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 in Part I, Item 1A. You should read the following discussion and analysis along with the "Selected Financial Data" and the financial statements and notes attached to those statements included elsewhere in this report.

Overview

We are a clinical stage biopharmaceutical company focused on the research, development and commercialization of engineered DNA-binding proteins for the development of novel therapeutic strategies for unmet medical needs. 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. Our strategy is to develop highly specific ZFP nucleases (ZFNs) and ZFP transcription factors (ZFP TFs) through early stage clinical testing and strategically partner with biopharmaceutical companies at points of value inflection to execute late-stage clinical trials and commercial development. In the long term, our goal is to forward integrate to capture the value of late-stage and commercial ZFP Therapeutic products for ourselves.

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 corporate collaborations and research grants.

Our revenues have consisted primarily of revenues from our corporate partners for ZFNs and ZFP TFs, 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 funding will continue beyond their initial terms or that we are able to meet the milestones specified in these agreements.

In the development of our ZFP technology platform, we are focusing our resources on higher-value ZFP Therapeutic product development. We are conducting a Phase 2 and two Phase 1/2 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 will be 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.

In January 2012, we established a collaborative partnership with Shire AG (Shire) to research, develop and commercialize some of our preclinical ZFP Therapeutic development programs, including programs in hemophilia, Huntington's disease and other monogenic diseases. We also have several proprietary preclinical programs in monogenic diseases, including hemoglobinopathies such as sickle cell disease (SCD) and ß-thalassemia and several lysosomal storage disorders. In addition, we have research stage programs in other monogenic diseases, including certain immunodeficiencies.

For the year ended December 31, 2012, we incurred a consolidated net loss of $22.3 million, or $0.42 per share, compared to a net loss of $35.8 million, or $0.71 per share, for the same period in 2011. As of December 31, 2012, we had cash, cash equivalents, marketable securities and interest receivable totaling $76.3 million compared to $84.5 million as of December 31, 2011. As of December 31, 2012, we had an accumulated deficit of $275.5 million.

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.

Revenue Recognition

Revenues from research activities made under strategic partnering agreements and collaborations are recognized as the services are provided when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured. Revenue generated from research and licensing agreements typically includes upfront signing or license fees, cost reimbursements, research services, minimum sublicense fees, milestone payments and royalties on future licensee's product sales.

Multiple Element Arrangements prior to the adoption of ASU No. 2009-13, Revenue Recognition - Multiple Deliverable Revenue Arrangements (ASU 2009-13). For revenue arrangements entered into before January 1, 2011, that include multiple deliverables, the elements of such agreement were divided into separate units of accounting if the deliverables met certain criteria, including whether the fair value of the delivered items could be determined and whether there was evidence of fair value of the undelivered items. In addition, the consideration was allocated among the separate units of accounting based on their fair values, and the applicable revenue recognition criteria are considered separately for each of the separate units of accounting. Prior to the adoption of ASU 2009-13, we recognized nonrefundable signing, license or non-exclusive option fees as revenue when rights to use the intellectual property related to the license were delivered and over the period of performance obligations if we had continuing performance obligations. We estimated the performance period at the inception of the arrangement and reevaluated it each reporting period. Changes to these estimates were recorded on a prospective basis.

Multiple Element Arrangements after the adoption of ASU 2009-13. ASU 2009-13 amended the accounting standards for certain multiple element revenue arrangements to:

• provide updated guidance on whether multiple elements exist, how the elements in an arrangement should be separated, and how the arrangement consideration should be allocated to the separate elements;

• require an entity to allocate arrangement consideration to each element based on a selling price hierarchy, also called the relative selling price method, where the selling price for an element is based on vendor-specific objective evidence ("VSOE"), if available; third-party evidence ("TPE"), if available and VSOE is not available; or the best estimate of selling price ("ESP"), if neither VSOE nor TPE is available; and

• eliminate the use of the residual method and require an entity to allocate arrangement consideration using the selling price hierarchy.

For revenue agreements with multiple element arrangements, such as license and development agreements, entered into on or after January 1, 2011, the Company will allocate revenue to each non-contingent element based on the relative selling price of each element. When applying the relative selling price method, the Company determines the selling price for each deliverable using VSOE of selling price or TPE of selling price. If neither exists the Company uses ESP for that deliverable. Revenue allocated is then recognized when the basic four revenue recognition criteria are met for each element. The collaboration and license agreement entered into with Shire in January 2012 was evaluated under these updated accounting standards.

Additionally, the Company recognizes 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. Fees from licensees upon sublicensing Sangamo technologies by them to third parties (sublicense fees) are recognized as revenue in the period such fees are due. Minimum annual sublicense fees are also recognized as revenue in the period in which such fees are due. Royalty revenues are generally recognized when earned and collectability of the related royalty payment is reasonably assured. The Company recognizes 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.

Sangamo's research grants are typically multi-year agreements and provide for the reimbursement of qualified expenses for research and development as defined under the terms of the grant agreement. Revenue under grant agreements is recognized when the related qualified research expenses are incurred.

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, validation of our testing processes and procedures and related overhead expenses. 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 that have no alternative future use are expensed as incurred. 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.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payment awards made to our employees and directors, including employee stock options, employee stock purchases related to the Employee Share Purchase Plan (ESPP) and restricted stock units (RSUs), on estimated fair values. The fair value of stock-based awards is amortized over the vesting period of the award using a straight-line method over the requisite service period.

To estimate the value of a stock option award and purchases related to ESPP, we use the Black-Scholes option pricing model. This model requires inputs such as expected life, expected volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. While estimates of expected life and volatility 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. To estimate the value of RSUs, we use the closing market value of our common stock on the date the award is issued. Further, we are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. If factors change and different assumptions are employed in determining the fair value of stock-based awards, the stock-based compensation expense recorded in future periods may differ significantly from what was recorded in the current period.

Results of Operations

Years Ended December 31, 2012, 2011 and 2010

Revenues



                                                                         Year Ended December 31,
                                                                           %                                                           %
                               2012          2011         Change         Change           2011          2010         Change          Change
                                                                (In thousands, except percentage values)
Revenues:
Collaboration agreements     $ 18,186      $  6,110      $ 12,076            198 %      $  6,110      $ 16,819      $ (10,709 )          (64 %)
Research grants                 3,469         4,209      $   (740 )          (18 %)        4,209         3,986            223              6 %

Total revenues               $ 21,655      $ 10,319      $ 11,336            110 %      $ 10,319      $ 20,805      $ (10,486 )          (50 %)

Total revenues consisted of revenues from collaboration agreements and research grants. We anticipate revenues over the next several years will primarily be derived from our collaboration agreements with Shire, Sigma-Aldrich Corporation (Sigma) and Dow AgroSciences LLC (DAS), a wholly owned subsidiary of Dow Chemical Corporation.

Revenues from our corporate collaboration agreements were $18.2 million in 2012, $6.1 million in 2011, and $16.8 million in 2010. The increase in 2012 from 2011 was primarily due to revenues of $11.0 million in connection with our license agreement with Shire, which was entered into in January 2012. These revenues included amortization of a $13.0 million upfront license payment and revenues for research services provided to Shire. The decrease in 2011 from 2010 was primarily due to the completion in July 2010 of the amortization period of revenues related to the commercial license fee received from Sigma under our expanded agreement of October 2009.

Research grant revenues were $3.5 million in 2012, $4.2 million in 2011 and $4.0 million in 2010. The decrease of $0.7 million in 2012 from 2011 was primarily due to decreased revenues of $0.5 million from the California Institute for Regenerative Medicine (CIRM) as well as $0.4 million from the Michael J. Fox Foundation for Parkinson's Research (MJFF), partially offset by higher revenues of $0.2 million from the Juvenile Diabetes Research Foundation International (JDRF) from a final study payment in support of development of our SB-509 program for the treatment of diabetic neuropathy (DN) which was terminated in October 2011. The increase in 2011 compared to 2010 relates to $1.1 million of increased revenues from our agreement with the CHDI Foundation, Inc. (CHDI) to develop a novel therapeutic for Huntington's disease, increased revenues of $0.7 million from CIRM and increased revenues of $0.4 million for other research grants, partially offset by decreased revenues of $1.0 million related to funding from JDRF. Additionally, in 2010, we received $1.0 million in funds awarded and recognized as revenue for four qualifying therapeutic discovery projects under the Patient Protection and Affordable Care Act.

During 2012, revenues related to Shire, Sigma and DAS represented 51%, 11% and 22%, respectively, of total revenues. During 2011, revenues related to Sigma, DAS, CIRM and CHDI represented 15%, 43%, 18% and 11% of total revenues, respectively. During 2010, revenues related to Sigma and DAS represented 59% and 21%, respectively, of total revenues.

Operating Expenses



                                                                         Year Ended December 31,
                                                                            %                                                          %
                                2012          2011         Change         Change           2011          2010         Change        Change
                                                                (In thousands, except percentage values)
Operating expenses:
Research and development      $ 31,709      $ 32,098      $   (389 )           (1 %)     $ 32,098      $ 33,154      $ (1,056 )          (3 %)
General and administrative      12,144        14,042      $ (1,898 )          (14 %)       14,042        12,586         1,456            12 %

Total operating expenses      $ 43,853      $ 46,140      $ (2,287 )           (5 %)     $ 46,140      $ 45,740      $    400             1 %

Research and Development Expenses

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 HIV/AIDS program in the clinic and if we are able to progress our earlier stage ZFP therapeutic product candidates into clinical trials as well as our programs under collaboration with Shire. Pursuant to the terms of the agreement with Shire, future expenses related to research activities related to the collaboration will be reimbursed by Shire, including employee and external research costs. The reimbursement funds received from Shire will be recognized as revenue as the costs are incurred and collection is reasonably assured.

Research and development expenses were $31.7 million in 2012 compared to $32.1 million in 2011 and $33.2 million in 2010. The decrease of $0.4 million in 2012 compared to 2011 was primarily due to decreased clinical and manufacturing expenses related to our HIV/AIDS program as well as our terminated SB-509 program of $4.5 million and lower stock-based compensation of $0.8 million, partially offset by higher expenses related to our pre-clinical ZFP Therapeutic programs of $3.5 million, including our programs under collaboration with Shire, as well as higher personnel related expenses of $0.8 million. The decrease of $1.1 million in 2011 from 2010 was primarily due to decreased clinical expenses related to our terminated SB-509 program of $5.0 million, specifically our Phase 2b study in diabetic neuropathy, partially offset by increased spending on our HIV/AIDS program of $2.4 million.

The main focus for our company is the development of novel human therapeutics and we are building a pipeline of ZFP Therapeutics. Our lead ZFP Therapeutic, SB-728-T, a ZFN-modified autologous T-cell product for the treatment of HIV/AIDS, is the first therapeutic application of our ZFN technology and is being evaluated in ongoing clinical trials, the most advanced of which are a Phase 2 study (SB-728-902 Cohort 5) and a Phase 1/2 study (SB-728-1102) in HIV-infected subjects. We expect to present data from these programs at appropriate scientific and medical meetings in 2013.

We have established a collaborative partnership for some of our preclinical ZFP Therapeutic development programs in certain monogenic diseases, genetic conditions that result from a defect in a single gene. In January 2012, we entered into a collaboration and license agreement with Shire, to research, develop and commercialize ZFP Therapeutics for hemophilia, Huntington's disease and other monogenic diseases based on our ZFP technology. We also have several proprietary preclinical programs in monogenic diseases, including hemoglobinopathies such as SCD and ß-thalassemia and several lysosomal storage disorders. In addition, we have research stage programs in other monogenic diseases, including certain immunodeficiencies.

We also continue to fulfill our obligations under the terms of our non-therapeutic collaborations with Sigma and DAS. We provided manufacturing and research assistance to DAS for our ZFP technology through 2012. In addition, to the extent we continue to receive royalties from Sigma, we will incur fees related to certain technologies that we have in-licensed.

Drug development is inherently uncertain and the successful completion of our development programs is subject to numerous technological challenges and risks and we cannot presently estimate anticipated completion dates for any of our programs. Material cash inflows associated with the sale of products, if any, which result from our research efforts are not expected for at least five years. See Risk Factors-"Our potential therapeutic products are subject to a lengthy and uncertain regulatory process, and if these potential products are not approved, we will not be able to commercialize these products" and "Our gene regulation and gene modification technology is relatively new, and if we are unable to use this technology in all our intended applications, it would limit our revenue opportunities."

The table below shows research and development expenses for our primary clinical development program, SB-728-T, expenses associated with other clinical stage programs as well as expenses related to our pre-clinical and research stage programs, including our therapeutic programs under collaboration with Shire and non-therapeutic collaborations.

                                                             Year Ended
                                                            December 31,
                                                           (In thousands)
       Programs                                    2012         2011         2010
       SB-728-T clinical programs                $  9,115     $ 11,297     $  6,980
       Other clinical programs                        510        5,645       13,058
       Pre-clinical and research programs          22,083       15,156       13,116

       Total research and development expenses   $ 31,708     $ 32,098     $ 33,154

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and personnel related 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.

General and administrative expenses were $12.1 million in 2012, $14.0 million in 2011 and $12.6 million in 2010. The decrease of $1.9 million in 2012 from 2011was primarily due to lower stock-based compensation of $1.9 million as well as lower professional services of $0.8 million, partially offset by higher personnel related expenses of $0.6 million due to higher headcount, salaries and incentive compensation, and other allocated facility expenses of $0.2 million. The increase of $1.4 million in 2011 from 2010 was primarily due to increased professional services of $0.9 million, including legal fees, and higher salaries and personnel related expenses of $0.5 million due to higher headcount.

Other income (expense), net

Other expense was $0.1 million in 2012, compared to other income of $0.1 million in 2011 and 2010. The expense in 2012 was primarily related to disposal of fixed assets, partially offset by interest income of $0.1 million. Other income in 2011 and 2010 was comprised of interest income.

Liquidity and Capital Resources

Liquidity

Since inception, we have incurred significant net losses and we have funded our operations primarily through the issuance of equity securities, payments from corporate collaborators and strategic partners and research grants.

As of December 31, 2012, we had cash, cash equivalents, marketable securities and interest receivable totaling $76.3 million compared to $84.5 million as of December 31, 2011. The decrease was primarily attributable to the use of capital required to fund our continuing operations, including the advancement of our ZFP Therapeutic programs. The decrease was also attributable to the completion of an underwritten public offering of our common stock in April 2011, in which 6,700,000 shares of our common stock were sold at a public offering price of $7.70 per share. The net proceeds to us from the offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately $50.2 million.

Our most significant use of capital pertains to salaries and benefits for our employees and external development expenses, such as manufacturing and clinical trial activity, related to our ZFP Therapeutic programs. Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of U.S. government agencies, U.S. treasury debt securities, corporate debt securities and money market funds. Cash in excess of immediate requirements is invested in accordance with our investment policy with a view toward capital preservation and liquidity.

In January 2012, we entered into a collaboration and license agreement with Shire, pursuant to which we are collaborating with Shire to research, develop and commercialize certain gene targets in human therapeutics and diagnostics for hemophilia, Huntington's disease and other monogenic diseases based on our ZFP technology. Under the Agreement, we received an upfront license fee of $13.0 million. We are also eligible to receive milestone payments, however, our eligibility is based on our achievement of specified research, regulatory, clinical development, commercialization and sales milestones and depends upon ours and Shire's ability to continue to progress our programs under collaboration. We will also be eligible to receive royalty payments that are a tiered double-digit percentage of net sales of products developed under the collaboration, if any.

Cash Flow

Net cash used in operating activities was $8.1 million in 2012, $25.9 million in 2011 and $23.9 million in 2010. For all periods, net cash used in operating activities primarily reflects our net operating losses. The decrease in net cash used in operating activities in 2012 compared to 2011 was primarily the result of a $13.0 million upfront payment related to our collaboration and license . . .