SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File No. 0-30171

SANGAMO BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

501 Canal Boulevard, Suite A100

Richmond, CA 94804

(510) 970-6000

(Address, including zip code, and telephone number,

including area code, of the registrant’s principal executive offices)

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

None

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

Common stock $.01 par value

(Title of Class)

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 30, 2004, based on the closing sale price as reported by the Nasdaq National Market of the Company’s Common Stock, was approximately $111,636,397.

      The total number of shares outstanding of the Registrant’s Common Stock was 25,354,183 as of February 14, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement for its 2005 Annual Meeting of Stockholders (the “2005 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      Some statements contained in this report are forward-looking with respect to our operations, economic performance and financial condition. Statements that are forward-looking in nature should be read with caution because they involve risks and uncertainties, which are included, for example, in specific and general discussions about:

      Various terms and expressions similar to them are intended to identify these cautionary statements. These terms include: “anticipates,” “believes,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “seeks,” “should” and “will.” Actual results may differ materially from those expressed or implied in those statements. Factors that could cause these differences include, but are not limited to, those discussed under “Risks Related to Our Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Sangamo undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or circumstances arising after the date of this report. Readers are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K.

PART I

Company Overview and Business Strategy

Background

      Sangamo is a leader in the research, development, and commercialization of DNA binding proteins for the therapeutic regulation and modification of disease-associated genes. Our proprietary technology platform is based on the engineering of a naturally occurring class of proteins referred to as zinc finger DNA binding proteins (ZFPs). We believe that ZFPs can be targeted to virtually any gene in the human genome or the genome of any other organism. Our scientists use engineered ZFPs to make ZFP transcription factors, or ZFP TFs, which are proteins that bind to DNA and are able to turn genes on or off (see Figure A). Additionally, ZFPs may be engineered to create zinc finger nucleases (ZFNs). Engineered ZFNs can cut genomic DNA at a preselected location, facilitating either ZFN mediated gene correction of genes, that contain disease-causing mutations, or disruption of genes that facilitate or are responsible for disease pathology.

      The pharmaceutical industry has invested billions of dollars to discover and validate new genomic targets over the last several years. While there have been several notable successes, in many cases it has proven difficult to identify small-molecule drugs, monoclonal antibodies or recombinant proteins which can therapeutically modulate these targets in man. We believe that our ZFP technology platform constitutes a new therapeutic approach enabling the regulation of validated drug targets that have proven intractable to conventional methods of drug discovery. Sangamo, by enabling the development of ZFP Therapeutic products based on gene regulation or modification of such targets at the DNA level, is focused on establishing the first new therapeutic product development technology platform in the post-genomic era. One of our corporate partners, Edwards Lifesciences (Edwards), has initiated a Phase I clinical study to evaluate the safety and preliminary efficacy of a proprietary Sangamo ZFP Therapeutic for the treatment of peripheral artery disease (PAD). We have also filed an Investigational New Drug (IND) application with the U.S. Food and Drug Administration (FDA) and plan to initiate our own Phase I clinical trial of a ZFP Therapeutic in patients with diabetic neuropathy within the first quarter of 2005. We have also initiated preclinical animal studies of ZFP Therapeutics in congestive heart failure, nerve regeneration and neuropathic pain. In addition, we have research-stage programs in HIV, sickle cell anemia, X-linked severe combined immunodeficiency (X-linked SCID), Wiskott Aldrich Syndrome, age-related macular degeneration, and cancer immunotherapy.

      Going forward, we intend to invest the majority of our financial and scientific resources in the therapeutic applications of our ZFP technology. Notwithstanding our therapeutic focus, we believe the potential commercial applications of ZFPs are broad-based and range from human therapeutics and drug discovery to protein pharmaceutical production and the engineering of commercial crop plants. Our business model permits us to capitalize on the ZFP platform by facilitating the sale or licensing of ZFP TFs or ZFNs to companies working in any of these fields. For instance, Sangamo is supplying its pharmaceutical partners Medarex Inc. and, most recently, Pfizer Inc. with ZFP engineered cells for the enhanced production of therapeutic proteins, an advance that could substantially increase the efficiency of pharmaceutical protein production. In addition, Sangamo has provided companies such as LifeScan, a Johnson & Johnson company, with ZFP TFs to aid in the development of new therapeutic treatments for diabetes in the emerging field of regenerative medicine. Finally, our ZFP technology has been demonstrated to enable precise changes in the genomes of crop plants for commercially desirable traits.

      We have amassed a substantial proprietary position in the design, selection, composition, and use of engineered ZFPs to support all of these commercial products. We either own outright or have licensed the commercial rights to approximately 58 patents issued in the United States and foreign national jurisdictions, and we have 178 patent applications pending worldwide. We continue to license and file new patent applications that strengthen our core and accessory patent portfolio. We believe that our proprietary position will protect our ability to research, develop, and commercialize products and services based on ZFP technology across our chosen applications.

      Over the last 3 years, we have increasingly focused our company on ZFP Therapeutic product development and have recruited experienced scientists and managers with substantial product development experience. We filed Sangamo’s first IND application in January 2005 and, working with Edwards Lifesciences, played an important role in the filing of their ZFP Therapeutic IND application in February 2004. We are also building our capabilities in preclinical development, regulatory affairs and clinical research and are applying these capabilities across our product development programs. These include programs in cardiovascular disease, neurological disorders, cancer immunotherapy, the treatment of infectious diseases such as HIV infection, and monogenic diseases (diseases caused by deleterious DNA sequence mutations within single genes) such as X-linked SCID and sickle cell anemia.

DNA, Genes, and Transcription Factors

      DNA is present in all cells, except mature erythrocytes, and encodes the inherited characteristics of all living organisms. A cell’s DNA is organized in chromosomes as thousands of individual units called genes. Genes encode proteins, which are assembled through the process of transcription — whereby DNA is transcribed into ribonucleic acid (RNA) — and, subsequently, translation — whereby RNA is translated into protein. DNA, RNA, and proteins comprise many of the targets for pharmaceutical drug discovery and therapeutic intervention at the molecular level.

      The human body is composed of specialized cells that perform different functions and are thus organized into tissues and organs. All somatic cells in an individual’s body contain the same set of genes. However, only a fraction of these genes are turned on, or expressed, in an individual human cell at any given time. Genes are activated or repressed in response to a wide variety of stimuli and developmental signals. Distinct sets of genes are expressed in different cell types. It is this pattern of gene expression that determines the structure, biological function, and health of all cells, tissues, and organisms. The aberrant expression of certain genes can lead to disease.

      Transcription factors are proteins that bind to DNA and regulate gene expression. A transcription factor recognizes and binds to a specific DNA sequence within or near a particular gene and causes that gene to be activated or repressed. In higher organisms, transcription factors typically comprise two principal domains: the first is a DNA binding domain, which recognizes a target DNA sequence and thereby directs the transcription factor to the proper chromosomal location; the second is a functional domain that causes the target gene to be activated or repressed (see Figure A). The two-component structure of our engineered ZFP TFs is modeled on this naturally occurring structure of transcription factors in all higher organisms.

The Two Domain Structure of a ZFP Therapeutic

Figure A

Engineered Zinc Finger Protein Transcription Factors (ZFP TFs) for Therapeutic Gene Regulation

      Consistent with the two-domain structure of ZFP TFs, we take a modular approach to their design. The recognition domain is typically composed of three or more zinc fingers; each individual finger recognizes and binds to a three base pair sequence of DNA, and multiple fingers can be linked together to recognize longer stretches of DNA. By modifying the amino acids of a ZFP that directly interact with DNA, we can engineer novel ZFPs capable of recognizing pre-selected DNA sequences within or near virtually any gene.

      The ZFP DNA binding domain is coupled to a functional domain, creating a ZFP TF capable of controlling or regulating a target gene in the desired manner. For instance, an activation domain causes a target gene to be “turned on.” Alternatively, a repression domain causes the gene to be “turned off.” We believe that we can control the duration of the effects of ZFP TFs by several methods. ZFP TFs may be delivered by using different gene transfer systems that allow them to be briefly (transiently), or continuously expressed in a cell. We can also engineer ZFP TFs with functional domains that allow their activity to be controlled by the administration of a small-molecule drug. Finally, we can engineer ZFP TFs with repression domains that are able to reduce gene expression and, in some cases, even silence their target genes.

      To date, we have designed, engineered, and assembled several thousand ZFPs and have thoroughly tested the majority of these proteins for their affinity, or tightness of binding to their DNA target, as well as their specificity, or preference for their intended DNA target. We have developed standardized methods for the design, selection, and assembly of ZFPs capable of binding to a wide spectrum of DNA sequences and genes. We have linked ZFPs to numerous functional domains to create gene-specific ZFP TFs and have demonstrated the ability of these ZFP TFs to regulate hundreds of genes in dozens of different cell types and directly in whole organisms, including mice, rats, rabbits, pigs, plants, fruit flies, worms, and yeast. Sangamo scientists

and collaborators have published extensively in peer-reviewed scientific journals on the transcriptional function of ZFP TFs and the resulting changes in the behavior of the target cell, tissue, or organism.

Engineered ZFNs for Therapeutic Gene Modification: Gene Correction and Gene Disruption

      The ZFP DNA binding domain may also be coupled to the cleavage domain of a restriction endonuclease — an enzyme that cuts DNA — creating a zinc finger nuclease or ZFN. Using the DNA binding domain of an engineered ZFP to target the nuclease to a chosen location, we can design a ZFN to generate a physical break at a defined location in the DNA sequence of a target gene. This targeted break in the DNA can be manipulated to effect two different outcomes, either to facilitate the replacement of the disease-causing mutation with a “normal” or “corrected” DNA sequence or to disrupt the disease-related gene resulting in the expression of a truncated or non functional protein. We believe that ZFN-mediated gene correction will allow the corrected gene to be expressed in its natural chromosomal context and may provide a safe and effective approach to the precise repair of DNA sequence mutations responsible for monogenic diseases such as X-linked SCID and sickle cell anemia. Similarly, ZFN-mediated gene modification may permit the targeted disruption of a gene that is involved in disease pathology such as disruption of the CCR5 gene to treat HIV infection.

A Novel Class of Human Therapeutics

      With our ability to deliver gene-specific ZFP TFs and ZFNs for the activation, repression, correction, or disruption of target genes and DNA sequences, we are poised to develop a novel class of highly differentiated human therapeutics. We believe that as more genes are validated as high-value therapeutic targets, the clinical breadth and scope of ZFP Therapeutic applications may prove to be substantial.

      Following the genomics revolution of the 1990s, the sequencing and publication of the human genome, and the industrialization of genomics-based drug discovery, pharmaceutical and biotechnology companies have validated and characterized hundreds of new drug targets. However, these companies have had mixed results in translating these targets into lead product candidates or products which have advanced to clinical trials. There are many new drug targets which, although they have a clear role in disease processes, cannot be bound or modulated by small molecules with drug-like properties. Alternative therapeutic approaches may be required to modulate the biological activity of these so-called “non-druggable” targets. This may create a significant clinical and commercial opportunity for the therapeutic regulation or modification of disease-associated genes using engineered ZFP TFs or ZFNs.

      ZFP Therapeutics provide a new approach to non-druggable targets. ZFP TFs act through a mechanism that is unique among biological drugs: direct regulation of the “disease” gene as opposed to the protein target encoded by that gene. Thus, a protein target which may be intractable to small molecule control can instead be “turned on” or “turned off” at the DNA level. Engineered ZFP TFs are the only class of therapeutic molecules that act directly through the regulation of gene expression at the DNA level. This mode of action is not available to antisense RNA, siRNA, conventional small molecules, antibodies, or other protein pharmaceuticals.

      Therefore, we believe that ZFP Therapeutics provide a unique and proprietary approach to therapeutic design and have significant competitive advantages over small-molecule drugs, protein pharmaceuticals, and conventional gene therapy:

ZFP Therapeutic Gene Correction of Monogenic Disease

      Genetic diseases such as X-linked SCID, sickle cell anemia, and Wiskott Aldrich are caused by deleterious DNA sequence mutations within single genes. “Gene Correction” is the process by which a mutation, or disease-causing DNA sequence, can be repaired with the “correct” DNA sequence, restoring normal gene function. Our engineered ZFPs can be attached to nuclease domains to create ZFNs. The ZFN is able to “recognize” its intended gene target through its engineered (ZFP) DNA binding domain (Figure A). However, instead of regulating the expression of the target gene (as with a ZFP TF), the ZFN causes the gene to be cut near the ZFP binding site, triggering a repair process and facilitating the incorporation of the corrected DNA sequence into the chromosomal location where the disease-related mutation previously existed. A segment of DNA or “donor sequence” that encodes the correct gene sequence is also introduced into the cell to provide a template for the correction of the cellular gene.

      The process of gene correction occurs naturally and is called homologous recombination (HR). While gene correction has been pursued in academic research laboratories for over a decade, its clinical application has been limited by the low efficiency of HR, the biological process of gene repair. HR occurs naturally at a rate of approximately once in every one million cells receiving the DNA donor sequence; this rate is too low to be of clinical use. However, with our collaborators, we have shown that the use of engineered ZFNs to cleave the target gene near the defective sequence can increase the efficiency of targeted HR by several thousand times. ZFP Therapeutic gene correction is a revolutionary technical approach to gene repair because ZFNs, like all ZFPs, can be engineered to recognize virtually any target gene in the human genome. We are working to generate the preclinical data necessary to evaluate the potential utility of this approach for X-linked SCID and hemoglobinopathies such as sickle cell anemia and β-thalassemia.

ZFP Therapeutic Gene Disruption for Infectious Diseases

      ZFNs can also be used to disrupt a gene sequence. This may have therapeutic applications in diseases such as HIV and hepatitis C viral infections. To effect ZFN-mediated gene disruption, ZFNs are introduced into cells without an added DNA donor sequence. Under these circumstances, introduction of a double stranded break in the cellular gene prompts the cell’s repair machinery to rejoin the two broken ends of the DNA disrupting the gene’s normal coding sequence. This disruption frequently results in a shortened or non-functional protein product. In the case of HIV we are using this approach to disrupt the gene that encodes a cellular protein, CCR5, which is an essential co-factor for HIV infection of T-cells and other cells of the immune system.

THERAPEUTIC PRODUCT DEVELOPMENT

Product Development Strategy

      Over the last several years, we have shown that ZFP TFs can be engineered to bind their target genes with an optimal level of affinity and specificity and can regulate these targets in a way that causes the desired effect at the levels of target cell, tissue, and organism. We have extended these results to preclinical animal models of disease, including mice, rats, rabbits, and pigs. We have published some of these data in peer-reviewed journals. In February 2004, our partner, Edwards Lifesciences, submitted some of these data to the United States Food & Drug Administration (FDA) along with preclinical toxicology and biodistribution data as part of an IND application to support a Phase I clinical study. The Edwards study is designed to investigate the safety and preliminary efficacy of a ZFP TF designed to up-regulate the expression of vascular endothelial growth factor A (VEGF-A) in patients with the intermittent claudication stage of Peripheral Arterial

Disease (PAD). The Phase I clinical trial is ongoing under the supervision of Robert J. Lederman, M.D., of the National Heart, Lung and Blood Institute, National Institutes of Health (NIH). In addition, in January 2005, Sangamo submitted an IND for a Phase I clinical study to investigate the safety and preliminary efficacy of a ZFP TF designed to up-regulate the expression of VEGF-A in patients with diabetic neuropathy (DN). We expect this trial to begin in the first quarter of 2005. We intend to develop the additional preclinical data to support the development of ZFP Therapeutics for cardiovascular disease, infectious diseases including HIV infection, neuropathic pain, nerve regeneration, cancer, and monogenic diseases including X-linked SCID and hemoglobinopathies such as sickle cell anemia and ß-thalassemia.

Product Development Programs

      In addition to the Phase I clinical trial to evaluate the safety of a ZFP Therapeutic for the treatment of peripheral PAD and an IND application to initiate the Phase I DN clinical trial, we currently have three preclinical-stage programs (i.e., lead ZFP TF molecules in animal efficacy studies) and six research-stage programs (i.e., cell-based testing to identify and optimize lead ZFP TF or ZFN molecules for testing in animals).

Table 1. Clinical indications currently targeted by Sangamo’s clinical, preclinical, and research-stage ZFP Therapeutic product development programs.

      PAD is the result of inadequate arterial blood flow to the lower extremities. It is seen as a spectrum of disease, beginning with asymptomatic reduction in blood flow to the leg; followed by the development of intermittent claudication, which limits walking distance; followed by pain in the absence of exercise (resting pain); finally leading to tissue damage and severely impaired mobility (critical limb ischemia). The condition affects 8-12 million people in the United States. 80% of these patients have intermittent claudication and do not progress to resting pain or critical limb ischemia. This program is funded and managed by our development partner, Edwards Lifesciences, who filed an IND application in February 2004 and initiated a Phase I clinical trial in August, 2004 to treat intermittent claudication. Edwards has subsequently stated that they have completed preclinical efficacy experiments and expect to initiate a Phase I human clinical trial in critical limb ischemia, the more severe form of PAD, in 2005 at Duke University.

      Diabetic peripheral sensory and motor neuropathy is one of the most frequent complications of diabetes. Symptoms include numbness, tingling sensations and pain particularly in the toes or feet. This is gradually replaced by loss of sensation and motor function as nerve damage progresses. Ulcers and sores may appear on

numb areas of the foot or leg because pressure or injury goes unnoticed. Despite adequate treatment, these areas of trauma frequently become infected and this infection may spread to the bone, necessitating amputation of the leg or foot. More than 60% of non-traumatic lower-limb amputations in the United States occur among people with diabetes. In the period from 2000 to 2001 this translated to approximately 82,000 amputations. The American Diabetes Association estimates that there are approximately 18.3 million people with diabetes in the United States and that of those about 60% to 70% have mild to severe forms of neuropathy. According to the Centers for Disease Control (CDC), diabetes is becoming more common in the United States. From 1980 through 2002, the number of Americans with diabetes more than doubled.

      Apart from rigorous control of blood glucose, the only therapies approved by the FDA for the treatment of diabetic neuropathy are analgesics and antidepressants that address only the symptoms and do not retard or reverse the progression of the disease. VEGF A has been demonstrated to have direct neuroproliferative, neuroregenerative and neuroprotective properties. Administration of recombinant VEGF-A or the cDNA encoding VEGF-A has been observed to retard or partially reverse the condition in preclinical animal models of diabetic neuropathy. We have completed preclinical studies of VEGF-A activation in similar preclinical models to confirm and extend these findings by using our ZFP Therapeutic SB-509, which is designed to up-regulate the chromosomal VEGF-A gene. In January 2005, Sangamo filed an IND with the FDA for SB-509, a ZFP TF activator of VEGF-A, for the treatment of mild to moderate diabetic neuropathy. We expect to begin a multicenter Phase I, single blind, dose-escalation trial to measure the laboratory and clinical safety of SB-509 in patients in the first quarter of 2005.

      IHD results from inadequate blood flow to the heart. The most common manifestation of this disease is angina, or the onset of chest pain with exercise. Macrovascular therapy, in the form of percutaneous coronary intervention (angioplasty) or coronary artery bypass grafting, is available to treat angina; however, patients with downstream blood flow restrictions do not benefits from these interventions. Patients who are poor candidates for a revascularization procedure may be candidates for a biological drug designed to up-regulate the expression of VEGF-A. There are approximately 1.1 million revascularization procedures in the United States each year, and we believe that a significant fraction of these patients could potentially benefit from a less invasive, therapeutic angiogenesis product. Our IHD program is funded and managed by our partner, Edwards Lifesciences, and utilizes the same VEGF-targeted ZFP TF as the PAD program. In December 2004, Edwards stated that they expect to complete preclinical animal efficacy studies in 2005 and, based upon those data, potentially to initiate a human clinical trial to evaluate safety of a ZFP-TF activator of VEGF-A to treat post-myocardial IHD at Yale University School of Medicine.

      The CDC estimates that in 2004 there were 39 million people world-wide living with HIV infection. Of those individuals, 5 million people were newly infected with the virus. An estimated 3 million people died of AIDS in the same year. In the United States alone it is estimated that there were 1.0 million people living with HIV/AIDS, 44,000 new infections and 16,000 deaths in 2004.

      HIV infection results in the death of immune system cells and thus leads to AIDS, a condition in which the body’s immune system is depleted to such a degree that the patient is unable to fight off common infections. Ultimately, these patients succumb to opportunistic infections or cancers. CCR5 is the co-receptor for HIV entry into T-cells and CCR5 is not expressed on their surface, HIV cannot infect these cells. A population of individuals that is immune to HIV infection, despite multiple exposures to the virus, has been identified and extensively studied. They have a natural mutation, CCR5Δ32, that results in the expression of a shortened, or truncated, and non-functional CCR5 protein. This mutation appears to have no observable deleterious effect on the growth or survival or these individuals. We are using our ZFN-mediated gene disruption technology to disrupt the CCR5 gene in cells of a patient’s immune system to make these cells permanently resistant to HIV infection. The aim is to provide a population of HIV-resistant cells that can fight opportunistic infections. In collaboration with scientists at the University of Pennsylvania and the University

of Los Angeles California, UCLA, we are pursuing both ex-and in-vivo approaches in T-cells and hematopoietic stem cells.

      CHF is a gradual and long-term loss of pumping capacity by the heart that results in the backup of blood and fluid (edema) in the lungs and other tissues and organs. This fluid congestion can cause shortness of breath, coughing, swelling of the abdomen and extremities, fatigue, kidney damage, and kidney failure. The incidence and prevalence of CHF are increasing at an alarming rate, with approximately 550,000 new cases in the United States each year and a current patient population of more than 5 million Americans. There is strong scientific evidence to suggest that down-regulation of the gene encoding phospholamban (PLN) in the heart can improve the contractility of heart muscle in mammalian animal models of CHF. We have identified a lead ZFP TF repressor of PLN expression for the CHF program and have ongoing preclinical studies in rodent models of CHF.

      X-linked SCID is a rare, inherited genetic disease leading to severe T-cell and B-cell dysfunction, severe infection, and often death by the age of 2 years. This is the most common form of SCID affecting nearly 50% of all cases. Patients suffering from X-linked SCID harbor a mutation in the gene encoding the gamma chain of the interleukin-2 receptor γ chain (IL2Rγ). Sangamo scientists are using ZFN-mediated gene correction in an effort to repair this genetic lesion in hematopoietic stem cells and to use these corrected cells to reconstitute a patient’s immune system.

      Neuropathic pain comprises a set of chronic pain disorders that cannot be connected to a physical trauma, as is the case with acute pain. There are several million patients with neuropathic pain in the United States including late-stage cancer patients. Studies have shown that 90% of patients with advanced cancer experience severe pain, and that pain occurs in 30% of all cancer patients regardless of the stage of the disease. Pain usually increases as cancer progresses. The most common cancer pain is from tumors that metastasize to the bone. As many as 60–80% of cancer patients with bone metastasis experience severe pain. The second most common cancer pain is caused by tumors infiltrating nerves. Tumors near neural structures may cause the most severe pain. The few drugs currently being used to treat pain in these patients show marginal efficacy and can have very significant side effects. Chronic pain is a major and underserved market opportunity and is now an area of intense focus by pharmaceutical researchers owing to the discovery of several new pain-related pathways and drug targets. Recent studies have shown that in chronic pain, certain proteins in nerve cell membranes are up-regulated or over-expressed. Our scientists have identified ZFP TF product candidates that repress the expression of two of these pain targets in cell-based models. We are incorporating these ZFP TFs into gene transfer vectors for testing in pain models during 2005.

      SCA is caused by a mutation in the human β-globin gene that alters the solubility of hemoglobin under certain physiological conditions. The ensuing disease is characterized by chronic hemolytic anemia with episodes of severe pain and tissue damage often resulting in kidney failure, liver disease, stroke, and other complications. According to the National Heart, Lung and Blood Institute of the NIH, approximately 72,000 people in the U.S. have sickle cell disease. Moreover, approximately 2.5 million Americans carry the sickle cell trait. Although there is still no adequate general long-term treatment or cure, some patients may benefit from bone marrow transplantation. However, very few patients have matched donors, and the risks of infection and toxicity are quite high. Sangamo scientists and collaborators are developing methods for ZFN-mediated correction of the β-globin gene mutation that causes sickle cell anemia. We are collaborating on this program with the Children’s Hospital of Oakland Research Institute.

      β-Thalassemia is an inherited blood disorder that causes mild or severe anemia due to reduced hemoglobin and fewer red blood cells than normal. β-Thalassemia is caused by a mutation in the genes that code for β-hemoglobin. Severe forms of thalassemia are usually diagnosed in early childhood and are lifelong conditions. Currently, severe forms of thalassemia are treated by regular blood transfusions on a schedule (often every 2-4 weeks) to keep hemoglobin and red blood cell numbers at normal levels. Transfusion therapy, while lifesaving, is expensive and carries a risk of transmission of viral and bacterial diseases (for example, hepatitis). It also leads to excess iron in the blood (iron overload), which can damage the liver, heart, and other parts of the body. To prevent damage, iron chelation therapy is needed to remove excess iron from the body. Sangamo scientists and collaborators are developing methods for ZFN-mediated correction of the β-globin gene mutation that causes β-Thalassemia.

      Nerves are fragile and can be damaged by disease, pressure, stretching, or cutting. While recent advances in emergency care and rehabilitation allow many patients suffering from a nerve injury or neurodegenerative disease to survive for longer periods and live with their condition, there are currently no therapeutic options for restoring nerve function. The spectrum of direct nerve injuries ranges from “pinched” nerves, e.g. sciatica, to outright spinal cord severance. Neurodegenerative conditions include such disorders as amyotrophic lateral sclerosis (ALS), also called Lou Gehrig’s disease, which is a progressive, fatal neurological disease affecting as many as 30,000 Americans, with 5,600 new cases occurring in the United States each year. ALS occurs when specific nerve cells in the brain and spinal cord that control voluntary movement gradually degenerate. The loss of these motor neurons causes the muscles under their control to weaken and waste away, leading to paralysis. VEGF-A has been demonstrated to have direct neuroproliferative, neuroregenerative and neuroprotective properties. Evidence from preclinical and clinical studies using VEGF-A suggests that the targeted up-regulation of VEGF-A could be a viable approach to the treatment of degenerative nerve disease, crush injuries and may eventually be extended to spinal cord injury. In collaboration with several academic labs, we are evaluating ZFP TFs that activate the VEGF A gene in pre-clinical animal efficacy models of nerve damage and disease.

      The American Cancer Society estimates that the incidence of new cancer cases was approximately 1.3 million in 2004, with 565,500 cancer deaths, accounting for 1 of every 4 deaths in the United States. An increasing number of genes are being identified that appear to be important to the development and spread of many forms of cancer. We believe our ZFP TF technology has potential applications in cancer therapy, both in regulating endogenous genes and in activating the body’s natural mechanisms for fighting disease. Sangamo scientists are engineering replication incompetent adenoviral vectors to deliver ZFP TFs that up-regulate granulocyte macrophage colony-stimulating factor (GM-CSF) and pigment epithelial derived factor (PEDF). GM-CSF is a powerful immunostimulator and has been shown to augment anti-tumor immune responses. PEDF is a potent antiangiogenic factor that blocks the angiogenic function of VEGF. We believe that this approach may be used to treat cancer both at the tumor site and systemically.

Age-related Macular Degeneration (AMD)

      AMD is the leading cause of blindness in the United States. The “wet” form of the disease is responsible for most (90%) of the severe loss of vision and is caused by growth of abnormal blood vessels under the central part of the retina or macula. These new blood vessels may then bleed and leak fluid, causing the macula to bulge or lift up, thus distorting or destroying central vision. The Macular Degeneration Foundation estimates that there are approximately 200,000 new cases of wet macular degeneration in the United States each year. Each year 1.2 million of the estimated 12 million people in the US with macular degeneration will suffer severe central vision loss. Each year 200,000 individuals will lose all central vision in one or both eyes. Sangamo scientists are developing ZFP TFs to inhibit blood vessel growth, or angiogenesis, within the eye. They have identified ZFP TFs that can activate the expression of the gene for Pigment Epithelium Derived

Factor (PEDF), a factor known to inhibit the growth of blood vessels and ZFP TFs that can inhibit the expression of VEGF-A, a potent angiogenic factor. These factors will be tested in combination in preclinical animal models of AMD.

Wiskott Aldrich Syndrome (WAS)

      WAS is an immune deficiency disease involving both T and B-lymphocytes and platelets, the blood cells that help control bleeding. The syndrome is a result of a mutation in the gene that encodes the Wiskott Aldrich Syndrome protein, or WASp. Characteristic symptoms of Wiskott-Aldrich Syndrome may include an increased tendency to bleed caused by a reduced number of platelets, recurrent bacterial, viral and fungal infections, and eczema. As with any immune deficiency, WAS is a serious disease with potential threatening complications. Currently, the only “permanent cure” for WAS is bone marrow or cord blood stem cell transplantation. Sangamo scientists and collaborators are optimizing methods for ZFN-mediated correction of gene mutations that cause WAS in hematopoietic stem cells and to use these corrected cells to reconstitute a patient’s immune system.

Product Development Resources and Infrastructure

      As Sangamo continues its transition to a clinical development-stage biotechnology company, we are building our gene delivery capabilities and our capabilities in regulatory affairs, quality assurance and clinical research. Appointments in these areas included the hiring, in August 2004, of Dale Ando, M.D. as Vice President, Therapeutic Development and Chief Medical Officer. Dr. Ando has held senior positions in therapeutic product development in several biotechnology companies and has served on the National Institutes of Health (NIH) Recombinant DNA Advisory Committee (NIH RAC) and the Adenoviral Safety Committee. Our current plan is to establish regulatory affairs, quality assurance and clinical research expertise internally, while relying on third-party contract research organizations and contract manufacturers of ZFP Therapeutic products for toxicology and initial clinical studies. This will serve to minimize our investment in fixed capital while maximizing our flexibility in the selection of gene transfer systems for the delivery of ZFP TF genes. Our manufacturing and quality assurance personnel will oversee and audit the manufacturing and testing of our experimental products at third-party facilities.

CORPORATE RELATIONSHIPS

      We are applying our ZFP technology platform to several commercial applications in which our products provide the Company and our strategic partners and collaborators with technical, competitive, and economic advantages. Where and when appropriate, we have established and will continue to pursue ZFP Therapeutic strategic partnerships and Enabling Technology collaborations with selected pharmaceutical and biotechnology companies to fund internal research and development activities and to assist in product development and commercialization. In December 2004, we hired David Ichikawa as Senior Vice President, Business Development. Mr. Ichikawa has more than 20 years of industry experience with both pharmaceutical and biotechnology companies in various commercial areas.

      We believe the advancement of our first ZFP Therapeutics into clinical trials in 2004 and early 2005 come at a timely point in the evolution of the worldwide pharmaceutical industry. Large pharmaceutical companies face revenue growth challenges that may compel them to in-license or acquire emerging therapeutic technologies. Our success in advancing the VEGF programs in therapeutic angiogenesis and diabetic neuropathy into Phase I clinical trials may bring attention to the potential of ZFP Therapeutics to address the non-druggable, yet high-value targets residing within pharmaceutical research laboratories today.

Strategic Partnership with Edwards Lifesciences Corporation

      In January 2000, we announced a therapeutic product development collaboration with Edwards Lifesciences Corporation. Under the agreement, we have licensed to Edwards, on a worldwide, exclusive basis, ZFP Therapeutics for use in the activation of VEGFs and VEGF receptors in ischemic cardiovascular and vascular diseases. Edwards purchased a $5.0 million note that converted, together with accrued interest, into

333,333 shares of common stock at the time of our initial public offering (IPO) at the IPO price. In March 2000, Edwards purchased a $7.5 million convertible note in exchange for a right of first refusal for three years to negotiate a license for additional ZFP Therapeutics in cardiovascular and peripheral vascular diseases. That right of first refusal was not exercised and terminated in March 2003. Together with accrued interest, this note converted into common stock at the time of our initial public offering at the IPO price. Through 2001, we received $2 million in research funding from Edwards and a $1.4 million milestone payment for delivery of a lead ZFP Therapeutic product candidate. In November 2002, Edwards signed an amendment to the original agreement and agreed to provide up to $3.5 million in research and development funding, including $2.95 million for research and development activities performed in 2002 and 2003. The filing of the IND for PAD in 2004, and the achievement of other research-related milestones in 2003, triggered a total of $1.0 million in milestone payments from Edwards Lifesciences in the first quarter of 2004. We have retained all rights to use our technology for therapeutic applications of VEGF activation outside of ischemic cardiovascular and vascular diseases, including use in wound healing and neurological disorders. Revenues attributable to milestone achievement and collaborative research and development performed under the Edwards agreement were $615,000, $1.5 million and $2.0 million for 2004, 2003 and 2002, respectively. Related costs and expenses incurred for services performed under the Edwards agreement were $1.4 million and $1.9 million and for 2003 and 2002, respectively. There were no costs or expenses incurred under the Edwards agreement during 2004. We have no future commitments related to these agreements. Revenues attributable to milestone achievement and collaborative research and development performed under the Edwards agreement were 47%, 59% and 45% for 2004, 2003 and 2002, respectively, of total revenues earned by Sangamo. As of December 31, 2003 accounts receivable from Edwards represented 76% of our total accounts receivable balance. There were no amounts owed the Company under the Edwards agreements as of December 31, 2004.

      In the future, Sangamo may receive milestone payments and royalties under this agreement. We have received $2.5 million in milestone payments to date and we could receive $27 million in additional milestone payments under the agreement if all future milestones are met for the first product developed under the agreement. Any subsequent products developed under the agreement may generate up to $15 million in milestone payments each. We would also receive royalties on any sales of products generated under the agreement and these royalty obligations would continue until the expiration of the last-to-expire patent covering products developed under the agreement on a country-by-country basis. Based on currently issued patents, these royalty obligations would last through January 12, 2019. The development of any products is subject to numerous risks and no assurance can be given that any products will successfully be developed under this agreement. See “Risks Related to our Business — Our gene regulation technology is relatively new, and if we are unable to use this technology in all our intended applications, it would limit our revenue opportunities.”

      Under the Sangamo-Edwards agreement, we were responsible for advancing product candidates into preclinical animal testing. Edwards had responsibility for preclinical development, regulatory affairs, clinical development, and the sales and marketing of ZFP Therapeutic products developed under the agreement. Sangamo may receive milestone payments in connection with the development and commercialization of the first product under this agreement and may also receive royalties on product sales. As part of the November 2002 amendment to our original agreement, Edwards Lifesciences also entered into a joint collaboration with us to evaluate ZFP TFs for the regulation of a second therapeutic gene target, phospholamban (PLN), for the treatment of congestive heart failure. Under the amended agreement, Sangamo granted Edwards a right of first refusal to Sangamo’s ZFP TFs for the regulation of PLN. This right of first refusal terminated on June 30, 2004. On August 14, 2003 Edwards and Sangamo entered into a Third Amendment to the original license agreement. Under this amendment, Sangamo received payment for research and development milestones associated with the VEGF and PLN programs.

      There is no assurance that the companies will achieve the development and commercialization milestones anticipated in these agreements. Edwards has the right to terminate the agreement at any time upon 90 days written notice. In the event of termination, we retain all payments previously received as well as the right to develop and commercialize all related products.

Enabling Technology Programs

      We began marketing our Enabling Technologies to the pharmaceutical and biotechnology industry in 1998. Our Enabling Technology Agreements are based upon the delivery of an engineered ZFP TF that is capable of regulating the expression of a gene for which it is specifically designed and targeted. These agreements typically involve non-exclusive rights to use one or more ZFP TFs for internal research purposes or limited commercial applications.

      As the emphasis of our pharmaceutical research and development has shifted away from target validation to the downstream bottlenecks of the drug discovery process, we have refocused our Enabling Technology products and services on two principal areas: supplying our partners with our ZFP technology to enhance the production of pharmaceutical proteins, and providing ZFP TFs or ZFP-engineered cells which over-express a gene of interest for use in development of products for regenerative medicine or in the generation of cell lines for high-throughput compound screening. In the latter case, typically, pharmaceutical company researchers will use a cDNA encoding the drug target of interest to create these cell-based drug screens. However, if a third party holds a patent covering that cDNA, the pharmaceutical company might be prevented from using it for this purpose. Use of the ZFP-engineered cell-based system allows our partners to screen against drug targets whose gene and/or cDNA sequence is covered by competitor intellectual property, without infringing that intellectual property.

Enabling Technology Agreements for Pharmaceutical Protein Production

      Protein pharmaceuticals manufactured with genetically modified cells accounted for more than $13.3 billion in annual worldwide sales in 2001. Of this total, monoclonal antibodies accounted for approximately $2.6 billion. Industry experts believe that the introduction of new protein pharmaceuticals may lead to a significant shortfall in production capacity over the next several years.

      Sangamo scientists have demonstrated that ZFP-engineered mammalian cells may be used to increase the yield of systems used for pharmaceutical protein production. In January 2002, we announced an agreement with Medarex, Inc. to develop cell lines to enhance the production yields of monoclonal antibodies. Under this agreement, Medarex provided Sangamo with research funding in 2002 and 2003, and Sangamo will be entitled to milestone payments and, potentially, royalties on sales of Medarex antibodies manufactured with our ZFP TF technology. Medarex will receive a non-exclusive license to the resulting technology, and Sangamo will have the ability to utilize the technology in collaborations with other partners. Revenues attributable to collaborative research and development performed under the Medarex agreements were $600,000 for each of 2003 and 2002. There were no revenues in connection with the Medarex agreements during 2004. Related costs and expenses associated with collaborative research and development performed under the Medarex agreements were $242,000 and $273,000 in 2003 and 2002, respectively. There were no costs or expenses incurred under the Medarex agreements during 2004. During 2003 and 2002, the revenues attributable to collaborative research and development performed under the Medarex agreements comprised over 10% of total revenues earned by Sangamo.

      In January 2005, we announced a research collaboration agreement with Pfizer Inc to develop enhanced cell lines for protein pharmaceutical production. Under the terms of the agreement, Pfizer is funding research at Sangamo and Sangamo will provide our proprietary ZFP technology for Pfizer to assess its feasibility for use in mammalian cell-based protein production. We will generate novel cell lines and vector systems for enhanced protein production as well as novel technology for rapid creation of new production cell lines. During the first quarter of 2005, we received $500,000 in research-related funding under the agreement with Pfizer. Revenues attributable to collaborative research and development performed under the Pfizer agreement were $42,000 during 2004. There were no costs or expenses incurred under the Pfizer agreement during 2004. As of December 31, 2004 accounts receivable from Pfizer represented 88% of our total accounts receivable balance.

      In January 2005 Sangamo also announced an agreement with Amgen in which Sangamo will provide its ZFP technology to Amgen to evaluate its use in developing enhanced cell lines for protein production.

Enabling Technology Agreements for Regenerative Medicine

      In September 2004, Sangamo announced that it had entered into an agreement with LifeScan, Inc., a Johnson & Johnson company. The agreement provides LifeScan with Sangamo’s ZFP TFs for use in a program to develop therapeutic cell lines as a potential treatment for diabetes. In December 2004, this agreement was expanded to include additional targets important in diabetes. The agreements represented Sangamo’s first collaboration in the field of regenerative medicine. During 2004, revenues attributable to collaborative research and development performed under the LifeScan agreements were $85,000. Related costs and expenses associated with research and development performed under the LifeScan agreements were $5,000 in 2004.

Plant Agriculture

      Sangamo scientists and collaborators have shown that ZFP TFs can be used to regulate the expression of endogenous genes in plants with similar efficacy as has been shown in various mammalian cells and organisms. The ability to identify and subsequently regulate gene expression with engineered ZFP TFs may lead to the creation of new plants that increase crop yields; lower production costs; are more resistant to herbicides, pesticides, and plant pathogens; and permit the development of branded agricultural products with unique nutritional and processing characteristics. In addition, ZFNs can be used to facilitate the efficient and reproducible production of transgenic plants. To commercialize ZFP TFs and ZFNs in agricultural biotechnology, we intend to seek strategic relationships with corporate partners having capabilities in the research, development, and commercialization of agricultural products.

INTELLECTUAL PROPERTY AND TECHNOLOGY LICENSES

      Our success and ability to compete is dependent in part on the protection of our proprietary technology and information. We rely on a combination of patent, copyright, trademark, and trade secret laws, as well as confidentiality agreements materials transfer agreements and licensing agreements, to establish and protect our proprietary rights.

      We have licensed intellectual property directed to the design, selection, and use of ZFPs, ZFP TFs and ZFNs for gene regulation and modification from the Massachusetts Institute of Technology, Johnson and Johnson, The Scripps Research Institute, Johns Hopkins University, California Institute of Technology, and the University of Utah. These licenses grant us rights to make, use, and sell ZFPs and ZFP TFs under 11 families of patent filings. All of these patent families have been filed in the United States, and six have been filed internationally in selected countries. As of February 1, 2005, these patent filings have resulted in 14 issued U.S. patents and 7 granted foreign patents. We believe these licensed patents and patent applications include several of the early and important patent filings directed to design, selection, composition, and use of ZFPs, ZFP TFs, and ZFNs.

      As of February 1, 2005, we had 55 families of Sangamo-owned patent filings, including 18 issued U.S. patents, 19 granted foreign patents, 69 pending U.S. patent applications and 78 pending foreign patent applications. These patent filings are directed to improvements in the design, composition, and use of ZFPs, ZFP TFs, and ZFNs. In the aggregate, we believe that our licensed patents and patent applications, as well as the issued Sangamo patents and pending Sangamo patent applications, will provide us with a substantial proprietary position in our commercial development of ZFP technology. The following tables provide information regarding our U.S. patents and the U.S. patents we have licensed:

Sangamo-Owned US Patents