and perform research work at its Research Triangle Park research facility and at other locations.

In September 1999, we entered into a three-year research collaboration with Bristol-Myers Squibb to identify the mechanism of action of compounds delivered to us by Bristol-Myers Squibb. We do not know the identity and function of these compounds, including their field of activity, prior to their delivery.

Under this agreement, the parties agreed to a non-exclusive cross-license of research technology. We granted Bristol-Myers Squibb the right to use our proprietary technology covering C. elegans and D. melanogaster genetics, and in exchange, Bristol-Myers Squibb transferred to us combinatorial chemistry hardware and software, together with related intellectual property rights, which had been developed by Bristol-Myers Squibb. The technology received from Bristol-Myers Squibb under this agreement will expedite the development of our compound discovery capabilities.

Under the agreement, Bristol-Myers Squibb pays us a technology access fee and research support payments, as well as additional milestones and royalties based on achievements in the research and commercialization of products.

In July 2000, we established a three-year research collaboration with Dow AgroSciences to identify the mechanism of action of herbicides and fungicides delivered to us by Dow AgroSciences. We do not know the identity and function of these compounds prior to their delivery.

Under this agreement, we receive access to a collection of proprietary compounds from Dow AgroSciences that may be useful in our human therapeutic drug discovery programs.

We expect to identify and validate targets and format assays that will be used by Dow AgroSciences to develop new classes of fungicides and herbicides. Dow AgroSciences will pay us research support fees as well as milestone payments and royalties based on achievements in the research and commercialization of these products.

Exelixis enjoys collaborations with leading biotechnology product developers and solutions providers, among them Affymetrix, Agilent, Genemachines, Orchid BioSciences and Sangamo. These relationships enable us to continuously update and enhance our technology base at a minimal cost, and at the same time facilitate research and development efforts for the Company.

In order to enhance our research and technology access, we have established key relationships with government agencies and major academic centers in the U.S. and Europe. Our government collaborators include a number of U.S. Department of Agriculture campuses, and we maintain over ten academic collaborations with investigators at such institutions as Stanford University, Columbia University, University of Cologne, The Rockefeller Institute and the University of North Carolina. The purpose of these government and academic collaborations is to continuously improve our core technology and to facilitate the establishment of new discovery programs.

We will continue to establish strategic collaborations with government agencies and academic centers. We will seek to retain significant rights to develop and market products arising from our strategic alliances. In addition, we will continue to invest our own funds in certain specific areas and product opportunities with the aim of maintaining, enhancing and extending our core technology, as well as increasing our opportunities to generate greater revenue from such activities.

We face intense competition in the different market segments we are pursuing. There are many companies that have or are developing capabilities in the use of model systems to identify new products. In addition, there are many companies focused on the development of small molecule pharmaceuticals. Many genomics companies are expanding their capabilities, using a variety of techniques, to determine gene function and to develop products based on gene function. Our potential competitors in the field are many in number and include major pharmaceutical and agricultural companies, diagnostic companies, specialized biotechnology companies, genomics companies and academic institutions and universities.

Many of our potential competitors have significantly more financial, technical and other resources than we do, which may allow them to have a competitive advantage. We are aware that companies focused specifically on other model systems such as mice and yeast have alternative methods for identifying product targets. In addition, pharmaceutical, biotechnology and genomics companies and academic institutions are conducting work in this field. In the future, we expect the field to become more competitive with companies and academic institutions seeking to develop competing technologies.

Any products that we may develop or discover through application of our technologies will compete in highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and personnel resources than we do, and we cannot assure you that they will not succeed in developing technologies and products that may render our technologies and products and those of our collaborators obsolete or noncompetitive. In addition, many of our competitors have significantly greater experience than we do in their respective fields.

We seek patent protection in the United States and corresponding international markets for the plant and animal genes and gene functions, proteins, antibodies, biotherapeutics and small molecule pharmaceutical and agricultural products that we discover, as well as genetic and informatic methods and technology improvements for discovering such genes, functions, proteins, antibodies, biotherapeutics and small molecule pharmaceutical and agricultural products. Our intellectual property strategy is designed to provide us with freedom to operate and facilitate commercialization of our current and future products. Our patent portfolio includes a total of 33 issued U.S. patents. U.S. patent no. 4,670,388, exclusively licensed from Carnegie Institution of Washington, has the earliest patent expiration date, which is June 2, 2004. We are the assignee or exclusive licensee of three allowed and 97 pending U.S. patent applications and corresponding international or foreign patent applications related to our genetic and comparative genomic technologies, gene and protein targets and specialized screens, and the application of these technologies to diverse industries including agriculture, pharmaceuticals and diagnostics. Of the total issued U.S. patents, Exelixis Plant Sciences (formerly Agritope) adds an additional 16 issued U.S. patents, 14 pending U.S. patent applications and corresponding international or foreign patents and patent applications. An additional nine U.S. patent applications have been filed as part of the joint venture with Aventis CropScience.

We also rely in part on trade secret protection of our intellectual property. We try to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees and consultants also sign agreements requiring that they assign to Exelixis their interests in patents and other intellectual property arising from their work for Exelixis. All employees sign an agreement not to engage in any conflicting employment or activity during their employment with us, and not to disclose or misuse our confidential information. However, it is possible that these agreements may be breached or invalidated and if so, there may not be an adequate corrective remedy available. Accordingly, we cannot ensure that employees, consultants or third parties will not breach the confidentiality provisions in our contracts or infringe or misappropriate our patents, trade secrets and other proprietary rights, or that measures we are taking to protect our proprietary rights will be adequate.

In the future, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert such claims against us or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend ourselves against such claims, whether they are with or without merit and whether they are resolved in favor of or against our licensors, or us we may face costly litigation and diversion of management's attention and resources. As a result of such disputes, we may have to develop costly non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition.

As of December 31, 2000, we had 357 full-time employees, 142 of whom hold Ph.D. and/or M.D. degrees and 283 of whom were engaged in full- time research activities. We plan to expand our corporate development programs and hire additional staff as corporate collaborations are established and we expand our internal development programs. Our success will depend upon our ability to attract and retain employees. We face competition in this regard from other companies in the biotechnology, pharmaceutical and high technology industries as well as research and academic institutions. None of our employees are represented by a labor union, and we consider our employee relations to be good.

We have incurred net losses each year since our inception, including a net loss of approximately $75.3 million for the year ended December 31, 2000. As of that date, we had an accumulated deficit of approximately $130.0 million. We expect these losses to continue and anticipate negative cash flow for the foreseeable future. The size of these net losses will depend, in part, on the rate of growth, if any, in our license and contract revenues and on the level of our expenses. Our research and development expenditures and general and administrative costs have exceeded our revenues to date, and we expect to spend significant additional amounts to fund research and development in order to enhance our core technologies and undertake product development. As a result, we expect that our operating expenses will increase significantly in the near term and, consequently, we will need to generate significant additional revenues to achieve profitability. Even if we do increase our revenues and achieve profitability, we may not be able to sustain or increase profitability.

Our future capital requirements will be substantial, and will depend on many factors including:

• payments received under collaborative agreements;

• the progress and scope of our collaborative and independent research and development projects;

• our need to expand our product development efforts as well as develop manufacturing and marketing capabilities to commercialize products; and

• the filing, prosecution and enforcement of patent claims.

We anticipate that our current cash and cash equivalents, short-term investments and funding to be received from collaborators will enable us to maintain our currently planned operations for at least the next two years. Changes to our current operating plan may require us to consume available capital resources significantly sooner than we expect. We may be unable to raise sufficient additional capital when we need it, on favorable terms, or at all. If our capital resources are insufficient to meet future capital requirements, we will have to raise additional funds. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that would restrict our ability to incur further indebtedness. If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing, supply or collaboration agreements on unattractive terms.

We have experienced a period of rapid and substantial growth that has placed, and our anticipated growth in the future will continue to place, a strain on our administrative and operational infrastructure. As our operations expand, we expect that we will need to manage multiple locations and additional relationships with various collaborative partners, suppliers and other third parties. Our ability to manage our operations and growth effectively requires us to continue to improve our operational, financial and management controls, reporting systems and procedures. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. In addition, acquisitions involve the integration of different financial and management reporting systems. We may not be able to successfully integrate the administrative and operational infrastructure without significant additional improvements and investments in management systems and procedures.

Substantially all of our revenues to date have been derived from collaborative research and development agreements. Revenues from research and development collaborations depend upon continuation of the collaborations, the achievement of milestones and royalties derived from future products developed from our research. If we are unable to successfully achieve milestones or our collaborators fail to develop successful products, we will not earn the revenues contemplated under such collaborative agreements. In addition, some of our collaborations are exclusive and preclude us from entering into additional collaborative arrangements with other parties in the area or field of exclusivity.

We currently have collaborative research agreements with Bayer, Pharmacia, Bristol-Myers Squibb, Dow AgroSciences and Aventis. Our current collaborative agreement with Bayer is scheduled to expire in 2008, after which it will automatically be extended for one-year terms unless terminated by either party upon 12-month written notice. Our agreement permits Bayer to terminate our collaborative activities prior to 2008 upon the occurrence of specified conditions, such as the failure to agree on key strategic issues after a period of years or the acquisition of Exelixis by certain specified third parties. Similarly, our collaborative agreement with Pharmacia allows either party to terminate our research collaboration at the conclusion of its third year in 2002, at the conclusion of its fifth year in 2004, or any subsequent year. Pharmacia has advised us that certain of its research operations will become the basis for a new European enterprise. This new enterprise will have the exclusive right to certain of the research work currently being conducted under our agreement with Pharmacia, including the development and commercialization of products from those efforts. We are currently negotiating an amendment to our existing agreement to assign the research work and funding commitments in this research area to this new enterprise that will continue funding through at least the first quarter of 2002. Although our current negotiations include the possibility of our obtaining certain product rights from our research efforts to be conducted for the new enterprise, there can be no assurance that we will successfully conclude an agreement including such terms or that funding, if any, for the assigned portion of the research program will be maintained at the levels currently being funded beyond the first quarter of 2002. The Pharmacia agreement may also be terminated in the event of a conflict over material third- party intellectual property rights. Our collaborative agreement with Bristol- Myers Squibb expires in September 2002. Our collaborative agreement with Dow AgroSciences is scheduled to expire in July 2003, after which Dow AgroSciences has the option to renew on an annual basis. Our collaborative research arrangement with Aventis is scheduled to expire in June 2004. Thereafter, the arrangement renews annually unless Aventis terminates automatic renewal prior to the scheduled date of renewal. The Aventis arrangement is conducted through a limited liability company, Agrinomics, which is owned equally by Aventis and Exelixis. Aventis may surrender its interest in Agrinomics and terminate the related research collaboration prior to the scheduled expiration upon the payment of the subsequent year's funding commitment. In addition, both our agreements with Bayer and Pharmacia are subject to termination at an earlier date if certain specified individuals are no longer employed by us and we are unable to find replacements acceptable to Bayer or Pharmacia, as the case may be. In the case of Pharmacia, the right is triggered if either of two specified individuals directly involved in the research program cease to be employed by us. In the case of Bayer, the right is triggered if two or more of our Chief Executive Officer, Chief Scientific Officer, Agricultural Biotechnology Program Leader and Chief Informatics Officer cease to have a relationship with us within six months of each other.

If these existing agreements are not renewed or if we are unable to enter into new collaborative agreements on commercially acceptable terms, our revenues and product development efforts may be adversely affected.

We intend to conduct proprietary research programs in specific disease and agricultural product areas that are not covered by our collaborative agreements. Our pursuit of opportunities in agricultural and pharmaceutical markets could, however, result in conflicts with our collaborators in the event that any of our collaborators takes the position that our internal activities overlap with those areas that are exclusive to our collaborative agreements, and we should be precluded from such internal activities. Moreover, disagreements with our collaborators could develop over rights to our intellectual property. In addition, our collaborative agreements may have provisions that give rise to disputes regarding the rights and obligations of the parties. Any conflict with our collaborators could lead to the termination of our collaborative agreements, delay collaborative activities, reduce our ability to renew agreements or obtain future collaboration agreements or result in litigation or arbitration and would negatively impact our relationship with existing collaborators.

We have limited or no control over the resources that our collaborators may choose to devote to our joint efforts. Our collaborators may breach or terminate their agreements with us or fail to perform their obligations thereunder. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or may fail to devote sufficient resources to the development, manufacture, market or sale of such products. Certain of our collaborators could also become our competitors in the future. If our collaborators develop competing products, preclude us from entering into collaborations with their competitors, fail to obtain necessary regulatory approvals, terminate their agreements with us prematurely or fail to devote sufficient resources to the development and commercialization of our products, our product development efforts could be delayed and may fail to lead to commercialized products.

You must evaluate us in light of the uncertainties and complexities affecting a biotechnology company. Our technologies are still in the early stages of development. Our research and operations thus far have allowed us to identify a number of product targets for use by our collaborators and our own internal development programs. We are not certain, however, of the commercial value of any of our current or future targets, and we may not be successful in expanding the scope of our research into new fields of pharmaceutical or pesticide research, or other agricultural applications such as enhancing plant traits to produce superior crop yields, disease resistance or increased nutritional content. Significant research and development, financial resources and personnel will be required to capitalize on our technology, develop commercially viable products and obtain regulatory approval for such products.

Initially, we will rely on our collaborators to develop and commercialize products based on our research and development efforts. We have limited or no experience in using the targets that we identify to develop our own proprietary products. Our recent success in applying our drug development capabilities to our proprietary targets in cancer are subject to significant risk and uncertainty, particularly with respect to our ability to meet currently estimated timelines and goals for completing preclinical development efforts and filing an Investigational New Drug Application for compounds developed. In order for us to commercialize products, we would need to significantly enhance our capabilities with respect to product development, and establish manufacturing and marketing capabilities, either directly or through outsourcing or licensing arrangements. We may not be able to enter into such outsourcing or licensing agreements on commercially reasonable terms, or at all.

We have limited financial and managerial resources. This requires us to focus on product candidates in specific industries and forego opportunities with regard to other products and industries. For example, depending on our ability to allocate resources, a decision to concentrate on a particular agricultural program may mean that we will not have resources available to apply the same technology to a pharmaceutical project. While our technologies may permit us to work in both areas, resource commitments may require trade-offs resulting in delays in the development of certain programs or research areas, which may place us at a competitive disadvantage. Our decisions impacting resource allocation may not lead to the development of viable commercial products and may divert resources from more profitable market opportunities.

The biotechnology industry is highly fragmented and is characterized by rapid technological change. In particular, the area of gene research is a rapidly evolving field. We face, and will continue to face, intense competition from large biotechnology and pharmaceutical companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing research activities similar to ours. Some of our competitors have entered into collaborations with leading companies within our target markets, including some of our existing collaborators. Our future success will depend on our ability to maintain a competitive position with respect to technological advances.

Any products that are developed through our technologies will compete in highly competitive markets. Further, our competitors may be more effective at using their technologies to develop commercial products. Many of the organizations competing with us have greater capital resources, larger research and development staffs and facilities, more experience in obtaining regulatory approvals and more extensive product manufacturing and marketing capabilities. As a result, our competitors may be able to more easily develop technologies and products that would render our technologies and products, and those of our collaborators, obsolete and noncompetitive.

Our success will depend in part on our ability to obtain patents and maintain adequate protection of the intellectual property related to our technologies and products. The patent positions of biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our intellectual property rights from unauthorized use by third parties only to the extent that our technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. We will continue to apply for patents covering our technologies and products as and when we deem appropriate. However, these applications may be challenged or may fail to result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patents. In addition, our patents may be challenged, invalidated or fail to provide us with any competitive advantages.

We rely on trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information and trade secrets, but these measures may not provide adequate protection. While we seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators and consultants, we cannot assure you that our proprietary information will not be disclosed, or that we can meaningfully protect our trade secrets. In addition, our competitors may independently develop substantially equivalent proprietary information or may otherwise gain access to our trade secrets.

Our commercial success depends in part on our ability to avoid infringing patents and proprietary rights of third parties, and not breaching any licenses that we have entered into with regard to our technologies. Other parties have filed, and in the future are likely to file, patent applications covering genes and gene fragments, techniques and methodologies relating to model systems, and products and technologies that we have developed or intend to develop. If patents covering technologies required by our operations are issued to others, we may have to rely on licenses from third parties, which may not be available on commercially reasonable terms, or at all.

Third parties may accuse us of employing their proprietary technology without authorization. In addition, third parties may obtain patents that relate to our technologies and claim that use of such technologies infringes these patents. Regardless of their merit, such claims could require us to incur substantial costs, including the diversion of management and technical personnel, in defending ourselves against any such claims or enforcing our patents. In the event that a successful claim of infringement is brought against us, we may be required to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, or at all. Defense of any lawsuit or failure to obtain any of these licenses could adversely affect our ability to develop and commercialize products.

We are highly dependent on the principal members of our management and scientific staff, the loss of whose services might adversely impact the achievement of our objectives and the continuation of existing collaborations. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success. We do not currently have sufficient executive management and technical personnel to fully execute our business plan. There is currently a shortage of skilled executives and employees with technical expertise, and this shortage is likely to continue. As a result, competition for skilled personnel is intense and turnover rates are high. Although we believe we will be successful in attracting and retaining qualified personnel, competition for experienced scientists from numerous companies, academic and other research institutions may limit our ability to do so.

Our business operations will require additional expertise in specific industries and areas applicable to products identified and developed through our technologies. These activities will require the addition of new personnel, including management and technical personnel and the development of additional expertise by existing employees. The inability to attract such personnel or to develop this expertise could prevent us from expanding our operations in a timely manner, or at all.

We work with scientific advisors and collaborators at academic and other institutions that assist us in our research and development efforts. These scientists are not our employees and may have other commitments that would limit their availability to us. Although our scientific advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. In addition, although our scientific advisors and collaborators sign agreements not to disclose our confidential information, it is possible that valuable proprietary knowledge may become publicly known through them.

The Food and Drug Administration, or FDA, must approve any drug or biologic product before it can be marketed in the U.S. Any products resulting from our research and development efforts must also be approved by the regulatory agencies of foreign governments before the product can be sold outside the U.S. Before a new drug application or biologics license application can be filed with the FDA, the product candidate must undergo extensive clinical trials, which can take many years and may require substantial expenditures. The regulatory process also requires preclinical testing. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, delays or rejections may be encountered based upon changes in regulatory policy for product approval during the period of product development and regulatory agency review. The clinical development and regulatory approval process is expensive and time consuming. Any failure to obtain regulatory approval could delay or prevent us from commercializing products.

Our efforts to date have been primarily limited to identifying targets. Significant research and development efforts will be necessary before any products resulting from such targets can be commercialized. If regulatory approval is granted to any of our products, this approval may impose limitations on the uses for which a product may be marketed. Further, once regulatory approval is obtained, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may result in restrictions and sanctions with respect to the product, manufacturer and relevant manufacturing facility, including withdrawal of the product from the market.

Although our technology is not dependent on genetic engineering, genetic engineering plays a prominent role in our approach to product development. For example, research efforts focusing on plant traits may involve either selective breeding or modification of existing genes in the plant under study. Public attitudes may be influenced by claims that genetically engineered products are unsafe for consumption or pose a danger to the environment. Such claims may prevent our genetically engineered products from gaining public acceptance. The commercial success of our future products will depend, in part, on public acceptance of the use of genetically engineered products including drugs and plant and animal products.

The subject of genetically modified organisms has received negative publicity, which has aroused public debate. For example, certain countries in Europe are considering regulations that may ban products or require express labeling of products that contain genetic modifications or are "genetically modified." Adverse publicity has resulted in greater regulation internationally and trade restrictions on imports of genetically altered products. If similar action is taken in the U.S., genetic research and genetically engineered products could be subject to greater domestic regulation, including stricter labeling requirements. To date, our business has not been hampered by these activities. However, such publicity in the future may prevent any products resulting from our research from gaining market acceptance and reduce demand for our products.

Our collaborators or we may develop genetically engineered agricultural and animal products. The field-testing, production and marketing of genetically engineered products are subject to regulation by federal, state, local and foreign governments. Regulatory agencies administering existing or future regulations or legislation may prevent us from producing and marketing genetically engineered products in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays or other impediments to our product development programs and the commercialization of products.

The FDA has released a policy statement stating that it will apply the same regulatory standards to foods developed through genetic engineering as it applies to foods developed through traditional plant breeding. Genetically engineered food products will be subject to premarket review, however, if these products raise safety questions or are deemed to be food additives. Our products may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise questions regarding safety or our products are deemed to be food additives.

The FDA has also announced that it will not require genetically engineered agricultural products to be labeled as such, provided that these products are as safe and have the same nutritional characteristics as conventionally developed products. The FDA may reconsider or change its policies, and local or state authorities may enact labeling requirements, either of which could have a material adverse effect on our ability or the ability of our collaborators to develop and market products resulting from our efforts.

Our research and development processes involve the controlled use of hazardous materials, including chemicals, radioactive and biological materials. Our operations produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our insurance coverage and our total assets. Compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.

In addition, our collaborators may use hazardous materials in connection with our collaborative efforts. To our knowledge, their work is performed in accordance with applicable biosafety regulations. In the event of a lawsuit or investigation, however, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials use by these parties. Further, we may be required to indemnify our collaborators against all damages and other liabilities arising out of our development activities or products produced in connection with these collaborations.

Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. A number of factors, many of which we cannot control, could subject our operating results and stock price to volatility, including:

• recognition of upfront licensing or other fees;
• payments of non-refundable upfront or licensing fees to third parties;
• acceptance of our technologies and platforms;
• the success rate of our discovery efforts leading to milestones and royalties;
• the introduction of new technologies or products by our competitors;
• the timing and willingness of collaborators to commercialize our products;
• our ability to enter into new collaborative relationships;
• the termination or non-renewal of existing collaborations; and
• general and industry-specific economic conditions that may affect our collaborators' research and development expenditures.

A large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed in the short term. In addition, we expect operating expenses to increase significantly during the next year. Accordingly, if our revenues decline or do not grow as anticipated due to the expiration of existing contracts or our failure to obtain new contracts, our inability to meet milestones or other factors, we may not be able to correspondingly reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. As a result, in some future quarters, our operating results may not meet the expectations of stock market analysts and investors, which could result in a decline in the price of our stock.

We believe the trading price of our common stock will remain highly volatile and may fluctuate substantially due to factors such as the following:

• the announcement of new products or services by us or our competitors;

• quarterly variations in our or our competitors' results of operations;

• failure to achieve operating results projected by securities analysts;

• changes in earnings estimates or recommendations by securities analysts;

• developments in the biotechnology industry;

• acquisitions of other companies or technologies; and

• general market conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

These factors and fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock.

In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert management's attention and resources, which could have a material and adverse effect on our business.

We have made, and may in the future make, acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. Acquisitions involve numerous risks, including, but not limited to:

• difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies;
• diversion of management's attention from other operational matters;
• the potential loss of key employees of acquired companies;
• the potential loss of key collaborators of the acquired companies;
• lack of synergy, or the inability to realize expected synergies, resulting from the acquisition; and
• acquired intangible assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired company.

Mergers and acquisitions, including our recent acquisition of Agritope, Inc., are inherently risky, and the inability to effectively manage these risks could materially and adversely affect our business, financial condition and results of operations.

We may be held liable if any product our collaborators or we develop causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Although we intend to obtain general liability and product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or to otherwise protect ourselves against potential product liability claims could prevent or inhibit the commercialization of products developed by our collaborators or us.

Given our location, our facilities are vulnerable to damage from earthquakes. We are also vulnerable to damage from other types of disasters, including fire, floods, power loss, communications failures and similar events. If any disaster were to occur, our ability to operate our business at our facilities would be seriously, or potentially completely, impaired. In addition, the unique nature of our research activities could cause significant delays in our programs and make it difficult for us to recover from a disaster. The insurance we maintain may not be adequate to cover our losses resulting from disasters or other business interruptions. Accordingly, an earthquake or other disaster could materially and adversely harm our ability to conduct business.

If our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of outstanding options and warrants) in the public market, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity or equity- related securities in the future at a time and price that we deemed appropriate. In October 2000, a significant number of shares of our common stock held by existing stockholders became freely tradable, subject in some instances to the volume and other limitations of Rule 144. Sales of these shares and other shares of common stock held by existing stockholders could cause the market price of our common stock to decline.

Some of our existing stockholders can exert control over us, and may not make decisions that are in the best interests of all stockholders.

Due to their combined stock holdings, our officers, directors and principal stockholders (stockholders holding more than 5% of our common stock) acting together, may be able to exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of our company, even when a change may be in the best interests of our stockholders. In addition, the interests of these stockholders may not always coincide with our interests as a company or the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve.

ITEM 2. PROPERTIES

We currently have commitments to lease an aggregate of 178,000 square feet of office and laboratory facilities in South San Francisco, California in three buildings. The first building lease, for 33,000 square feet, expires on July 31, 2005. The second building lease is for two buildings, one for 70,000 square feet and the other for 50,000 square feet currently under construction, and expires 17 years from the rent commencement date. Under this second building lease, we have two five-year options to extend the term prior to expiration. We are also currently a sublessee of approximately 25,000 square feet in a nearby building until such time as the building under construction is completed. We also lease approximately 17,000 square feet of office and laboratory space in Portland, Oregon and own a 15-acre farm in Woodburn, Oregon. Greenhouse capacity at the farm currently totals 50,000 square feet. The lease in Portland expires on February 28, 2003, and there is an option to renew for an additional five years.

We believe that our present facilities will be sufficient for a minimum of 18 months. Depending on our growth, we believe that we may require additional space thereafter and will seek additional facilities.

We are not party to any material legal proceedings.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has traded on the Nasdaq National Market under the symbol "EXEL" since April 11, 2000. The following table sets forth, for the periods indicated, the high and low bid quotations for our common stock as reported by the Nasdaq National Market:

On March 12, 2001 the last reported sale price on the Nasdaq National Market for our common stock was $8.75 per share.

As of March 12, 2001 there were approximately 485 stockholders of record of Exelixis common stock.

Since inception, we have not paid dividends on our common stock. We currently intend to retain all future earnings, if any, for use in our business and currently do not plan to pay any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors.

In May 2000, we completed our initial public offering for aggregate proceeds of approximately $136.0 million. In connection with the offering, we paid a total of approximately $9.5 million in underwriting discounts and commissions and $1.8 million in other offering costs and expenses. After deducting the underwriting discounts and commissions and the offering costs and expenses, our net proceeds from the offering were approximately $127.5 million.

From the time of receipt through December 31, 2000, the proceeds from the offering were used for research and development activities, capital expenditures, working capital, merger and acquisition expenses and other general corporate purposes. In the future, we intend to use the remaining net proceeds in a similar manner. As of December 31, 2000, $112.6 million of the proceeds remained available and were primarily invested in short-term marketable securities.

We believe that we are a leader in the discovery and validation of high- quality novel targets for several major human diseases, and a leader in the discovery of potential new drug therapies, specifically for cancer and other proliferative diseases. Our mission is to develop proprietary cancer products by leveraging our integrated discovery platform to increase the speed, efficiency and quality of pharmaceutical and agricultural product discovery and development.

Through our expertise in comparative genomics and model system genetics, we are able to find new drug targets that we believe would be difficult or impossible to uncover using other experimental approaches. Our pharmaceutical research identifies novel genes and proteins expressed by those genes that, when changed, either decrease or increase the activity in a specific disease pathway in a therapeutically relevant manner. These genes and proteins then represent either potential product targets or drugs that may treat disease, or prevent disease initiation or progression.

We have established commercial collaborations with Aventis CropScience, Bayer, Bristol-Myers Squibb, Dow AgroSciences and Pharmacia, which provide us with substantial funding, including licensing fees, research funding, milestone payments when specific objectives are met and royalties if our partners successfully develop and commercialize products. In addition, many of these collaborations provide us with access to strategic technologies. Committed funding, which does not include milestones or royalties, from these collaborators totals over $210 million. Revenues from these collaborations were $24.8 million in 2000, $10.5 million in 1999 and $2.3 million in 1998.

Our sources of potential revenue for the next several years are likely to include upfront license and other fees, funded research payments under existing and possible future collaborative arrangements, milestone payments and royalties from our collaborators based on revenues received from any products commercialized under those agreements. Since inception we have funded our operations primarily through private placements of preferred stock, revenues received from collaborative arrangements, equipment lease financing and loan facilities and our initial public offering.

We have incurred operating losses in each of the last three years with net losses of approximately $75.3 million in 2000, $18.7 million in 1999 and $15.7 million in 1998. As of December 31, 2000, Exelixis had an accumulated deficit of approximately $130.0 million. Exelixis' losses have resulted principally from costs associated with research and development activities, investment in core technologies and general and administrative functions. As a result of planned expenditures for future research and development activities, Exelixis expects to incur additional operating losses for the foreseeable future.

In December 2000, Exelixis completed its acquisition of Agritope, Inc. As a result of the acquisition, Agritope became a wholly-owned subsidiary of Exelixis, and we subsequently changed its name to Exelixis Plant Sciences, Inc. ("Exelixis Plant Sciences" or "Agritope"). The transaction, which was accounted for under the purchase method of accounting, was effected through the exchange of 0.35 of a share of Exelixis common stock for each outstanding share of Agritope capital stock. Approximately 1.7 million shares of Exelixis common stock were issued in connection with the transaction. In addition, unexpired and unexercised options and warrants to purchase shares of Agritope capital stock were assumed by Exelixis pursuant to the transaction and converted into fully vested options and warrants to purchase approximately 880,000 shares of Exelixis common stock.

The purchase price, which for financial accounting purposes was valued at $93.5 million, was allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition, as determined by an independent valuation. As a result of this transaction, we recorded expense associated with the purchase of in-process research and development of $38.1 million, net tangible liabilities of $3.6 million, and intangible assets (including goodwill) of $51.8 million, the majority of which will be amortized over 15 years.

Exelixis Plant Sciences is an agricultural biotechnology company that develops improved plant products and provides technology for the agricultural industry and is comprised of two business segments: Research and Development and a majority-owned subsidiary, Vinifera, Inc., which propagates and markets grapevines to the U.S. premium wine grape production industry.

Through proprietary processes, Vinifera propagates and grafts grapevine plants for sale to vineyards and to growers of table grapes. The grapevine propagation business of Vinifera is not material to Exelixis' consolidated financial statements, and therefore there will be no separate reporting of this segment. Exelixis considers grapevine propagation to be an ancillary business.

In June 1998, Exelixis purchased a minority interest in Artemis Pharmaceuticals, a genetics company located in Cologne, Germany. Exelixis also entered into certain non-exclusive license agreements providing Artemis with access to its technologies. In September 1998, Exelixis entered into a five-year cooperation agreement with Artemis under which they agreed to share technology and business opportunities as they arise. While either party may terminate this agreement at any time, Exelixis believes that the agreement provides it a significant opportunity to access complementary genetic research. Exelixis has no financial obligation to fund Artemis. Exelixis accounts for its investment in Artemis under the equity method of accounting.

In July 1999, Exelixis acquired substantially all the assets of MetaXen, a biotechnology company focused on molecular genetics. In addition to paying cash consideration of $0.9 million, Exelixis assumed a note payable relating to certain acquired assets with a principal balance of $1.1 million. Exelixis also assumed responsibility for a facility lease relating to the office and laboratory space occupied by MetaXen. See Note 6 of Notes to Consolidated Financial Statements.

At the time of the acquisition, MetaXen had an existing research collaboration with Eli Lilly & Company. This agreement provided for sponsored research payments to be made to MetaXen. The scope of work under the agreement was completed by Exelixis in October 1999. Accordingly, it received and recognized revenues of approximately $0.2 million in fulfillment of that arrangement.

License, research commitment and other non-refundable payments received in connection with research collaboration agreements are deferred and recognized on a straight-line basis over the relevant periods specified in the agreements, generally the research term. Exelixis recognizes contract research revenues as services are performed in accordance with the terms of the agreements. Any amounts received in advance of performance are recorded as deferred revenue.

Product sales are recognized when the products are shipped and title passes to the purchaser.

Total revenues were $24.8 million for the year ended December 31, 2000, compared to $10.5 million in 1999 and $2.3 million in 1998. License and contract revenues earned in 1998 were related to Exelixis' collaboration with Bayer. Revenues increased in 1999 primarily due to the addition of the Pharmacia research agreement. During 2000, revenues continued to increase due to additional license and contract revenues earned from existing collaborations with Bayer, Pharmacia and Bristol-Myers Squibb, our new collaboration with Dow AgroSciences, and the acquisition of Agritope.

Research and development expenses consist primarily of salaries and other personnel-related expenses, facility costs, supplies and depreciation of facilities and laboratory equipment. Research and development expenses were $48.5 million for the year ended December 31, 2000, compared to $21.7 million in 1999 and $12.1 million in 1998. The increases were due primarily to increased staffing and other personnel-related costs and non-cash stock compensation expense (as described below). These expenses were incurred to support new collaborative arrangements and Exelixis' internal self-funded research efforts, including increased expenses related to the acquisitions of MetaXen and Agritope. Exelixis expects to continue to devote substantial resources to research and development, and it expects that research and development expenses will continue to increase in absolute dollar amounts in the future.

General and administrative expenses consist primarily of personnel costs to support Exelixis' activities, facilities costs and professional expenses, such as legal fees. General and administrative expenses were $18.9 million for the year ended December 31, 2000, compared to $7.6 million in 1999 and $5.5 million in 1998. The increase in general and administrative expenses in 2000 compared to 1999 related primarily to increased recruiting expenses, non-cash stock compensation expense (as described below) and rent for facilities and expenses associated with moving into our new corporate headquarters. The increase in general and administrative expenses in 1999 compared to 1998 related primarily to increased legal expenses, non-cash stock compensation expense (as described below) and rent for facilities and lease expenses for equipment. Exelixis expects that its general and administrative expenses will increase in absolute dollar amounts in the future as it expands its business development, legal and accounting staff, adds infrastructure and incurs additional costs related to being a public company, including directors' and officers' insurance, investor relations programs and increased professional fees.

Deferred stock compensation for options granted to employees is the difference between the deemed value for financial reporting purposes of our common stock on the date such options were granted and their exercise price. Deferred stock compensation for options granted to consultants has been determined in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and is periodically remeasured as the underlying options vest in accordance with Emerging Issues Task Force ("EITF") No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or Services."

In connection with the grant of stock options to employees and consultants, Exelixis recorded deferred stock compensation of approximately $10.0 million in the year ended December 31, 2000, compared to $15.9 million in 1999 and $2.4 million in 1998. These amounts were recorded as a component of stockholders' equity (deficit) and are being amortized as charges to operations over the vesting periods of the options. Exelixis recorded amortization of deferred stock compensation of approximately $14.0 million for the year ended December 31, 2000, compared to $3.5 million in 1999 and $0.7 million in 1998. See Note 10 of Notes to Consolidated Financial Statements.

In connection with the Agritope purchase we recorded expense of $38.1 million relating to acquired in-process research and development. The valuation of the purchased in-process research and development was based upon the results of an independent valuation using the income approach for each of the ten projects in- process. The in-process projects relate primarily to the development of disease and insect resistant fruits and vegetables and are expected to be completed over approximately the next three to six years. The income approach estimates the value of each acquired project in-process based on its expected future cash flows. The valuation analysis considered the contribution of the core technology as well as the percent complete of each in-process research and development project. The expected present value of the cash flows associated with the in- process research and development projects was computed using a risk adjusted rate of return of 35% which is considered commensurate with the overall risk and percent complete of the in-process projects. The purchased technology was not considered to have reached technological feasibility, and it has no alternative future use, accordingly, it has been recorded as a component operating expense.

Net interest income was $5.6 million for the year ended December 31, 2000, compared to $46,000 of net income in 1999 and $50,000 of net expense in 1998. Interest income (expense), net consists of amounts earned on cash, cash equivalents and short-term investments, substantially offset by interest expense incurred on notes payable and capital lease obligations. The increase in 2000 over the previous years primarily relates to interest income earned on the proceeds from Exelixis' initial public offering.

Minority interest in subsidiary net loss represents the minority shareholders' portion of Vinifera's operating loss. Net loss reported by Exelixis which is attributable to the minority shareholders was approximately $0.1 million in 2000. Since we own greater than 50% of Vinifera, we consolidate Vinifera's operating results; a portion of which is then allocated to the minority shareholders as minority interest in proportion to their ownership interest, partially offsetting our operating loss.

During the year ended December 31, 1998, Exelixis recorded a loss of $0.3 million representing its share of the loss recorded by Artemis using the equity method of accounting. As this loss reduced Exelixis' investment in and receivables from Artemis to zero, no subsequent loss amounts have been recorded in the statements of operations.

Exelixis has incurred net operating losses since inception and, consequently, has not recorded any federal or state income taxes.

As of December 31, 2000, Exelixis had federal net operating loss carryforwards of approximately $104.4 million. Exelixis also had federal research and development credit carryforwards of approximately $4.8 million. If not utilized, the net operating loss and credit carryforwards expire at various dates beginning in 2005. Under the Internal Revenue Code, as amended, and similar state provisions, certain substantial changes in Exelixis' ownership could result in an annual limitation on the amount of net operating loss and credit carryforwards that can be utilized in future years to offset future taxable income. Annual limitations may result in the expiration of net operating loss and credit carry forwards before they are used. See Note 11 of Notes to Consolidated Financial Statements.

Since inception, Exelixis has financed its operations primarily through private placements of preferred stock, loans, equipment lease financings and other loan facilities and payments from collaborators. In addition, during the second quarter of 2000, Exelixis completed its initial public offering raising $124.7 million in net cash proceeds. Exelixis intends to use the proceeds for research and development activities, capital expenditures, working capital and other general corporate purposes. As of December 31, 2000, Exelixis had approximately $112.6 million in cash, cash equivalents and short-term investments.

Exelixis' operating activities used cash of $12.9 million for the year ended December 31, 2000, compared to $7.3 million in 1999 and $12.7 million in 1998. Cash used in operating activities related primarily to funding net operating losses, partially offset by an increase in deferred revenue from collaborators and non-cash charges related to acquired in-process research and development, depreciation and amortization of deferred stock compensation.

Exelixis' investing activities used cash of $96.4 million for the year ended December 31, 2000, compared to $6.5 million in 1999 and $0.5 million in 1998. The use of cash for 2000 consists primarily of $135.8 million invested in short- term investments, partially offset by proceeds from maturities of short-term investments of $44.7 million. Investing activities consist primarily of purchases of property, equipment and short-term investments. Exelixis expects to continue to make significant investments in research and development and its administrative infrastructure, including the purchase of property and equipment to support its expanding operations.

Exelixis' financing activities provided cash of $123.5 million for the year ended December 31, 2000, compared to $17.1 million in 1999 and $7.6 million in 1998. These amounts consisted primarily of proceeds from Exelixis' initial public offering and sales of preferred stock, and amounts received under various financing arrangements.

Exelixis believes that its current cash and cash equivalents, short-term investments and funding to be received from collaborators, will be sufficient to satisfy its anticipated cash needs for at least the next two years. However, it is possible that Exelixis will seek additional financing within this timeframe. Exelixis may raise additional funds through public or private financing, collaborative relationships or other arrangements. Exelixis cannot assure you that additional funding, if sought, will be available or, even if available, will be available on terms favorable to Exelixis. Further, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Exelixis' failure to raise capital when needed may harm its business and operating results.

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivatives and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 137 deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. To date, the Company has not engaged in derivative or hedging activities.

In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of Accounting Principles Board Opinion ("APB") 25", which was generally effective July 1, 2000. Interpretation No. 44 did not have any material impact on the Company's consolidated financial statements.

Our investments are only subject to interest rate risk and our interest income may fluctuate due to changes in U.S. interest rates. By policy, we limit our investments to money market instruments, debt securities of U.S. government agencies and debt obligations of U.S. corporations. We manage market risk by our diversification requirements, which limit the amount of our portfolio that can be invested in a single issuer. We manage credit risk by limiting our purchases to high quality issuers. Through our money manager, we maintain risk management control systems to monitor interest rate risk. The risk management control systems use analytical techniques, including sensitivity analysis. The quantitative impact of interest rate changes is calculated based on Bloomberg's proprietary duration modeling techniques. Assuming a hypothetical interest rate increase of 10%, the fair value of our total investment portfolio as of December 31, 2000 would have potentially incurred a loss of approximately $366,000. There would have been no material impact at December 31, 1999.

All highly liquid investments with a maturity of three months or less from the date of purchase are considered cash equivalents. The Company views its available-for-sale portfolio as available for use in current operations. Accordingly, we have classified all investments with a maturity date greater than three months as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date.

As of December 31, 2000, Vinifera, a majority-owned subsidiary of Agritope, had borrowings under a $1.5 million revolving line of credit, which is subject to interest rate risk. Due to the short-term nature of the borrowings under this credit facility, an immediate 10% increase in interest rates would not have a material effect on Exelixis' financial condition or results of operations.

The information required by this item will be contained in the Proxy Statement under the caption "Executive Compensation," and is hereby incorporated by reference thereto.

The information required by this item will be contained in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management," and is hereby incorporated by reference thereto.

The information required by this item will be contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions," and is hereby incorporated by reference thereto.

(a) The following documents are being filed as part of this report:

(b) Reports on Form 8-K.

Exelixis filed a Current Report on Form 8-K on November 9, 2000, reporting the Company's financial results for the third quarter of fiscal year 2000.

Exelixis filed a Current Report on Form 8-K on December 22, 2000, reporting the completion of the Company's acquisition of Exelixis Plant Sciences, Inc. (formerly Agritope, Inc.)

(c) See (a)(3) above.

(d) See (a)(3) above.

Know All Persons by these Presents, that each person whose signature appears below constitutes and appoints George A. Scangos and Glen Y. Sato, and each or any one of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report on Form 10-K has been signed by the following persons on behalf of the Registrant and of the capacities and on the dates indicated.

* Management contract or compensatory plan.

1. Incorporated by reference to Exelixis' Registration Statement on Form S-1 (No. 333-30978), filed with the SEC on February 7, 2000, as amended.
2. Incorporated by reference from Exelixis' Quarterly Report on Form 10-Q, filed with the SEC on May 15, 2000.
3. Incorporated by reference from Exelixis' Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2000.