The discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains trend analysis, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," "continue," and other words of similar import or the negative of those terms or expressions. Such forward-looking statements are subject to known and unknown risks, uncertainties, estimates and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those set forth in such forward-looking statements as a result of, but not limited to, the "Risk Factors" described below. You should read the following discussion and analysis along with the financial statements and notes attached to those statements included elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on March 3, 2009.

Overview

We were incorporated in June 1995. From our inception through September 30, 2009, our activities related primarily to establishing and operating a biotechnology research and development organization and developing relationships with our corporate collaborators. Our scientific and business development endeavors currently focus on the engineering of novel zinc finger DNA-binding proteins (ZFPs) for the regulation and modification of genes. We have incurred net losses since inception and expect to incur losses in the future as we continue our research and development activities. To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from research grants and from corporate collaborators and strategic partners. As of September 30, 2009, we had an accumulated deficit of $190.2 million.

Our revenues have consisted primarily of revenues from our corporate partners for ZFP transcription factors (ZFP TFs) and ZFP nucleases (ZFNs), contractual payments from strategic partners for research programs and research milestones, and research grant funding. We expect revenues will continue to fluctuate from period to period and there can be no assurance that new collaborations or partner fundings will continue beyond their initial terms.

In the development of our ZFP technology platform we have continued to place more emphasis internally on higher-value therapeutic product development and less on our enabling technology applications. We believe this shift in emphasis has the potential to increase the return on investment to our stockholders by allocating capital resources to higher value, therapeutic product development activities. At the same time, it may reduce our revenues over the next several years and subject us to higher financial risk by increasing expenses associated with product development. We have filed Investigational New Drug (IND) applications with the U.S. Food and Drug Administration (FDA) and have initiated three Phase 2 clinical trials of a ZFP Therapeutic in subjects with diabetic neuropathy and one Phase 2 clinical trial in subjects with amyotrophic lateral sclerosis (ALS). We are also conducting two Phase 1 clinical trials to evaluate a ZFP Therapeutic for the treatment of HIV/AIDS. Development of novel therapeutic products is costly and is subject to a lengthy and uncertain regulatory process by the FDA. Our future products are gene-based therapeutics. Adverse events in both our own clinical program and other programs may have a negative impact on regulatory approval, the willingness of potential commercial partners to enter into agreements and the perception of the public.

Research and development expenses consist primarily of salaries and personnel expenses, stock-based compensation expenses, laboratory supplies, pre-clinical and clinical studies, manufacturing expenses, allocated facilities expenses, subcontracted research expenses and expenses for trademark registration and technology licenses. Research and development costs incurred in connection with collaborator-funded activities are expensed as incurred. Costs to acquire technologies that are utilized in research and development and that have no alternative future use are expensed as incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives. We expect these expenses will increase as we focus on development of ZFP Therapeutics. Additionally, in order to develop ZFP TFs and ZFNs as commercially relevant therapeutics, we expect to expend additional resources for expertise in the manufacturing, regulatory affairs and clinical research aspects of biotherapeutic development.

General and administrative expenses consist primarily of salaries and personnel expenses for executive, finance and administrative personnel, stock-based compensation expenses, professional fees, allocated facilities expenses, patent prosecution expenses and other general corporate expenses. As we pursue commercial development of our therapeutic leads we expect the business aspects of the Company to become more complex. We may be required in the future to add personnel and incur additional costs related to the maturity of our business.

Critical Accounting Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2009, as compared with those applied during the prior fiscal year.

Revenue Recognition

Revenue is generally recognized when the four basic criteria of revenue recognition are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) is based on management's judgments regarding the nature of the fee charged for products or services delivered and the collectibility of those fees.

Since our inception, a substantial portion of our revenues has been generated from research and licensing agreements. Revenue under such agreements typically includes upfront signing or license fees, cost reimbursements, milestone payments and royalties on future licensee's product sales.

We recognize nonrefundable signing, license or non-exclusive option fees as revenue when rights to use the intellectual property related to the license have been delivered and over the term of the agreement if we have continuing performance obligations. We estimate the performance period at the inception of the arrangement and reevaluate it each reporting period. This reevaluation may shorten or lengthen the period over which the remaining revenue is recognized. Changes to these estimates are recorded on a prospective basis. We recognize milestone payments, which are subject to substantive contingencies, upon completion of specified milestones, which represents the culmination of an earnings process, according to contract terms. Royalties are generally recognized as revenue upon the receipt of the related royalty payment. We recognize cost reimbursement revenue under collaborative agreements as the related research and development costs for services are rendered. Deferred revenue represents the portion of research or license payments received which have not been earned.

Our revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values and the applicable revenue recognition criteria are applied to each of the separate units.

Research and Development Expenses

We expense research and development expenses as incurred. Research and development expenses consist of direct and research-related allocated overhead costs such as facilities costs, salaries and related personnel costs, and material and supply costs. In addition, research and development expenses include costs related to clinical trials to validate our testing processes and procedures and related overhead expenses. Expenses resulting from clinical trials are recorded when incurred based in part on factors such as estimates of work performed, patient enrollment, progress of patient studies and other events. We make good faith estimates that we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject to risks and may change depending upon a number of factors, including our clinical development plan.

Share-Based Compensation

We measure and recognize compensation expense for all share-based payment awards made to our employees and directors, including employee share options and employee share purchases related to the Employee Share Purchase Plan ("ESPP"), on estimated fair values, utilizing the modified prospective transition method. The fair value of equity-based awards is amortized over the vesting period of the award using a straight-line method.

To estimate the value of an award, we use the Black-Scholes option pricing model. This model requires inputs such as expected life, expected volatility and risk-free interest rate. Further, the forfeiture rate also impacts the amount of aggregate compensation. These inputs are subjective and generally require significant analysis and judgment to develop. While estimates of expected life, volatility and forfeiture rate are derived primarily from our historical data, the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected life assumption. We review our valuation assumptions quarterly and, as a result, it is likely we will change our valuation assumptions used to value share based awards granted in future periods.

RESULTS OF OPERATIONS

Three months and nine months ended September 30, 2009 and 2008

Revenues



                                                        Three months ended September 30,                               Nine months ended September 30,
                                                    (in thousands, except percentage values)                      (in thousands, except percentage values)
                                                2009              2008           Change           %             2009             2008           Change          %
Revenues:
Collaboration agreements                    $       4,012     $       3,196    $      816         26 %     $       11,382     $     7,658    $      3,724       49 %
Research grants                                        51               549          (498 )      (91 )%               564           1,694          (1,130 )    (67 )%

Total revenues                              $       4,063     $       3,745    $      318          8 %     $       11,946     $     9,352    $      2,594       28 %

Total revenues consist of revenues from collaboration agreements, strategic partnerships and research grants.

Revenues from our corporate collaboration and strategic partnering agreements were $4.0 million for the three months ended September 30, 2009, compared to $3.2 million in the corresponding period in 2008. The increase in collaboration agreement revenues was primarily attributable to increased revenues of $1.0 million in connection with our laboratory research reagents license agreement with Sigma-Aldrich Corporation ("Sigma") and increased revenues of $325,000 in connection with our research agreement with Pfizer Inc., partially offset by decreased revenues of $278,000 in connection with our research license and commercial option agreement with Dow AgroSciences LLC ("DAS"), and decreased royalty revenues of $181,000 in connection with our agreement with Sigma. Research grant revenues were $51,000 for the three months ended September 30, 2009, compared to $549,000 in the corresponding period in 2008. The decrease in research grant revenues was primarily due to decreased revenues of $250,000 related to our grant from the Juvenile Diabetes Research Foundation ("JDRF") and decreased revenues of $271,000 in connection with our grant from the Michael J. Fox Foundation for Parkinson's Research ("MJFF").

Revenues from our corporate collaboration and strategic partnering agreements were $11.4 million for the nine months ended September 30, 2009, compared to $7.7 million in the corresponding period in 2008. The increase in collaboration agreement revenues was primarily attributable to increased revenues of $1.1 million in connection with our research license and commercial option agreement with DAS, increased revenues of $2.0 million in connection with our laboratory research reagents license agreement with Sigma, increased revenues of $250,000 in connection with our agreement with Open Monoclonal Technology, increased revenues of $325,000 in connection with our research agreement with Pfizer Inc. and increased revenues of $178,000 in connection with our research and license agreement with Genentech. Research grant revenues were $564,000 for the nine months ended September 30, 2009, compared to $1.7 million in the corresponding period in 2008. The decrease in research grant revenues was primarily due to decreased revenues of $553,000 related to our grant from MJFF, decreased revenues of $500,000 related to our grant from JDRF and decreased revenues of $141,000 in connection with our grant from DARPA.

Operating Expenses



                                                     Three months ended September 30,                             Nine months ended September 30,
                                                 (in thousands, except percentage values)                     (in thousands, except percentage values)
                                              2009             2008            Change          %             2009             2008         Change         %
Operating expenses:
Research and development                  $      6,166     $       7,563    $     (1,398 )    (18 )%    $       20,299    $     24,492    $  (4,193 )    (17 )%
General and administrative                       2,701             2,564             138        5 %              8,634           8,036          598        7 %

Total expenses                            $      8,867     $      10,127    $     (1,260 )    (12 )%    $       28,933    $     32,528    $  (3,595 )    (11 )%

Research and Development

Research and development expenses consist primarily of salaries and personnel expenses, stock-based compensation expense, laboratory supplies, pre-clinical and clinical studies, manufacturing expenses, allocated facilities expenses, subcontracted research

expenses and expenses for trademark registration and technology licenses. We expect to continue to devote substantial resources to research and development in the future and expect research and development expenses to increase in the next several years if we are successful in advancing our ZFP Therapeutic product candidates into clinical trials. To the extent we collaborate with others with respect to clinical trials, increases in research and development expenses may be reduced or avoided.

Research and development expenses were $6.2 million for the three months ended September 30, 2009, compared to $7.6 million in the corresponding period in 2008. The decrease in research and development expenses was primarily attributable to decreased pre-clinical, clinical and manufacturing expenses of $959,000, primarily associated with our SB-509-601 clinical trial as well as HIV / AIDS and glioblastoma multiforme programs, decreased expenses related to consulting of $349,000 and decreased technology licenses expenses of $241,000. This decrease was partially offset by increased stock-based compensation expense of $258,000.

Research and development expenses were $20.3 million for the nine months ended September 30, 2009, compared to $24.5 million in the corresponding period in 2008. The decrease in research and development expenses was primarily attributable to decreased pre-clinical and manufacturing expenses of $2.7 million, primarily associated with our HIV / AIDS and glioblastoma multiforme programs, and decreased expenses related to consulting of $860,000, lab supplies of $428,000 and technology licenses expenses of $373,000. This decrease was partially offset by increased clinical trials expenses of $235,000, primarily associated with our Phase 2 ALS study.

General and Administrative

General and administrative expenses consist primarily of salaries and personnel expenses for executive, finance and administrative personnel, stock-based compensation expenses, professional services expenses, allocated facilities expenses, patent prosecution expenses and other general corporate expenses. As we pursue commercial development of our therapeutic leads, we expect the business aspects of the Company to become more complex. We may be required in the future to add personnel and incur additional costs related to the maturity of our business.

General and administrative expenses were $2.7 million for the three months ended September 30, 2009, compared to $2.6 million in the corresponding period in 2008. The increase was primarily attributable to increased stock-based compensation expenses of $147,000.

General and administrative expenses were $8.6 million for the nine months ended September 30, 2009, compared to $8.0 million in the corresponding period in 2008. The increase was primarily attributable to increased stock-based compensation expenses of $321,000, increased salaries and personnel expenses of $133,000 and increased professional services expenses of $89,000.

Interest and Other Income (Loss), net

Interest and other income (loss), net, was $(47,000) for the three months ended September 30, 2009, compared to $42,000 in the corresponding period in 2008. For the three months ended September 30, 2009, foreign currency remeasurement losses, which related to the cash balance held at our wholly-owned UK subsidiary, Gendaq Limited, exceeded interest income, creating a loss for the period. Foreign currency remeasurement losses were $135,000 for the three months ended September 30, 2009, compared to foreign currency remeasurement losses of $373,000 in the corresponding period of 2008. Interest income was $88,000 for the three months ended September 30, 2009, compared to interest income of $415,000 in the corresponding period of 2008. The decrease was due to lower average investment balances and lower interest rates.

Interest and other income, net, was $793,000 for the nine months ended September 30, 2009, compared to $1.4 million in the corresponding period in 2008. The decrease was primarily due to lower interest income earned of $1.3 million due to lower average investment balances and lower interest rates. The decrease was partially offset by foreign currency remeasurement gains of $302,000 for the nine months ended September 30, 2009, compared to foreign currency remeasurement losses of $376,000 in the corresponding period of 2008. Remeasurement gains/losses related to the cash balance held at our wholly-owned UK subsidiary, Gendaq Limited.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from research grants and from corporate collaborators and strategic partners. As of September 30, 2009, we had cash, cash equivalents, marketable securities and interest receivable totaling $47.9 million. On October 2, 2009, in connection with the expansion of our

license agreement with Sigma, Sangamo sold Sigma 636,133 shares of common stock at a price of $7.86 per share to Sigma, resulting in gross proceeds of approximately $5.0 million and Sangamo received an additional $15.0 million as an upfront license fee. On October 13, 2009, Sangamo completed an underwritten public offering of its common stock, in which Sangamo sold an aggregate of 3,000,000 shares of its common stock at a public offering price of $7.20 per share. The net proceeds to Sangamo from the sale of shares in this offering, after deducting underwriting discounts and commissions and other estimated offering expenses, were approximately $20.9 million.

During the nine months ended September 30, 2009, the net cash used in operating activities was $17.8 million. Net cash used in operating activities related to our net loss of $16.2 million and changes in operating assets and liabilities of $6.5 million. The changes in operating assets and liabilities were primarily comprised of decreases in deferred revenues of $5.0 million, decreases in accounts payable and accrued liabilities of $1.6 million and increases in accounts receivable of $890,000, partially offset by increases in accrued compensation and employee benefits of $1.0 million. This was partially offset by net non-cash charges of $4.9 million. Non-cash charges were primarily comprised of $4.7 million related to stock-based compensation and $440,000 in depreciation and amortization, partially offset by foreign currency remeasurement gains of $302,000. During the nine months ended September 30, 2008, net cash used in operating activities of $23.0 million related to our net loss of $21.7 million and changes in operating assets and liabilities of $5.4 million. The changes in operating assets and liabilities were primarily comprised of increases in accounts receivable of $8.6 million and decreases in accounts payable and accrued liabilities of $295,000, partially offset by increases in deferred revenues of $3.2 million. This was partially offset by net non-cash charges of $4.1 million. Non-cash charges were primarily comprised of $4.3 million related to stock-based compensation, depreciation and amortization of $381,000 and foreign currency remeasurement losses of $376,000, partially offset by amortization of premium / discount on marketable securities of $931,000.

During the nine months ended September 30, 2009, net cash provided by investing activities was $11.4 million and was primarily comprised of maturities of marketable securities of $46.8 million, partially offset by purchases of marketable securities of $35.2 million. During the nine months ended September 30, 2008, net cash provided by investing activities was $18.4 million and was primarily comprised of maturities of marketable securities of $84.1 million and proceeds from sales of investments of $4.0 million, partially offset by purchases of marketable securities of $69.0 million.

Net cash provided by financing activities for the nine months ended September 30, 2009 was $713,000 and primarily related to proceeds from the issuance of common stock. Net cash provided by financing activities for the nine months ended September 30, 2008 was $1.4 million and related to proceeds from the issuance of common stock.

While we expect our rate of cash usage to increase in the future, in particular, to support our product development endeavors, we believe that the available cash resources, funds received from corporate collaborators, strategic partners and research grants will be sufficient to finance our operations through 2010. We may need to raise additional capital to fund our ZFP Therapeutic development activities. Additional capital may not be available in terms acceptable to us, or at all. If adequate funds are not available, our business and our ability to develop our technology and our ZFP Therapeutic products would be harmed.