**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                            | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                                                                                                   |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                            | ** ** | ** **                                                                                                                                                                                                                 |
| ** **                            | ** ** | **For the  quarterly period ended March 31, 2005**                                                                                                                                                                    |
|                                  |
| **o**                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                                                                                                  |
| ** **                            | ** ** | ** **                                                                                                                                                                                                                 |
| ** **                            | ** ** | **For the transition period  from               to               .** |
|                                  |
| **Commission  File Number 000-31275** |

 

**LARGE SCALE BIOLOGY CORPORATION**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                      | ** ** | **77-0154648**                             |
|-------------------------------------------------------------------|------------|--------------------------------------------|
| (State or  other jurisdiction of   incorporation or organization) |       | (I.R.S.  employer   identification number) |
|                                                              |       |                                       |
| **3333  Vaca Valley Parkway, Vacaville, CA 95688**                |
| (Address of  principal executive offices and zip code)            |
| ** **                                                        |
| **(707) 446-5501**                                                |
| (Registrant’s  telephone number, including area code)        |

 

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

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes o No ý

 

The number of shares outstanding ofregistrant’s common stock, $0.001 par value, as of May 11, 2005:  31,486,299

 

 

----

 

*Some of the statements contained in thisreport constitute forward-looking statements that involve substantial risks anduncertainties. In some cases, you can identify these statements byforward-looking words such as “may,” “will,” “expect,” “plan,” “anticipate,” “believe,”“forecast,” “project,” or “continue” and variations of these words or comparablewords. In addition, any statements, which refer to expectations, projections orother characterizations of future events or circumstancesare forward-looking statements. Our Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contain many such forward-lookingstatements. These forward-looking statements involve known and unknown risks,uncertainties and situations that may cause our or our industry’s actualresults, level of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these statements. The risk factorscontained in this report, under the heading Factors That May Affect OurBusiness, as well as any other cautionary language in this report, provideexamples of risks, uncertainties and events that may cause our actual resultsto differ from the expectations described or implied in our forward-lookingstatements.*

 

*Although we believe that the expectations reflectedin the forward-looking statements are reasonable, we cannot guarantee futureresults, levels of activity, performance or achievements. You should not placeundue reliance on these forward-looking statements, which apply only as of thedate of this report. Except as required by law, we do notundertake to update or revise any forward-looking statement, whether as aresult of new information, future events, or otherwise.*

 

*Large Scale Biology Corporation, LSBC*, our logo, GENEWAREÒ, BAMFTM, GRAMMRTM an*d other product and tradenames are trademarks of or registered trademarks of Large Scale BiologyCorporation in the United States and/or other countries. Other product andtrade names mentioned herein may be trademarks and/or registered trademarks oftheir respective companies. References in this report to “the Company,” “our,” “we”and “us” refer collectively to Large Scale Biology Corporation, a Delawarecorporation, and its predecessors and subsidiaries.*

 

----

 

**LargeScale Biology Corporation**

**Form 10-Q**

**For theQuarter Ended March 31, 2005**

**Table ofContents**

 
|                                     |                                                                                                                 | **PAGE** |
|------------------------------------------|----------------------------------------------------------------------------------------------------------------------|----------|
| PART I – FINANCIAL INFORMATION |                                                                                                                 |
|                                     |                                                                                                                 |     |
| Item 1.                        | Financial Statements                                                                                                 |     |
|                                     |                                                                                                                 |     |
|                                     | Condensed Consolidated Balance Sheets as of  March 31, 2005 and December 31, 2004 (Unaudited)              | 1        |
|                                     |                                                                                                                 |     |
|                                     | Condensed Consolidated Statements of  Operations for the three months ended March 31, 2005 and 2004 (Unaudited) | 2        |
|                                     |                                                                                                                 |     |
|                                     | Condensed Consolidated Statements of Cash  Flows for the three months ended March 31, 2005 and 2004 (Unaudited) | 3        |
|                                     |                                                                                                                 |     |
|                                     | Notes to Condensed Consolidated Financial  Statements (Unaudited)                                                    | 4        |
|                                     |                                                                                                                 |     |
| Item  2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 8        |
|                                     |                                                                                                                 |     |
| Item  3.                       | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 21       |
|                                     |                                                                                                                 |     |
| Item 4.                        | Controls and  Procedures                                                                                             | 21       |
|                                     |                                                                                                                 |     |
| PART II – OTHER INFORMATION    |                                                                                                                 |
|                                     |                                                                                                                 |     |
| Item 2.                        | Unregistered Sales of Equity Securities and  Use of Proceeds                                                         | 22       |
|                                     |                                                                                                                 |     |
| Item 6.                        | Exhibits                                                                                                             | 22       |
|                                     |                                                                                                                 |     |
| SIGNATURE                                | 23                                                                                                                   |

 

----

 

**PART I– FINANCIAL INFORMATION**

** **

**Item 1.****Financial Statements**

 

**LargeScale Biology Corporation**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                       | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|
| **Assets**                                       | ** ** | ** **              | ** ** | ** **                      | ** ** |
| Current  assets:                                 |       |                    |       |                            |       |
| Cash and  cash equivalents                       |       | $                       | 427,000    |                            | $          | 1,112,000 |   |
| Accounts  receivable, net                        |       | 196,000                 |       | 133,000                         |       |
| Prepaid  expenses                                |       | 685,000                 |       | 521,000                         |       |
| Total  current assets                            |       | 1,308,000               |       | 1,766,000                       |       |
| Property,  plant, and equipment, net             |       | 7,401,000               |       | 7,798,000                       |       |
| Intangible  assets, net                          |       | 2,044,000               |       | 2,194,000                       |       |
| Other assets                                     |       | 1,210,000               |       | 1,037,000                       |       |
|                                             |       | $                       | 11,963,000 |                            | $          | 12,795,000 |   |
| **Liabilities  and Stockholders’ Equity**   | ** ** | ** **              | ** ** | ** **                      | ** ** |
| Current  liabilities:                            |       |                    |       |                            |       |
| Accounts  payable                                |       | $                       | 976,000    |                            | $          | 735,000 |   |
| Accrued  employee compensation                   |       | 390,000                 |       | 343,000                         |       |
| Accrued  expenses                                |       | 114,000                 |       | 24,000                          |       |
| Short-term  debt                                 |       | 600,000                 |       | —                          |       |
| Deferred  revenue and customer advances          |       | 13,000                  |       | 28,000                          |       |
| Total  current liabilities                       |       | 2,093,000               |       | 1,130,000                       |       |
| Long-term  debt                                  |       | 2,900,000               |       | 1,000,000                       |       |
| Accrued  stock compensation                      |       | 973,000                 |       | 898,000                         |       |
| Deferred  rent                                   |       | 352,000                 |       | 336,000                         |       |
| Total  liabilities                               |       | 6,318,000               |       | 3,364,000                       |       |
| Stockholders’  equity:                      |       |                    |       |                            |       |
| Common  stock; issued and outstanding:           |       |                    |       |                            |       |
| March 31,  2005 — 31,486,299 shares;   |       |                    |       |                            |       |
| December 31,  2004 — 31,382,813 shares |       | 201,362,000             |       | 201,074,000                     |       |
| Stockholders’  notes receivable             |       | (19,000                 | )          | (20,000                         | )          |
| Accumulated  deficit                             |       | (195,698,000            | )          | (191,623,000                    | )          |
| Total  stockholders’ equity                 |       | 5,645,000               |       | 9,431,000                       |       |
|                                             |       | $                       | 11,963,000 |                            | $          | 12,795,000 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

1

----

 

**LargeScale Biology Corporation**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Revenues                                                      |       | $                                     | 433,000    |   | $ | 319,000 |   |
| Costs and  expenses:                                          |       |                                  |       |   |   |
| Development  agreements                                       |       | 670,000                               |       | 487,000 |   |
| Research and  development                                     |       | 2,231,000                             |       | 2,239,000 |   |
| General and  administrative                                   |       | 1,449,000                             |       | 1,926,000 |   |
| Total costs  and expenses                                     |       | 4,350,000                             |       | 4,652,000 |   |
| Loss from  operations                                         |       | (3,917,000                            | )          | (4,333,000 | ) |
| Interest  income (expense), net                               |       | (158,000                              | )          | 9,000 |   |
| Net loss                                                      |       | $                                     | (4,075,000 | ) | $ | (4,324,000 | ) |
| Net loss per  share – basic and diluted                  |       | $                                     | (0.13      | ) | $ | (0.16 | ) |
| Weighted  average shares outstanding – basic and diluted |       | 31,400,327                            |       | 27,320,293 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

2

----

 

**LargeScale Biology Corporation**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Cash flows  from operating activities:                                       |       |                                  |       |   |   |
| Net loss                                                                     |       | $                                     | (4,075,000 | ) | $ | (4,324,000 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                  |       |   |   |
| Depreciation  of property, plant and equipment                               |       | 397,000                               |       | 363,000 |   |
| Amortization  of intangible assets                                           |       | 150,000                               |       | 132,000 |   |
| Stock  compensation expense                                                  |       | 240,000                               |       | 200,000 |   |
| Vesting of  warrant issued with long-term debt                               |       | 109,000                               |       | — |   |
| Changes in  assets and liabilities:                                          |       |                                  |       |   |   |
| Accounts  receivable                                                         |       | (63,000                               | )          | 125,000 |   |
| Prepaid  expenses                                                            |       | (164,000                              | )          | (272,000 | ) |
| Other assets                                                                 |       | (173,000                              | )          | (277,000 | ) |
| Accounts  payable                                                            |       | 367,000                               |       | (64,000 | ) |
| Accrued  employee compensation                                               |       | 47,000                                |       | (218,000 | ) |
| Accrued  expenses                                                            |       | 90,000                                |       | 52,000 |   |
| Deferred  revenue and customer advances                                      |       | (15,000                               | )          | 41,000 |   |
| Deferred  rent                                                               |       | 16,000                                |       | — |   |
| Net cash  used in operating activities                                       |       | (3,074,000                            | )          | (4,242,000 | ) |
| Cash flows  from investing activities:                                       |       |                                  |       |   |   |
| Capital  expenditures                                                        |       | (126,000                              | )          | (33,000 | ) |
| Net cash  used in investing activities                                       |       | (126,000                              | )          | (33,000 | ) |
| Cash flows  from financing activities:                                       |       |                                  |       |   |   |
| Proceeds  from issuance of common stock                                      |       | 14,000                                |       | 7,604,000 |   |
| Proceeds  from issuance of short-term debt                                   |       | 600,000                               |       | — |   |
| Proceeds  from issuance of long-term debt                                    |       | 1,900,000                             |       | — |   |
| Proceeds  from stockholder loan payments                                     |       | 1,000                                 |       | 4,000 |   |
| Change in  restricted cash                                                   |       | —                                |       | 143,000 |   |
| Principal  payments on long-term debt                                        |       | —                                |       | (14,000 | ) |
| Net cash  provided by financing activities                                   |       | 2,515,000                             |       | 7,737,000 |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | (685,000                              | )          | 3,462,000 |   |
| Cash and  cash equivalents at beginning of period                            |       | 1,112,000                             |       | 7,737,000 |   |
| Cash and  cash equivalents at end of period                                  |       | $                                     | 427,000    |   | $ | 11,199,000 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

----

 

**LargeScale Biology Corporation**

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.  TheCompany and Summary of Significant Accounting Policies**

 

Large Scale Biology Corporation and itssubsidiaries (collectively, the “Company”, “we” or “our”) is a product-focusedbiotechnology company using proprietary technologies to develop and manufacturerecombinant biologics.  Ourbiomanufacturing opportunities include vaccines, complex proteins and follow-onoff-patent therapeutics.    We arefocusing our efforts on the following products:

 

•                  RecombinantAprotinin, a protease inhibitor used in medical, research and manufacturingapplications

 

•                  Vaccinesfor human and animal healthcare, including antiviral and anticancerapplications

 

•                  Certainfollow-on off-patent biologics and proprietary products, including Interferonalpha 2a and 2b, Alpha-galactosidase A for treatment of Fabry disease andLysosomal acid lipase for the treatment of Wolman disease and cholesterol esterstorage disorder and reduction of plaque in arteries

 

The technology employed in our productdevelopment and biomanufacturing operations includes our proprietary GENEWAREtransient gene expression system and GRAMMR system to shuffle and improve genesequences.  Our manufacturing processescan be used to produce follow-on therapeutic products.  We believe that our combination ofproprietary technologies and existing manufacturing infrastructure enables usto rapidly and economically develop partner-specified products and toparticipate in market opportunities in major disease categories.

 

Our wholly-owned subsidiary, PredictiveDiagnostics, Inc., or PDI, is a diagnostics company established for thecommercial development of a proprietary approach to early diagnosis oflife-threatening diseases.  PDI’sproducts are supported by our technology developed in the course of our pastgenomics and medical product development programs.  PDI’s initial product focus is in the fieldof oncology.  Our Biomarker AmplificationFilter, or BAMF Technology, potentially provides low-cost and rapid analysis ofmultiple biomarkers derived from profiling thousands of individual proteins,peptides and other metabolites found in clinical blood samples.  Current typical diagnostic tests rely onmeasuring the variations from the normal amount of a single protein orbiomarker.  Our BAMF Technology findsmultiple proteins or biomarkers in blood samples and creates a disease “fingerprint,”potentially leading to an accurate and early detection of disease.

 

The Company’s proprietary systems aresupported by patents and patent applications. The Company’s corporate offices, research and development and itssubsidiary company, Predictive Diagnostics, Inc. (“PDI”) are headquarteredin Vacaville, California.  The Company’sbiomanufacturing operation is located in Owensboro, Kentucky.

 

4

----

 

The Company incurred net losses of $4,075,000and $17,425,000, and negative operating cash flows of $3,074,000 and$14,566,000 in the three months ended March 31, 2005 and the yearended December 31, 2004, respectively.  These negative cash flows were financedprimarily by proceeds from the Company’s IPO in 2000, a private placement ofour common stock during the first quarter of 2004 and loans received during December 2004and the first quarter of 2005.  TheCompany’s history of negative cash flows and its cash and cash equivalentbalance of $427,000 at March 31, 2005, raise substantial doubt aboutthe Company’s ability to continue as a going concern, absent any new sources ofsignificant cash flows.  In an effort tomitigate this near-term concern, the Company received $3,000,000 in cash inexchange for a promissory note on April 15, 2005 (see Note 3) andcontinues to seek additional debt or equity financing.  In addition, the Company is seeking to securefunds for our subsidiary, PDI, and the Company through a sale of PDI stock heldby the Company.  The Company is alsopursuing potential opportunities for significant revenue growth and concurrentsources of working capital with other companies for the joint development andcommercialization of recombinant Aprotinin, Lysosomal acid lipase andInterferon alpha 2a and 2b products.  TheCompany is currently in discussions with pharmaceutical companies capable ofmarketing these products.  The commercializationof these products for therapeutic applications will require approval by theFood and Drug Administration (“FDA”) and product scale-up at ourbiomanufacturing facility under FDA regulations.  However, we cannot assure you that we willsuccessfully obtain equity or debt financing or product related revenues assuch events are subject to factors beyond the Company’s control.  The financial statements do not include anyadjustments relating to the recoverability and classification of assets or theamounts and classification of recorded liabilities that might be necessary shouldthe Company be unable to continue as a going concern.

 

*Basis of Presentation*— The unaudited condensed consolidated financialstatements have been prepared by the Company in accordance with the rules andregulations of the Securities and Exchange Commission regarding interimfinancial information.  Accordingly,these financial statements and notes thereto do not include certain disclosuresnormally associated with financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America.  This interim financial information should beread in conjunction with the Company’s audited consolidated financialstatements and notes thereto for the year ended December 31, 2004 includedin the Company’s Annual Report on Form 10-K.

 

The unaudited condensed consolidatedfinancial statements include the accounts of Large Scale Biology Corporationand its subsidiaries.  All intercompanybalances and transactions have been eliminated. In the opinion of the Company’s management, the unaudited condensedconsolidated financial statements include all adjustments (consisting of onlynormal recurring adjustments) and disclosures considered necessary for a fairpresentation of the results of the interim periods presented.  This interim financial information is notnecessarily indicative of the results of any future interim periods or for theCompany’s full year ending December 31, 2005.

 

*Segment Reporting* —The Company operates in one reportable segment.

 

*Intangible Assets* —The following table presents the carrying values andaccumulated amortization of intangible assets as of March 31, 2005:

 
| Capitalized  patent costs       |   | $          | 1,852,000 |   |
|---------------------------------|--------|------------|-----------|--------|
| Intellectual  property licenses |   | 3,264,000  |      |
|                            |   | 5,116,000  |      |
| Accumulated  amortization       |   | (3,072,000 | )         |
|                            |   | $          | 2,044,000 |   |

 

5

----

 

*Stock-Based Compensation* —The Company adopted Statement of Financial Accounting Standards No. 123 (“SFAS123”), “Accounting for Stock-Based Compensation” effective January 1, 2003for its stock-based employee compensation plans using the prospectiverecognition method under Statement of Financial Accounting Standards No. 148(“SFAS 148”), “Accounting for Stock-Based Compensation-Transition andDisclosure, an amendment of SFAS 123.” This method applies the recognition provisions of SFAS 123 to allemployee stock awards granted, modified, or settled after January 1, 2003and accordingly, recognized compensation expense for those issuances under ourstock-based employee compensation plans. The fair values of stock options were estimated at the date of grantusing the Black-Scholes option-pricing model and are being amortized over thevesting period of generally 3 years.  Forstock awards granted prior to January 1, 2003, compensation expense hasnot been recognized under SFAS 123, unless those stock awards were modifiedafter January 1, 2003.  During December 2004Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS123R”), “Share Based Payment,” was issued requiring the expensing of allstock-based compensation.  The Company isevaluating the effects of SFAS 123R but believes its implementation will nothave a material effect on the Company’s financial statements since the Companyhad already adopted FASB 123 for its stock-based employee compensation plans asdescribed above.

 

Prior to January 1, 2003, the Companyaccounted for stock options granted to employees and directors and otherstock-based employee compensation plans using the intrinsic value method ofaccounting in accordance with Accounting Principles Board Opinion No. 25 (“APB25”), “Accounting for Stock Issued to Employees” and relatedinterpretations.  As such, the Companyrecognized compensation expense for stock options only if the quoted marketvalue of the Company’s common stock exceeded the exercise price of the optionon the grant date.  Any compensationexpense realized using this intrinsic value method is being amortized over thevesting period of the option.

 

The following table presents the effect onnet loss and net loss per share if we had always applied the fair valuerecognition provisions of SFAS 123 to stock-based awards to employees:

 
| ** **                                                                                        | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Net loss as  reported                                                                             |       | $                                     | (4,075,000 | ) | $ | (4,324,000 | ) |
| Stock-based  employee compensation expense included in reported net loss                          |       | 240,000                               |       | 176,000 |   |
| Stock-based  employee compensation expense determined using the fair value method for all  awards |       | (441,000                              | )          | (546,000 | ) |
| Pro forma  net loss                                                                               |       | $                                     | (4,276,000 | ) | $ | (4,694,000 | ) |
| Net loss per  share:                                                                              |       |                                  |       |   |   |
| Basic and  diluted – as reported                                                             |       | $                                     | (0.13      | ) | $ | (0.16 | ) |
| Basic and  diluted – pro forma                                                               |       | $                                     | (0.14      | ) | $ | (0.17 | ) |

 

The fair values of stock options areestimated at the date of grant using the Black-Scholes option-pricing model andamortized over the vesting period of typically 3 or 4 years for the calculationof stock-based employee compensation in the above table.  The Company did not grant any stock optionsto employees and directors during the three months ended March 31, 2005and granted 510,000 stock options to employees and directors during the threemonths ended March 31, 2004.

 

6

----

 

Stock options issued to non-employees asconsideration for services provided to the Company have been and continue to beaccounted for under the fair value method in accordance with SFAS 123 andEmerging Issues Task Force No. 96-18, “Accounting for Equity InstrumentsThat Are Issued to Other Than Employees for Acquiring, or in Conjunction withSelling, Goods or Services,” which requires that compensation expense berecognized for all such options.

 

*Net Loss Per Share*— Basic net loss per share is computed by dividing the net loss for the periodby the weighted average number of common shares outstanding during theperiod.  Diluted net loss per share iscomputed by dividing the net loss for the period by the weighted average numberof common shares outstanding during the period, plus the potential dilutiveeffect of common shares issuable upon exercise or conversion of outstandingstock options and warrants during the period. The weighted average number of potentially dilutivecommon shares were 131,706 and 984,878 for the three months ended March 31,2005 and 2004, respectively.  Theseshares are excluded from diluted net loss per share because of theiranti-dilutive effect.

 

**2. Debt Financings**

** **

On December 17, 2004, the Companyentered into a $2.9 million loan agreement, with an initial advance of$1.0 million received on December 20, 2004, and a second advance of$1.9 million received on January 14, 2005.  Borrowings under the loan bear interest at 8%and are secured by a first priority lien on the Company’s assets located at itsOwensboro, Kentucky facility including land, building and improvements;fixtures, machinery and equipment; and certain patented intellectual propertyand related know-how used at the Owensboro facility.  The borrowed funds were partially used torepay existing long-term debt and the use of such funds is restricted toworking capital and acquisition of machinery and equipment to be installed atthe Owensboro facility.  The loancontains certain representations and warranties and financial and othercovenants.  In addition, the Company issubject to covenants limiting transactions with affiliates, additionalindebtedness and leases, asset sales, and liens on properties.  The Company believes that it is in fullcompliance with these covenants.  Theprincipal balance under the loan is due on June 17, 2006 and interest isdue quarterly commencing on March 17, 2005.

 

In connection with this loan agreement, theCompany issued a common stock purchase warrant to purchase a maximum of 700,000shares of common stock at $1.42 per share. The warrant is exercisablestarting the earlier of July 31, 2006 or 45 days following the prepaymentof the promissory note, and expires on December 17, 2011.  Issuable under the warrant are 113,372shares of common stock as of March 31, 2005.  The fair value of the shares issuable underthis warrant was estimated with the initial advance of $1.0 million received onDecember 20, 2004 and the final advance of $1.9 million received on January 14,2005, using the Black-Scholes option-pricing model with the followingweighted-average assumptions: expected volatility of 118% and 109%,respectively, risk-free interest rate of 4.2% and 4.1%, respectively, initialexpected life of seven years and no expected dividend yield.  The resulting fair value is being amortizedover the loan period and resulted in $109,000 of interest expense beingrecorded during the first quarter of 2005 in the consolidated statements ofoperations.

 

On March 3, 2005, the Company issued a $600,000 convertiblepromissory note (“Note”) to Kevin J.Ryan, the Company’s President and Chief Executive Officer and a member of theCompany’s Board of Directors.  TheNote bears interest at 8% and is due on July 1, 2005.  The Note is convertible into Common Stock ofthe Company, at the option of the holder, on or before the due date, at aconversion price equal to the greater of $0.95 per share, or 90% of the averageof the closing prices of Company’s common stock over the 22 trading days endingthe day before the conversion of the Note. The Note may be prepaid by the Company without penalty at any time.

 

7

----

 

**3. Subsequent Events**

** **

On April 15, 2005, the Company received $3,000,000 in cash inexchange for a promissory note (“Promissory Note”) issued to Kevin J. Ryan, the Company’s President andChief Executive Officer and a member of the Company’s Board of Directors.  The Promissory Note bears interest at theprime rate plus two percent per annum initially at 7.75% due monthly starting May 15,2005 with a rate not less than 7.25%. The Promissory Note is due on April 17, 2006.  Borrowings under the loan are secured bycertain patented intellectual property. The Promissory Note may be prepaid by the Company without penalty at anytime.  The holder of the Promissory Notemay elect to be repaid up to $1,500,000 as a result of any Company financingevent with net proceeds of $4,000,000 or more.

 

In connection with the Promissory Note, theCompany issued a common stock purchase warrant that expires on April 15,2011.  The holder of the warrant has theoption either to purchase 903,614 shares of the Company’s common stock at $0.83per share or common stock of the Company’s subsidiary, Predictive Diagnostic,Inc (“PDI”).  The PDI exercise pricewould be the lowest price per share of the PDI stock in any PDI financing eventof no less than $1,500,000.  The numberof warrant shares would be determined by dividing $3,000,000 by the PDIexercise price.  PDI common stockissuable pursuant to the warrant would be subject to exchange and underwriter’sholding period restrictions, or “lock-ups”. The fair value of the shares issuable under this warrant was estimatedon April 15, 2005, using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions: expected volatility of 109%, risk-freeinterest rate of 4.2%, initial expected life of six years and no expecteddividend yield.  The resulting fair valuewill be amortized over the loan period.

 

**Item 2.**           Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

** **

The following discussionof our financial condition and results of operations should be read inconjunction with our unaudited condensed consolidated financial statements andrelated notes included in this Report and our audited consolidated financialstatements and related notes for the year ended December 31, 2004 includedin our Annual Report on Form 10-K.

 

**Overview**

 

Our current efforts are focused on improvingcash flows, developing and manufacturing products and entering intorelationships to market and sell our products. Management’s objective is to manufacture and sell products in order togenerate sufficient cash flows to sustain our operations.

 

Our cash balance was $427,000 at March 31, 2005,and we have incurred negative operating cash flows of $3,074,000 during thefirst quarter of 2005 and $14,566,000 during 2004.  The current rate of cash usage raisessubstantial doubt about the Company’s ability to continue as a going concern,absent any new sources of significant cash flows.  In an effort to mitigate this near-termconcern, we are seeking to obtain debt financing or equity financing throughthe private placement of our common or preferred stock.  In addition, we are seeking to secure fundsfor our wholly-owned subsidiary, Predictive Diagnostics, Inc., or PDI, andthe Company through a sale of PDI stock held by the Company.  A successful PDI related financing may notonly improve our balance sheet, but also reduce ongoing expenses, as PDIbecomes a separate operation.   We arealso pursuing opportunities for revenue growth with other companies for thejoint development and commercialization of recombinant Aprotinin, Interferonalpha 2a and 2b and Lysosomal acid lipase products.  We are currently in discussions withpharmaceutical companies capable of marketing these products.  Such arrangements may provide revenues to usthrough license fees, the reimbursement of research and development costs,milestone payments and product sales. The commercialization of these products for therapeutic applicationswill require approval by the FDA and product scale-up at our biomanufacturingfacility under FDA regulations.  However,we cannot assure you that we will successfully obtain equity or debt financingor product related revenues as such events are subject to factors beyond ourcontrol.  The financial statements do notinclude any adjustments relating to the recoverability and classification ofassets or the amounts and classification of recorded liabilities that might benecessary should the Company be unable to continue as a going concern.

 

8

----

 

**Recent Developments**

 

On December 17, 2004, we entered into a$2.9 million loan agreement, with an initial advance of $1.0 millionreceived on December 20, 2004, and a second advance of $1.9 millionreceived on January 14, 2005.  Inconnection with this loan agreement, we issued a common stock purchase warrantto purchase a maximum of 700,000 shares of common stock at $1.42 pershare.  On March 3, 2005, we borrowed $0.6 million from Kevin J. Ryan, our President and ChiefExecutive Officer and a member of the our Board of Directors and issuedhim a convertible promissory note due on July 1, 2005.  On April 15, 2005, we borrowed an additional$3.0 million from Mr. Ryan andissued him a promissory note due on April 17, 2006 and a common stockpurchase warrant.  The holder of thewarrant has the option either to purchase 903,614 shares of our common stock at$0.83 per share or common stock of our subsidiary, Predictive Diagnostic, Inc.

 

Schering-Plough Animal Health Corporationextended their previously announced research collaboration agreement to fundproduct development work in the area of animal health vaccines.  We entered an agreement to manufacture andsupply one of the Company’s proprietary protein products for distribution byEMD Biosciences, Inc., part of Merck KGaA’s Life Science and Analyticsdivision.  In addition, we entered acollaborative research and development agreement with Bayer CropScience toinvestigate the potential application of the Company’s proprietarypharmaceutical product, lysosomal acid lipase, for an important orphan andother therapeutic disease applications.

 

Related to our diagnostics subsidiary, theresults of collaborative research to diagnose multiple sclerosis using a simpleblood test were published in the Journal of Molecular Neuroscience.  PDI entered into acollaboration with the University of Utah Research Foundation toidentify biomarkers from maternal blood tests for the early diagnosis ofpregnancy-related complications and disorders such as pre-term birth andpreeclampsia.  In addition, PDI andPerkinElmer announced the discovery of blood biomarkers for Alzheimer’s diseasebased on the results of a joint study presented at the American Association forClinical Chemistry Conference in Baltimore, Maryland.

 

Deloitte & Touche LLP declined tostand for re-election and ceased being our independent registered publicaccounting firm on April 15, 2005 after completion of the audit of ourconsolidated financial statements for the year ended December 31,2004.  We appointed Macias Gini &Company LLP as our new independent registered public accounting firm on May 3,2005 to audit our financial statements for the year ending December 31,2005.

 

9

----

 

**Results of Operations**

 

*Revenues*— The following table presents the changes in revenues from the first quarter of 2004 to2005:

 
| ** ** | ** ** | **Quarters ended March 31,** | ** ** | **Increase from 2004** | ** ** |
|------------|------------|-----------------------------------|------------|------------------------|------------|
| ** ** | ** ** | **2005**                          | ** ** | **2004**               | ** ** | **Amount** | ** ** | **%** | ** ** |
| Revenues   |       | $                                 | 433,000    |                   | $          | 319,000 |   | $ | 114,000 |   | 36% |   |
|            |            |                                   |            |                        |            |  |  |  |  |  |  |  |

 

Therevenue increase is a result of the new contracts with the US ArmyMedical Research Institute of Infectious Diseases, or USAMRIID, that started inDecember 2004 and the University of Louisville that started in June 2004.  We expect quarterly revenues in 2005 toincrease modestly from the first quarter of 2005 with the addition of thecollaborative research and development agreement with Bayer CropScience butwill not be substantially higher unless we enter into new revenue generating agreementsor expand our existing agreements.

 

*Development agreements*and*research and development**costs*— The following table presents the changes in total research activities from thefirst quarter of 2004 to 2005:

 
| ** **                 | ** ** | **Quarters ended March 31,** | ** ** | **Increase (Decrease) from 2004** | ** ** |
|----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **Amount** | ** ** | **%** | ** ** |
| Development  agreements    |       | $                                 | 670,000    |                              | $          | 487,000 |   | $ | 183,000 |   | 38% |   |
| Research and  development  |       | 2,231,000                         |       | 2,239,000                         |       | (8,000 | ) | — |   |
| Total  research activities |       | $                                 | 2,901,000  |                              | $          | 2,726,000 |   | $ | 175,000 |   | 6% |   |

 

Developmentagreements and research and development costs consist mainly ofpersonnel expenses, outside research services, research materials andlaboratory overhead costs.*  Development agreement* costs, asthey related to activities performed under revenue generating researchagreements and grants, have and are expected to fluctuate consistently withincreases or decreases in revenues earned from research agreements andgrants.  The increase in developmentagreement expense from 2004 to 2005 is attributed to increased efforts of $0.1million performed under each of the new contracts with USAMRIID and theUniversity of Louisville.  We expectdevelopment agreement expense in the second quarter of 2005 to increasemodestly from the first quarter directly related to revenues as mentionedabove.  *Research anddevelopment* expense from 2004 to 2005 has essentially remained thesame.  We expect research and developmentexpense in the second quarter of 2005 to be materially consistent with thefirst quarter.

 

*General and administrative*—The following table presents the changes in general and administrative expenses from the first quarter of 2004 to2005:

 
| ** **                  | ** ** | **Quarters ended March 31,** | ** ** | **(Decrease) from 2004** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **2005**                          | ** ** | **2004**                 | ** ** | **Amount** | ** ** | **%** | ** ** |
| General and  administrative |       | $                                 | 1,449,000  |                     | $          | 1,926,000 |   | $ | (477,000 | ) | (25)% |   |
|                             |            |                                   |            |                          |            |  |  |  |  |  |  |  |

 

The decrease in general and administrative expense is primarilyattributable to the sublease of our Germantown, Maryland, facility during August 2004*.* The facility rental, operating and clean-up expenses that were incurred duringthe first quarter of 2004 were eliminated by 2005.

 

*Interest income and expense*— Interest income is not significant because of our declining cash andmarketable securities balances available for investment.  Interest expense was not significant in 2004because of the small amount of our long-term debt.  With the addition of debt of$2.9 million in December 2004 and January 2005,$0.6 million in March 2005 and $3.0 million in April 2005,we expect interest expense to increase substantially in 2005 which includescharges for warrants issued in connection with this debt.  If additional debt is incurred or existingdebt repaid, we expect interest expense to increase or decrease accordingly.

 

10

----

 

**Liquidity and Capital Resources**

 

*Net cash used in operating activities*— The following table presents cash flows fromoperating activities for the first quarters of 2005 and 2004:

 
| ** **                                  | ** ** | **Quarters Ended March 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2005**                          | ** ** | **2004** | ** ** |
| Cash paid to  employees                     |       | $                                 | (1,559,000 | ) | $ | (1,813,000 | ) |
| Cash paid to  suppliers                     |       | (1,820,000                        | )          | (2,923,000 | ) |
| Total cash  paid to employees and suppliers |       | (3,379,000                        | )          | (4,736,000 | ) |
| Cash  received from customers               |       | 354,000                           |       | 485,000 |   |
| Net interest  received (paid)               |       | (49,000                           | )          | 9,000 |   |
| Net cash  used in operating activities      |       | $                                 | (3,074,000 | ) | $ | (4,242,000 | ) |

 

The decrease in *cash paid to employees* is the result of severance benefitspaid during the first quarter of 2004 to employees affected by our closure ofour Germantown, Maryland facility.  Thedecrease in *cash paid to suppliers*is the result of decreased cash expenditures of $0.1 million andoffsetting sublease rental receipts of $0.1 million related to ourGermantown, Maryland facility, and a $0.5 million increase in accountpayable and accrued expenses excluding accrued capital expenditures at March 31,2005.

 

We expect the negative operating cash flowsto continue throughout 2005 at a similar rate as the first quarter of2005.  However, the current rate of cashusage is not sustainable.  Our ability todevelop our products and sustain operations will require subsequent fundingthrough collaborations, or debt or equity financing in the short term andproduct sales in the long term.

 

*Net cash used in investing activities*—We spent $0.1 million on capital expenditures inthe quarter ended March 31, 2005. We have no material capital expenditure commitments at March 31,2005.  We anticipate that ourbiomanufacturing facility in Owensboro, Kentucky, may require capital expendituresto support our business objectives if we sign revenue-generating contracts.

 

*Net cash provided by financing activities*—In 2000 we received net proceeds of $88.8 millionfrom our initial public offering, which sustained our operations through2003.  Financing activities have notprovided significant cash flows from 2001 through 2003.  On March 8, 2004, we received netproceeds of approximately $7.5 million in a private placement of commonstock.

 

On December 17, 2004, we entered into a$2.9 million loan agreement, with an initial advance of $1.0 millionreceived on December 20, 2004, and a second advance of $1.9 millionreceived on January 14, 2005. Borrowings under the loan bear interest at 8% and are secured by a firstpriority lien on our assets located at our Owensboro, Kentucky facilityincluding land, building and improvements; fixtures, machinery and equipment;and certain patented intellectual property and related know-how used at theOwensboro facility.  The borrowed fundswere partially used to repay existing long-term debt and the use of such fundsis restricted to working capital and acquisition of machinery and equipment tobe installed at the Owensboro facility. The principal balance under the loan is due on June 17, 2006 andinterest is due quarterly commencing on March 17, 2005.

 

On March 3, 2005, we issued a $600,000 convertiblepromissory note, or Note, to Kevin J.Ryan, our President and Chief Executive Officer and a member of our board ofdirectors.  The Note bearsinterest at 8% and is due on July 1, 2005. The Note is convertible into our common stock, at the option of theholder, on or before the due date, at a conversion price equal to the greaterof $0.95 per share, or 90% of the average of the closing prices of our commonstock over the 22 trading days ending the day before the conversion of theNote.  The Note may be prepaid by uswithout penalty at any time.

 

11

----

 

On April 15, 2005, we received $3,000,000 in cash inexchange for a promissory note, or Promissory Note, issued to Kevin J. Ryan, our President and ChiefExecutive Officer and a member of our board of directors.  The Promissory Note bears interest at theprime rate plus two percent per annum initially at 7.75% due monthly starting May 15,2005 with a rate not less than 7.25%. The Promissory Note is due on April 17, 2006.  Borrowings under the loan are secured bycertain patented intellectual property. The Promissory Note may be prepaid by us without penalty at any time.  The holder of the Promissory Note may electto be repaid up to $1,500,000 as a result of any Company financing event withnet proceeds of $4,000,000 or more.

 

Our history of negative cash flows and ourcash balance of $427,000 at March 31, 2005, raise substantial doubtabout the Company’s ability to continue as a going concern, absent any newsources of significant cash flows.  In aneffort to mitigate this near-term concern, we are seeking debt or equityfinancing, sale of stock of our subsidiary, PDI, and joint development andcommercialization of products with other companies.  However, we cannot assure you that we willsuccessfully obtain equity or debt financing or product related revenues assuch events are subject to factors beyond our control.

 

**Critical Accounting Policies**

 

We consider the following accounting policiesto be critical given they involve estimates and judgments made by managementand are important for our investors’ understanding of our operating results andfinancial condition.

 

*Long-Lived Assets* — Our long-lived assets include capitalized costs of filingpatent applications, capitalized licenses and property and equipment.  We evaluate our long-lived assets forimpairment in accordance with SFAS No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets” whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable.  Estimates of future cash flows and timing ofevents for evaluating long-lived assets for impairment are based uponmanagement’s judgment.  If any of ourintangible or long-lived assets are considered to be impaired, the amount ofimpairment to be recognized is the excess of the carrying amount of the assetsover its fair value.

 

All long-lived assets are amortized ordepreciated over the shorter of their estimated useful lives, the estimatedperiod that the assets will generate revenue, or the statutory or contractualterm in the case of patents and intellectual property licenses.  Estimates of useful lives and periods ofexpected revenue generation are reviewed periodically for appropriateness andare based upon management’s judgment.

 

*Stock-Based Compensation*—We adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”),“Accounting for Stock-Based Compensation” effective January 1, 2003 forits stock-based employee compensation plans using the prospective recognitionmethod under Statement of Financial Accounting Standards No. 148 (“SFAS148”), “Accounting for Stock-Based Compensation-Transition and Disclosure, anamendment of SFAS 123.”  This methodapplies the recognition provisions of SFAS 123 to all employee stock awardsgranted, modified, or settled after January 1, 2003 and accordingly,recognized compensation expense for those issuances under our stock-basedemployee compensation plans. Methodologies used for calculations such as the Black-Scholesoption-pricing model and variables such as volatility and expected life arebased upon management’s judgment.  Suchmethodologies and variables are reviewed and updated periodically forappropriateness and affect the amount of recorded charges.

 

During December 2004 Statement ofFinancial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), “ShareBased Payment,” was issued requiring the expensing of all stock-based compensation.  The Company is evaluating the effects of SFAS123R but believes its implementation will not have a material effect on theCompany’s financial statements since the Company had already adopted FASB 123for its stock-based employee compensation plans as described above.

 

12

----

 

### **Factors That May Affect Our Business**

 

# ***Risks Related To Our Business***

 

*The Company’srecurring losses from operations and current cash and cash equivalent balanceraise substantial doubt about its ability to continue as a going concern.*

 

Our cash balance was $427,000 at March 31, 2005,and we have incurred negative operating cash flows of $3,074,000 during thefirst quarter of 2005.  We have realizedsignificant net losses and negative operating cash flows in recent years and inthe quarter ended March 31, 2005. Based upon our current cash balance, our current rate of negativeoperating cash flows and the expected cost to complete the development of ourproducts, we cannot assure you that the Company will be able to continue as agoing concern.  The financial statementsdo not include any adjustments relating to the recoverability andclassification of assets or the amounts and classification of recordedliabilities that might be necessary should the Company be unable to continue asa going concern.

 

Our revenues for the year ended December 31, 2004 was$1,767,000 and $433,000 for the first quarter of 2005.  We expect a modest increase in our revenuesin 2005.  We may be required to furtherreduce our operating costs by further restructuring our operations or reducingthe scope of our development programs. These actions would adversely affect our ability to generate new sourcesof revenue.  If we are unable tosignificantly increase our revenues and cash received from customers, we willnot be able to achieve profitability or positive operating cash flows, ourworking capital will continue to erode, and our business will suffer.

 

Our product development programs need substantial additional funding tobe commercialized.  Our recombinantAprotinin, Alpha-galactosidase A, and Interferon alpha 2a and 2b requireclinical trials to prove their efficacy and safety for pharmaceuticalapplications.  We do not have sufficientworking capital to complete all phases of clinical trials.  Our PDI subsidiary requires funding for itsstart-up activities.  If we are unable toraise sufficient financing or collaborative funding, we may delay or abandonsome of our product development initiatives, which would likely harm ourbusiness.

 

*Our workingcapital is not sufficient to fund our operations or all of our productdevelopment initiatives.*

 

We require substantial working capital tocontinue our product development programs and to fund our operations.  In addition, the risks inherent in developinginnovative products or platforms, such as recombinant Aprotinin,Alpha-galactosidase A, Interferon alpha 2a and 2b, Lysosomal acid lipase andBAMF technology diagnostic tests make it difficult to forecast with certaintythe capital required to commercialize our products.  We may raise this capital through public orprivate equity financings or through collaborations or strategicpartnerships.  We cannot assure you thatwe will be able to obtain additional financing on commercially reasonableterms, if at all.  Our recent operatingresults and our current stock price may limit our ability to raise capital byselling and issuing additional equity securities.  If additional funds are raised through theissuance of equity securities or convertible debt securities, the percentageownership of our then-current stockholders would be reduced and the value oftheir investments might decline. In addition, any new securities issued mighthave rights, preferences or privileges senior to those securities held by ourexisting stockholders.  If we raiseadditional funds through the issuance of debt, we might become subject torestrictive covenants or high rates of interest, and our assets could becomeencumbered, which would limit our ability to borrow in the future.  We may be unsuccessful in entering into anynew collaboration or strategic partnership that resultsin significant working capital or revenue. Further, any significant revenues we generate from such collaborationsor partnerships may not be realized for several quarters or years, asregulatory approval and other matters could impede commercialization of theseproducts.  If we are unable to raisesufficient additional capital, we may have to curtail or cease operations.

 

13

----

 

*Our stock could bedelisted from the Nasdaq National Market if it doesnot meet its continued listing requirements.*

 

The Nasdaq National Market, or Nasdaq, maintains listing maintenance standards that requiresmaintaining stockholders’ equity of $10,000,000 or more, and a common stock aminimum bid price of $1.00.  On April 20,2005, we received notice from the staff of Nasdaq thatwe failed to meet the stockholders’ equity requirement and that it would be reviewingour eligibility for continued listing on Nasdaq.  We submitted to Nasdaqa plan of compliance, which was denied by the staff of Nasdaq on May 18,2005.  We plan to appeal thedetermination by the staff of Nasdaq.  If we are not successful in our appeal, ourcommon stock would be delisted from Nasdaq.  In addition, the bid price for our stock hasrecently closed below $1.00 per share. If the bid price for our common stock remains below $1.00 for30 consecutive trading days, Nasdaq may choose tonotify us that it may delist our stock from Nasdaq.  After the initial 30-day trading period, wewould have a 180-day cure period during which our stock must meet the $1.00minimum bid price requirement.  If ourstock price does not trade above $1.00 for at least ten consecutive days duringthe 180-day cure period, we would be entitled to a hearing.  However, we cannot assure you that our commonstock would not be delisted from Nasdaq following suchhearing.  Delisting from Nasdaq may, among other things, limit liquidity.  If our common stock ceases to be listed on Nasdaq, we expect that our common stock would then be tradedon the Nasdaq SmallCap Market.  If ourstock is potentially subject to delisting from Nasdaq,we may have the ability to increase our stock price through certain capitaltransactions including a reverse stock split or share repurchases.

 

*We may not be able to enter into collaborationsnecessary to fully develop and commercialize our products and technologies, andwe will be dependent on our collaborators if we do.*

* *

We are independently pursuing sometherapeutic product applications into the development stage.  However, we expect to develop andcommercialize most of our future products in collaboration with pharmaceutical,biotechnology and other companies.  Forexample, our strategy concerning our recombinant Aprotinin, Alpha-galactosidaseA, Interferon alpha 2a and 2b, Lysosomal acid lipase and BAMF technologydiagnostic tests involves seeking partners to complete the development andcommercialization of these products.  Wecannot assure you that such collaborative arrangements will be available to uson acceptable terms, or at all.  If ourcash flows continue to deteriorate or we take significant steps to reduce ourexpenses, potential partners may question our ability to perform and choose notto do business with us, which would make it harder for us to find a partner andwould harm our ability to commercialize our products.  Our success will depend in large part on ourability to enter into future collaborations with other companies for thefinancing of development and/or regulatory approval and commercialization ofour products.  Our reliance upon thesecompanies for these capabilities will reduce our control over such activitiesand could make us dependent upon them. Furthermore, obtaining funds through arrangements with collaborativepartners or others may require us to relinquish our rights to certaintechnologies, product candidates or products that we would otherwise seek todevelop or commercialize on our own, or to sell or license our rights tocertain products or technologies on terms that are worse than we might havebeen able to obtain in a different environment. To date, we have entered into only a limited number of collaborations.  Some of our existing agreements provide uswith rights to participate financially in the commercial development ofproducts resulting from the use of our technologies.  We may be unable to obtain such rights infuture collaborations.  In addition,unforeseen delays or complications could arise and result in the breach of ourcontractual obligations with our collaborators and others, or us not being ableto perform at the quality and capacity levels required for success.

 

*We may beunable to recruit and retain senior management and other key scientificpersonnel on whom we are dependent.*

 

The loss of a number of our senior management or other key scientificpersonnel could significantly harm our business, cause collaborators to ceasedoing business with us, cause potential collaborators to decline to do businesswith us, or inhibit our research and development and commercializationefforts.  None of our key personnel aresubject to employment agreements that prevent them from leaving ouremployment.  We face competition forresearch scientists and technical staff from other companies, academicinstitutions, government entities, nonprofit laboratories and otherorganizations.  We have implemented 10%cash salary reductions substituting non-cash stock compensation for our highestpaid employees to conserve cash.  Inaddition, we adhere to an eighteen-month salary review process for seniorpersonnel.  Our compensation practicesmay be less attractive compared to our 

 

14

----

 

competition.  Failure to recruit and retain seniormanagement and scientific personnel on acceptable terms may prevent us fromachieving our business objectives.

 

*We are inthe early or middle stages of product commercialization, and we may not be ableto successfully develop our products and technologies nor sustain commercialuse of our technology.*

 

We are in the early or middle stages of commercializing our productsunder development, and we are subject to all of the risks inherent in thedevelopment of a business enterprise, including the need for substantialcapital to support the development of our products and technologies.  Our anticipated products most likely willrequire that we enter into new collaborations before we can manufacture and/or marketthem.  For instance, we believe that ourNHL vaccine, which is ready for Phase II trials, cannot be further developedwithout collaboration.  The prospects fordevelopment of our Alpha-galactosidase A, recombinantAprotinin, Interferon alpha 2a and 2b, and Lysosomal acid lipase products arelimited without collaboration or partnering support.  Because we are in new and developing fieldssuch as diagnostic tests for disease, and our research focuses on new and unprovenproducts, our therapeutic vaccines, proteins and other therapeutics underdevelopment may not be effective for their intended purpose, or may not meetregulatory requirements for safety and efficacy.  In addition, even if we successfully developa product, there may not be a substantial commercial market for that product atcommercially viable prices.

 

*We are in new and developing fields and there may not be a market forour technologies.*

 

Our technologies, including our GENEWARE and BAMF technology, havelimited commercial precedent.  Much ofour research is fundamentally unique, and we cannot assure the acceptance ofits scientific merit or the benefits of products produced by it, nor that the public will react favorably to it.  The usefulness of the information andproducts generated by our proteomics, functional genomics and bioinformaticstechnologies is unproven, and our collaborators and potential collaborators maydetermine that they are not useful, cost-effective, or otherwise unacceptableto them.  We generate large amounts ofdata from our research with genes and proteins and we may not be able to mineor integrate this data in a timely manner or turn it into commercially viableinformation.  In addition, because ourfields are characterized by rapid innovation, we must complete development ofour technologies in time to meet market demand, if any.  If we fail to do so, it is likely that othertechnologies and companies will predominate and we will not be able to earn asufficient return on our investment.

 

*Alternative technologies may supersede our technologies or make themnon-competitive.*

 

Genomics, proteomics, biomanufacturing and bioinformatics are intenselycompetitive fields.  They arecharacterized by extensive research efforts, which result in rapidtechnological progress that can render existing technologies obsolete oreconomically noncompetitive.  If ourcompetitors succeed in developing more effective technologies or render ourtechnologies obsolete or noncompetitive, our business will suffer.  Many universities, public agencies andestablished pharmaceutical, biotechnology, health care, chemical and other lifesciences companies with substantially greater resources than we have aredeveloping and using technologies and are actively engaging in the developmentof products similar to or competitive with our products and technologies.  Like us, our competitors are using proteomicsand genomics technologies to identify potential drug targets, therapeuticproteins and diagnostic marker proteins. To remain competitive, we must continue to invest in new technologiesand improve existing technologies.  Ifour revenues and cash flows do not improve significantly, we will not have theresources to continue such investment.

 

Our competitors may devise faster, more complete or more accuratemethods to obtain proteomic and functional genomic information than ourtechnologies and systems, including our GENEWARE systems and BAMFtechnology.  There has been and continuesto be substantial academic and commercial research effort devoted to thedevelopment of such methods.  Ifsuccessful competitive methods were developed, it would undermine thecommercial basis for the products and technologies we intend to provide.

 

15

----

 

*Generaleconomic conditions may cause uncertainty with respect to other companies andentities collaborating with us or otherwise dealing with us, and this can havean adverse effect on our revenues and cash flows.*

 

To a large extent, decisions by businesses and other entities tocollaborate or otherwise do business with us are discretionary, and thedecision making process typically takes many months to complete.  We believe that the previous slowdown in theU.S. and global economies, and the biotechnology and pharmaceutical industriesin particular, has caused potential collaborators and customers to deferdecisions to work with us or to access our technologies.  As a result, revenues and cash flows havebeen uncertain.  Future results aredifficult to predict, as it is difficult to accurately assess and predict thefuture demand for our products, technologies and services.  General economic conditions are expected toimprove as the economy grows.  However,we cannot assure you that any such improvement will cause our results ofoperations to improve.  If economicconditions decline or stagnate, our revenues and operating results could beadversely affected.

 

*Conflictswith collaborators or licensees could harm our business.*

 

Conflicts with collaborators could have a negative impact on ourrelationships with them, and our revenues to be derived from theserelationships, and impair our ability to enter into future collaborations, allof which could adversely affect our business. Collaborators could develop competing products, preclude us fromentering into collaborations with their competitors or terminate theiragreements with us prematurely. Moreover, disagreements could arise with collaborators or licensees overrights to our intellectual property, our rights to share in any of the futurerevenues from products or technologies resulting from use of our technologies,our rights to payments for achievement of milestones or our performance ofresearch and development activities on behalf of collaborators, or ouractivities in separate fields may conflict with other business plans of ourcollaborators or licensees.

 

*We mustenter into agreements with third parties to provide sales and marketingservices, or develop these capabilities on our own, if we are to successfullycommercialize our products and technologies.*

 

Although we plan to enter into sales and marketing arrangements withthird parties, we may not be able to enter into these arrangements on favorableterms, if at all.  We must also expandour business development force with sufficient technical expertise to generatedemand for our products and technologies. Our possible inability to hire business development personnel, orcontract for effective sales and marketing capabilities would significantlyimpair our ability to commercialize our products and technologies.

 

*We may notbe able to successfully manufacture products in commercial quantities or atacceptable costs.*

 

The failure of our technologies to provide safe, effective, useful orcommercially viable approaches to the discovery, development and/or productionof drug targets and proteins which can be used as therapeutics and diagnostictests for diseases, such as cancer, would significantly limit our business planand future growth.

 

*Concentrationof ownership among our existing executive officers, directors and principalstockholders may enable them to collectively influence significant corporatetransactions that require stockholder approval.*

 

Our directors, our executive officers and principal stockholdersaffiliated with our directors and executive officers beneficially own, in theaggregate, approximately 21% of our outstanding common stock as of May 11, 2005.  The concentration of ownership in combinationwith other common stockholders may collectively influence significant corporatetransactions such as mergers, changes in control, consolidation or sale of someor all of our assets, and other significant corporate transactions requiringshareholder approval.

 

16

----

 

*Our stockholderrights plan and provisions of our charter documents and Delaware law mayinhibit a takeover, which could adversely affect our stock price.*

 

We have adopted a stockholder rights plan and declared a dividenddistribution of one right for each outstanding share of common stock tostockholders of record as of May 4, 2001. Subject to certain specified exceptions and limitations under the rightsplan, we will continue to issue one right for each share of common stock thatbecomes outstanding after May 4, 2001. Each right entitles the holder to purchase one unit consisting of oneone-hundredth of a share of our Series A JuniorParticipating Preferred Stock for $45 per unit. Under certain circumstances, if a person or group acquires 15% or moreof our outstanding shares of common stock, holders of the rights (other thanthe person or group causing their exercisability) will be able to purchase, inexchange for the $45 exercise price, shares of our common stock or of anycompany into which we are merged having a value of $90.  In addition, the board of directors has theoption, under certain circumstances, to exchange each right (other than rightsheld by the person or group triggering the board of directors’ option) for ashare of common stock for no additional consideration on the part of the holderof the right.  The rights expire on April 27,2011.  Our rights plan could make it moredifficult for a third party to acquire us (or a significant percentage of ouroutstanding capital stock) by causing substantial dilution of the stockownership of a person or group attempting to acquire control of us.  Our rights plan may have the effect ofdiscouraging takeover attempts because a potential acquirer would have to negotiatewith our board of directors to avoid suffering dilution.

 

Provisions in our charter and bylaws and applicable provisions of theDelaware General Corporation Law may also make it more difficult for a thirdparty to acquire control of us without the approval of our board of directors.  These provisions may make it more difficultor expensive for a third party to acquire a majority of our common stock ordelay, prevent or deter a merger, acquisition, tender offer or proxy contest,which may adversely affect our stock price.

 

**Risks Related to Our Industry**

 

*Ifcompanies in the pharmaceutical, biotechnology, healthcare, and life sciencesindustries do not succeed or their demand for our products and technologiesdecreases, then our revenues could be reduced.*

 

We expect to derive our revenues primarily from products andtechnologies provided to the pharmaceutical, biotechnology, healthcareand life sciences industries. Accordingly, our success will depend directly on the success ofcompanies in these industries and their demand for our products, services andtechnologies.  Our operating results mayfluctuate substantially due to reductions and delays in expenditures bycompanies in those industries, or their unwillingness or inability to use ourproducts and technologies.  Thesereductions and delays may result from factors that are not within our control,such as:

 

•                  changes ineconomic conditions generally;

•                  the extent towhich companies in these industries conduct research and development involvingdiagnostics, proteomics and functional genomics in-house or through industryconsortia;

•                  the extent towhich genomic information is or is not made publicly available;

•                  consolidation within oneor more of these industries;

•                  changes in theregulatory environment affecting these industries;

•                  pricing pressures;

•                  market-driven pressureson companies to consolidate and reduce costs; and/or

•                  other factorsaffecting spending in these industries.

 

17

----

 

*Ifcompetitive products are better than our products, then our business may fail.*

 

Our human and veterinary therapeutics and vaccines are included in thehighly competitive markets for protein development and production.  We face significant competition in ourprotein product development and production efforts from entities usingalternative, and in some cases, higher volume and larger scale, approaches forthe same purpose.  Competitors withsubstantially greater resources are actively developing products similar to orcompetitive with our products and potential products.  Our competitors may succeed in developingproducts or obtaining regulatory approval before we do or in developingproducts that are more effective than those we develop or propose to develop.  A large number of universities and othernot-for-profit institutions, many of which are funded by the U.S. and foreigngovernments, are also conducting research to discover genes and theirfunctions.  Any one or more of theseentities may discover and establish a patent position in one or more of thegenes or proteins that we wish to commercialize.

 

Several pharmaceutical, biotechnology,chemical and other life sciences companies engage in research and developmentin the use of unique gene expression systems to produce therapeuticproteins.  These competitors may developproducts earlier or obtain regulatory approvals faster than we may be able to,or develop products that are more effective than ours.  New developments are expected to continue,and discoveries by others may render our products and technologiesnoncompetitive, which could lead to the failure of our business.

 

Diagnostics companies in the health care industry with more resourcesthan us constitute varied competition for our diagnostic technology, which isearly stage.  Competing diagnostic technologiesmay be developed and marketed that may be competitively superior to ours.

 

*Ourcollaborators and we may not obtain FDA and other approvals for our products ina timely manner, or at all.*

 

Drugs and certain diagnostic products and tests are subject to anextensive and uncertain regulatory approval process by the FDA and comparableagencies in other countries.  Theregulation of new products and certain diagnostic products and tests isextensive, and the required process of laboratory testing and human studies islengthy, expensive and uncertain.  Theburden of these regulations will fall on us to the extent we are developingproprietary products.  We may not be ableto obtain the clearances and approvals necessary for the clinical testing,field-testing, manufacturing or marketing of our products.  If the products or diagnostic tests are theresult of a collaborative effort, these burdens may fall on our collaboratorsor we may share these burdens with them. We may not obtain FDA or other approvals for those products or tests ina timely manner, or at all.  We mayencounter significant delays or excessive costs in our efforts to securenecessary approvals or licenses.  Even ifwe obtain FDA regulatory approvals, the FDA extensively regulates manufacturing,labeling, marketing, promotion and advertising after product approval.  Further, once a manufacturer obtainsregulatory approval, a marketed product and its manufacturer are subject tocontinual review, and discovery of previously unknown problems with a product,test or manufacturer may result in restrictions on the product, test,manufacturer or manufacturing facility, including withdrawal of the product ortest from the market.  In some countries,regulatory agencies also set or approve the sale prices for drug and diagnosticproducts and tests.  Additionally,several of our product development areas may involve relatively new technologythat has not been the subject of extensive product testing in humans.  The regulatory requirements governing these drugand diagnostic products, tests, and related clinical procedures remainuncertain and the products and tests themselves may be subject to substantialreview by the FDA and foreign governmental regulatory authorities that couldprevent or delay approval.  Regulatoryrequirements ultimately imposed on our products could limit our ability totest, manufacture and commercialize our products and tests.

 

18

----

 

*USDA rules couldadversely affect us or our collaborators.*

 

We must comply with USDA regulations for outdoor releases ofgenetically engineered organisms as well as other products designed for use onor with agricultural products.  Inaddition, the USDA prohibits growing and transporting genetically modified plantsexcept pursuant to an exemption or under special permits.  We may use genetically modified plants asscreening or production hosts.  Changesin USDA policy regarding the movement or field release of genetically modifiedplant hosts could adversely affect our business by increasing the cost of ourproducts and technologies or decreasing consumer demand for those products andtechnologies or causing the government to prohibit their sale or use.  If we fail to comply with such rules orpolicies, we may be subject to financial loss or be liable for costs incurredas a result of non-compliance.

 

*If there isnegative public reaction to the use of genetically engineered products andtechnologies, then the market for certain products and technologies we developwill be adversely affected.*

 

Future commercial success of some of our products and of the productsof some of our collaborators will depend in part on public acceptance of theuse of genetically engineered products including drugs, plants and plant products.  Claims that genetically engineered productsare unsafe for consumption or pose a danger to the environment may influencepublic attitudes.  Negative publicreaction to genetically modified organisms and products could result in greatergovernment regulation of genetic research and resultant products, includingstricter labeling requirements, and could cause a decrease in the demand forour products, even if such products do not result from GMO organisms.

 

*We may be sued for product liability and our product liabilityinsurance may not be adequate.*

 

The testing, marketing and sale of our and our collaborators’ productsand diagnostic tests will entail a risk of allegations of product liability,and third parties may assert substantial product liability claims againstus.  While we have limited productliability insurance to protect against this risk, adequate insurance coveragemay not be available at an acceptable cost, if at all, in the future and aproduct liability claim or product recall could materially and adversely affectour business.  Inability to obtainsufficient insurance coverage at an acceptable cost or otherwise to protectagainst potential product liability claims could prevent or inhibit the commercializationof the products and diagnostic tests developed by our collaborators or us.  If we are sued for any injury allegedlycaused by our products or our collaborators’ products, our liability couldexceed our total assets and our ability to pay the liability.

 

*If we usehazardous materials in our business in a manner that causes injury or violateslaws, we may be liable for substantial damages.*

 

Our research and development processes involve the use of hazardousmaterials, including chemicals and radioactive and biological materials.  Our operations also produce hazardous wasteproducts.  The chemicals we use include,but are not limited to, flammable solvents such as methanol and ethanol;ethidium dye, which is a commonly used fluorescent dye for visualizing DNA;buffer solutions used in the purification of DNA; and various organic solvents,acids and bases.  We also use severalradioisotopes including phosphorous-32, carbon-14, sulfur-35, phosphorous-33,iodine-125 and hydrogen-3.  We cannoteliminate the risk of accidental contamination or discharge and any resultantinjury from these materials.  Federal,state and local laws and regulations govern the use, manufacture, storage,handling and disposal of these materials. We could be subject to civil damages and criminal penalties in the eventof an improper or unauthorized release of, or exposure of individuals to,hazardous materials.  Further, it ispossible that the materials we use could contaminate another party’sproperty.  In addition, claimants may sueus for injury or contamination that results from our use or the use by thirdparties of these materials, and our liability may exceed our total assets andour ability to pay the liability.  Inaddition, compliance with environmental laws and regulations is expensive, andcurrent or future environmental regulations may impair our research anddevelopment and production efforts. Although we have general liability insurance, these policies do notcover claims arising from pollution from chemical, radioactive or biologicalmaterials.  Our collaborators may also beworking with various types of hazardous materials in connection with ourcollaborations.  In the event of alawsuit or investigation, we could be held responsible for any injury we or ourcollaborators cause to persons or property by exposure to, or release of, anyhazardous materials.

 

19

----

 

*Healthcarereform and restrictions on reimbursements may limit the financial returns fromour products and diagnostic tests.*

 

Our ability and that of our collaborators to commercialize therapeuticsand diagnostic products and tests may depend in part on the extent to whichgovernment health administration authorities, private health insurers and otherorganizations will pay the cost of these products and tests.  These third parties are increasinglychallenging both the need for and the price of new medical products,tests and services.  Significantuncertainty exists as to the reimbursement status of newly approvedtherapeutics and diagnostics, and adequate third party reimbursement may not beavailable for any product to enable us to maintain price levels sufficient torealize an appropriate return on our investment in research and productdevelopment.

 

# ***Risks Related to Our IntellectualProperty***

# * *

*Patentprotection in the biotechnology, pharmaceutical, and healthcare industries isuncertain, which may result in a decrease in the value of our products andtechnologies.*

 

We are involved in overlapping and rapidly evolving areas ofbiotechnology, pharmaceutical development, healthcare, and diagnostics andbasic research involving viral vectors, plant transgenics, proteomics,functional genomics, protein transformation, and immunotherapy.  Each of these areas has been the subject ofintense research and patenting activity throughout the world by our commercialcompetitors, actual and potential collaborators, academic institutions andgovernment researchers.  We cannotdetermine whether or not there are patents currently pending that, if issued,would prevent us from practicing our core technologies, commercializing them ordeveloping commercially viable products and diagnostic tests based upon them.

 

The patent positions of biotechnology firms generally are highlyuncertain and involve complex legal and factual questions that will determinewho has the right to develop a particular product.  Changes in, or different interpretations of,patent laws in the United States and other countries might allow others to useour discoveries or to develop and commercialize products and technologiessimilar to our products and technologies without any compensation to us.  Our potential collaborators or customers mayconclude that uncertainties about patent protection decrease the value of ourdatabases, products and services.

 

Throughout the world there are numerous issued patents, as well aspublished foreign patent applications which may be issued as patents, many ofwhich relate to our current operations, our anticipated future operations andthe products we are likely to develop. The scope of these patents is a matter of legal interpretation and issubject to uncertainty.  We have notobtained, but we may in the future obtain, opinions from our patent counselthat we have freedom to conduct our commercial activities free of claims ofpatent infringement from third parties. From time to time, we receive letters from third parties offering tonegotiate a license to LSBC based on a perception that our processes orproducts might infringe a patent owned by the third party.  Disagreements could arise from these letters,and could result in costly and time-consuming litigation and divert ourfinancial and managerial resources.  Inaddition, if we are ever determined to infringe the patent of any third party,we may be required to obtain a license to use this patent, which would increaseour cost of doing business.

 

*Our patentapplications may not result in issued patents that are enforceable.*

 

Our disclosures in our patent applications may not be sufficient tomeet the statutory requirements for patentability in all cases.  As a result, we do not know which of ourpatent applications will result in enforceable patents.  Our patent applications may not be issued aspatents, and any patents that are issued to us may not provide commerciallymeaningful protection against competitors. Any issued patent may not provide us with competitive advantages.  Others may challenge our patents orindependently file patent applications that could result in an interferenceproceeding in the U.S. Patent and Trademark Office.  Others may be able to design around ourissued patents or develop products similar to our products.  In addition, others may discover uses forgenes or proteins other than those uses covered in our patents, and these otheruses may be separately patentable.

 

20

----

 

*Publicdisclosure and patents relating to our proprietary products, processes, anddiagnostic products and tests held by others may limit our proprietary rights.*

 

We are aware of issued patents and patent applications containingsubject matter such that we or our licensees or collaborators may require alicense or rights in order to research, develop orcommercialize some of our products, diagnostic tests and technologies.  We may find that licenses relating to suchsubject matter will not be available on acceptable terms, or at all.

 

*Patentinfringement or enforcement litigation or interference proceedings could becostly and disrupt our business and may prevent us from commercializing ourproducts and diagnostic tests.*

 

The technology that we use to develop our products, diagnostic testsand key resources, and those that we incorporate into our products, diagnostictests and technologies, may be subject to claims bythird parties, including our collaborators, that they infringe the patents orproprietary rights of others. Technologies of our collaborators may also be subject to infringement orsimilar claims which could impair our collaborative product and diagnostic testdevelopment and commercialization efforts. We also may need to enforce our patent rights in actions against others,which could be expensive.  The risk ofsuch events occurring will tend to increase as the fields of generic drug,vaccine, diagnostic, health care and the biotechnology industry expand, morepatents are issued and other companies engage in other generic drug, vaccine,diagnostics and biotechnology-related businesses.

 

With respect to identifying proteins uniquely associated with diseasestates or as targets for drug therapy, we are aware that companies havepublished patent applications relating to nucleic acids encoding specificproteins.  We are also aware of issuedand pending patent applications covering certain aspects of bioinformatic-baseddiagnostic testing.  The issued patentsby the U.S. Patent and Trademark Office to these companies may limit ourability and the ability of our collaborators to practice under any patents thatmay be issued to us.  Also, even if theU.S. Patent and Trademark office issues us a patent, the scope of coverage orprotection afforded to the patent may be limited.

 

*We may notbe able to protect our know-how and trade secrets.*

 

We generally control the disclosure and use of our know-how and tradesecrets using confidentiality agreements. It is possible, however, that:

 

•                  Some or allconfidentiality agreements will not be honored without our knowledge;

•                  Thirdparties will independently develop equivalent technology;

•                  Disputesmight arise with our consultants, collaborators or others concerning theownership of intellectual property; and/or

•                  Unauthorizeddisclosure of our know-how or trade secrets will occur without our knowledge.

 

###### **Item 3.**  Quantitative and Qualitative Disclosures About Market Risk

 

Information regardingour exposures to market risks is provided in Item 7A of our Annual Report on Form 10-Kfor the year ended December 31, 2004. There have been no material changes to our exposures to market risksince December 31, 2004.

 

###### **Item4.**  Controls and Procedures

 

(a)          *Disclosure controls and procedures*.  Our Chief Executive Officer and ChiefFinancial Officer, after evaluating the effectiveness of our “disclosurecontrols and procedures” (as defined in the Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report on Form 10-Q,have concluded that as of the end of the period covered by this report, ourdisclosure controls and procedures were effective.

 

(b)         *Changes in internal control over financial reporting*.  There were no changes in our internal controlover financial reporting identified in connection with the evaluation requiredby paragraph (d) of Exchange Act Rule 13a-15 that occurred during thefirst fiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

21

----

 

**PART II – OTHER INFORMATION**

 

###### **Item 2.**  Unregistered Sales of Equity Securities andUse of Proceeds

 

On March 3, 2005, we issued a $600,000 convertiblepromissory note, or Note, to Kevin J.Ryan, our President and Chief Executive Officer and a member of the our boardof directors.  The Note bearsinterest at 8% and is due on July 1, 2005. The Note is convertible into our common stock, at the option of theholder, on or before the due date, at a conversion price equal to the greaterof $0.95 per share, or 90% of the average of the closing prices of our commonstock on the 22 trading days ending the day before the conversion of the Note.  The Note may be prepaid by the Company withoutpenalty at any time.  This sale was madein reliance on Section 4(2) of the Securities Act and was madewithout general solicitation or advertising. Mr. Ryan is an accredited investor and has access to all relevantinformation to evaluate the investment.

 

###### **Item 6.** Exhibits

 

*List of Exhibits:*

 

| **Exhibit  Number** | ** ** | **Exhibit Title or  Description**                                                                                                                                   |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of  the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                |       | Certification of  the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1                |       | Certification of the Principal Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.   |
| 32.2                |       | Certification of the Principal Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.   |

 

22

----

 

**SIGNATURE**

 

**Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.**

 
| ** **                  | **Large Scale Biology Corporation** |
|-----------------------------|-------------------------------------|
| ** **                  | ** **                          |
| **Date: May 23, 2005** | **By:**                             | **/s/ Ronald J. Artale** | ** ** |
| ** **                  | ** **                          | **Ronald J. Artale** |
| ** **                  | ** **                          | **Senior Vice President, Chief Operating Officer** |
| ** **                  | ** **                          | **and** Chief Financial Officer |
| ** **                  | ** **                          | **(Principal Financial Officer)** |

 

23

----

 

**Exhibit Index**

** **
| **Exhibit  Number** | ** ** | **Exhibit Title or  Description**                                                                                                                                   |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of  the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2                |       | Certification of  the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1                |       | Certification of the Principal Executive  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.   |
| 32.2                |       | Certification of the Principal Financial  Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.   |

 

24

----