##### Table of Contents

---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,
D.C. 20549

FORM 10-Q

[ x ]       QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

| | For the quarterly period ended June 30, 2002.
| | ---------------------------------------------

[   ]       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
0-31275

LARGE SCALE BIOLOGY CORPORATION(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction ofincorporation or organization)                                                                                                            | 77-0154648(I.R.S. employeridentification number)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------
|                                                                                                                                                                                
|3333 Vaca Valley Parkway, Suite 1000, 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) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X  No ___

The number of shares outstanding of registrants common stock, $0.001 par value,
as of July 31, 2002: 25,005,616

---



---

##### Table of Contents

Some of the statements contained in this report constitute forward-looking statements that involve substantial risks
and uncertainties. In some cases, you can identify these statements by forward-looking words such as may , will , should , expect , plan , anticipate , believe ,
estimate or continue and variations of these words or comparable words. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking
statements. Our Managements Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations
that may cause our or our industrys actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.
The risk factors contained in this report, under the heading Factors That May Affect Our Business, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to
differ from the expectations described or implied in our forward-looking statements.

Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date
of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Large Scale Biology Corporation, LSBC, our logo, GENEWARE, PLURIGEN, ProGex and other product names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United
States and/or other countries. References in this report to the Company, our, we and us refer collectively to Large Scale Biology Corporation, a Delaware corporation, and its predecessors and
subsidiaries.



---

##### Table of Contents

Large Scale Biology CorporationForm 10-QFor the Quarter Ended June 30, 2002Table of Contents

|PART I  FINANCIAL INFORMATION | Page                                                                                                                 
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------
|                              
|Item 1.                        | Financial Statements                                                                                                 
|                              
|                               | Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 (unaudited)                          
|                              
|                               | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 (unaudited)
|                              
|                               | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (unaudited)          
|                              
|                               | Notes to Condensed Consolidated Financial Statements (unaudited)                                                     
|                              
|Item 2.                        | Managements Discussion and Analysis of Financial Condition and Results of Operations                                
|                               |                                                                                                                      
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                                           
|                              
|PART II  OTHER INFORMATION   
|                              
|Item 2.                        | Changes in Securities and Use of Proceeds                                                                            
|                              
|Item 4.                        | Submission of Matters to a Vote of Security Holders                                                                  
|                               |                                                                                                                      
|Item 5.                        | Other Information                                                                                                    
|                              
|Item 6.                        | Exhibits and Reports on Form 8-K                                                                                     



---

##### Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Large Scale Biology CorporationCondensed Consolidated Balance Sheets(Unaudited)

|                                                | June 30, 2002 |              | December 31, 2001
|----------------------------------------------- | ------------- | ------------ | -----------------
|                                                |               |              |                  
|                                                |               |              |                  
|Assets                                         
|                                                |               |              |                  
|Current assets:                                 |               |              |                  
|Cash and cash equivalents                       | $             | 9,762,000    |                  
|Marketable securities                           |               | 23,691,000   |                  
|Prepaid expenses and other current assets       |               | 1,589,000    |                  
|                                                |               |              |                  
|Total current assets                            |               | 35,042,000   |                  
|Property, plant, and equipment, net             |               | 17,292,000   |                  
|Patents and intellectual property licenses, net |               | 4,987,000    |                  
|Goodwill, net                                   |               | 839,000      |                  
|Other intangible assets, net                    |               | 531,000      |                  
|Other assets                                    |               | 589,000      |                  
|                                                |               |              |                  
|                                                | $             | 59,280,000   |                  
|                                                |               |              |                  
|                                               
|Liabilities and Stockholders Equity           
|Current liabilities:                            |               |              |                  
|Accounts payable                                | $             | 2,385,000    |                  
|Accrued expenses                                |               | 703,000      |                  
|Current portion of long-term debt               |               | 104,000      |                  
|Deferred revenue                                |               | 358,000      |                  
|                                                |               |              |                  
|Total current liabilities                       |               | 3,550,000    |                  
|Long-term debt                                  |               | 229,000      |                  
|Long-term deferred revenue                      |               | 169,000      |                  
|                                                |               |              |                  
|Total liabilities                               |               | 3,948,000    |                  
|                                                |               |              |                  
|Stockholders equity:                           |               |              |                  
|Common stock, issued and outstanding:           |               |              |                  
|June 30, 2002  24,974,584 shares;              |               |              |                  
|December 31, 2001  24,892,989 shares           |               | 191,933,000  |                  
|Stockholders notes receivable                  |               | (47,000      | )                
|Deferred compensation                           |               | (1,733,000   | )                
|Accumulated deficit                             |               | (134,821,000 | )                
|                                                |               |              |                  
|Total stockholders equity                      |               | 55,332,000   |                  
|                                                |               |              |                  
|                                                | $             | 59,280,000   |                  
|                                                |               |              |                  

See accompanying notes to condensed consolidated financial statements.

1



---

##### Table of Contents

Large Scale Biology CorporationCondensed Consolidated Statements of Operations(Unaudited)

|                                                        | Three Months Ended June 30, |   | Six Months Ended June 30, |  
|------------------------------------------------------- | --------------------------- | - | ------------------------- | -
|                                                        |                             |   |                           |  
|                                                        |                             |   | 2002                      |  
|                                                        |                             |   |                           |  
|Revenues                                                |                             | $ | 490,000                   |  
|                                                        |                             |   |                           |  
|Costs and expenses:                                     |                             |   |                           |  
|Development agreements                                  |                             |   | 161,000                   |  
|Research and development                                |                             |   | 5,908,000                 |  
|General, administrative and marketing                   |                             |   | 4,025,000                 |  
|Amortization of purchased intangibles                   |                             |   | 156,000                   |  
|                                                        |                             |   |                           |  
|Total costs and expenses                                |                             |   | 10,250,000                |  
|                                                        |                             |   |                           |  
|Loss from operations                                    |                             |   | (9,760,000                | )
|                                                        |                             |   |                           |  
|Other income (expense):                                 |                             |   |                           |  
|Interest income                                         |                             |   | 210,000                   |  
|Interest expense                                        |                             |   | (4,000                    | )
|                                                        |                             |   |                           |  
|Total other income                                      |                             |   | 206,000                   |  
|                                                        |                             |   |                           |  
|Net loss                                                |                             | $ | (9,554,000                | )
|                                                        |                             |   |                           |  
|Net loss per share - basic and diluted                  |                             | $ | (0.38                     | )
|                                                        |                             |   |                           |  
|Weighted average shares outstanding - basic and diluted |                             |   | 24,958,114                |  
|                                                        |                             |   |                           |  

See accompanying notes to condensed consolidated financial statements.

2



---

##### Table of Contents

|Large Scale Biology Corporation                                            
|---------------------------------------------------------------------------
|Condensed Consolidated Statements of Cash Flows                            
|(Unaudited)                                                                
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash flows from operating activities:                                      
|Net loss                                                                   
|Adjustments to reconcile net loss to net cash used in operating activities:
|Depreciation of property, plant and equipment                              
|Amortization of intangible assets                                          
|Stock compensation expense                                                 
|Accrued interest and amortized discount on marketable securities           
|Common stock issued for services                                           
|Changes in assets and liabilities:                                         
|Prepaid expenses and other current assets                                  
|Other assets                                                               
|Accounts payable                                                           
|Accrued expenses                                                           
|Deferred revenue                                                           
|                                                                           
|Net cash used in operating activities                                      
|                                                                           
|Cash flows from investing activities:                                      
|Purchases of marketable securities                                         
|Proceeds from matured marketable securities                                
|Capital expenditures                                                       
|Increase in capitalized patents                                            
|                                                                           
|Net cash provided by investing activities                                  
|                                                                           
|Cash flows from financing activities:                                      
|Proceeds from issuance of common stock                                     
|Proceeds from stockholder loan payments                                    
|Change in restricted cash                                                  
|Principal payments on long-term debt                                       
|                                                                           
|Net cash provided by (used in) financing activities                        
|                                                                           
|Net decrease in cash and cash equivalents                                  
|Cash and cash equivalents at beginning of period                           
|                                                                           
|Cash and cash equivalents at end of period                                 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|See accompanying notes to condensed consolidated financial statements.     

3



---

##### Table of Contents

Large Scale Biology CorporationNotes to Condensed Consolidated Financial Statements(Unaudited)

1. The Company and Summary of Significant
Accounting Policies

Large Scale Biology Corporation and its subsidiaries (collectively, the Company) applies its
proprietary proteomics, functional genomics and bioprocessing technologies to develop and manufacture personalized drugs, vaccines and diagnostics for rapid identification and effective treatment of disease. The Companys headquarters and a
research facility are located in Vacaville, California, a bioprocessing facility is located in Owensboro, Kentucky, and a proteomics research facility is located in Germantown, Maryland.

Basis of Presentation  The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC) regarding interim financial information. Accordingly, these financial statements and notes thereto do not include certain disclosures normally associated with financial statements prepared in
accordance with accounting principles generally accepted in the United States of America. This interim financial information should be read in conjunction with the Companys audited consolidated financial statements and notes thereto for the
year ended December 31, 2001, included in the Companys Annual Report on Form 10-K.

The unaudited condensed consolidated
financial statements include the accounts of Large Scale Biology Corporation and its subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of the Companys management, the unaudited condensed consolidated
financial statements include all adjustments (consisting of only normal recurring adjustments) and disclosures considered necessary for a fair presentation of the results of the interim periods presented. This interim financial information is not
necessarily indicative of the results of any future interim periods or for the Companys full year ending December 31, 2002.

Marketable Securities  Marketable securities at June 30, 2002 and 2001 consist of commercial paper, corporate and U.S. government agency notes, and bank certificates of
deposit all maturing within one year and are classified as held-to-maturity. The amortized cost of marketable securities at June 30, 2002 and 2001 approximates fair value. There were no significant holding gains or losses for any of the periods
shown.

Goodwill and Other Intangible Assets  Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The adoption of these new accounting standards resulted in the following changes in
accounting:

| |  | SFAS No. 141 does not recognize assembled workforce as an identifiable intangible asset. Accordingly, the carrying amount of assembled workforce as of December 31, 2001, equal to $115,000, was
reclassified from other intangible assets to goodwill. No other additions to goodwill, nor any write-offs or impairment of goodwill were recorded in the six months ended June 30, 2002.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | SFAS No. 142 discontinued the amortization of goodwill effective January 1, 2002. Instead, goodwill will be tested for impairment annually, or sooner if indicators of potential impairment exist,
based upon a fair value approach. In accordance with SFAS No. 142, the Company performed an initial impairment test of the net balance of goodwill (including assembled workforce) as of January 1, 2002 and found no evidence of impairment. As a result
of discontinuing the amortization of goodwill, amortization expense in the three and six months ended June 30, 2002 was $169,000 and $338,000 less, respectively, than the prior year periods.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All other intangible assets continue to be amortized over their useful lives and are evaluated for potential impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.

4



---

##### Table of Contents

Net Loss Per Share  Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period, plus
the potential dilutive effect of common shares issuable upon exercise or conversion of outstanding stock options and warrants during the period. The weighted average number of potentially dilutive common shares are 559,471 and 423,311 for the three
months ended June 30, 2002 and 2001, respectively, and 797,034 and 826,882 for the six months ended June 30, 2002 and 2001, respectively. These shares were excluded from diluted net loss per share because of their anti-dilutive effect.

2. Dow Contract

The Company entered into a Collaboration and License
Agreement with The Dow Chemical Company and its subsidiary, Dow AgroSciences LLC (collectively, Dow) on September 1, 1998. The research collaboration portion of the agreement had a three-year term ending in August 2001. Under the
research collaboration, the Company received funding for sponsored genomics research and payments for technology access fees and milestone achievements. Revenues from the research collaboration represented 89% and 88% of total revenues for the three
and six months ended June 30, 2001, respectively. The research collaboration ended in August 2001, although the Company retains royalty rights to future sales of products by Dow that may be derived from the research collaboration.

3. Restructuring

In June 2002, the Company implemented an organizational
restructuring that included a 25% reduction in employee headcount. In the three months ended June 30, 2002, the Company recorded a restructuring expense of approximately $900,000, representing severance and short-term health benefits for the
effected employees. The restructuring expense is included in general, administrative and marketing expense in the consolidated condensed statement of operations. Approximately $100,000 of the restructuring expense was unpaid at June 30,
2002.

4. Stock Options

In the three months ended June 30,
2002, the Company granted options to purchase 1,322,250 shares of the Companys common stock to employees and directors. The weighted average exercise price of these options equals $1.26. Excluding 21,750 options that vest immediately and have
an exercise period of five years, the remaining options vest on a quarterly basis over three years and have an exercise period of ten years from the date of grant.

The Company accounts for stock-based awards to employees and directors using the intrinsic value method. As such, given the exercise prices of the above options equaled the quoted market
value of the Companys common stock on the grant dates, no compensation expense or deferred compensation expense was recognized by the Company.

Item 2.   Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related
notes included in this Report and our audited consolidated financial statements and related notes for the year ended December 31, 2001 included in our Annual Report on Form 10-K. This discussion includes forward-looking statements, such as our
projections about future results of operations that are inherently uncertain. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors including, but not limited to, those
discussed in Factors That May Affect Our Business in this item.

5



---

##### Table of Contents

We are a biotechnology company founded in 1987. Our primary goal is to develop
therapeutic products using our proprietary technology and expertise in proteins. In addition, we are marketing our technologies to collaborators and commercial customers. We have technological expertise in three areas: (1) proteomics, which is the
study of proteins and how they change in disease and in response to drugs; (2) functional genomics, which is the study of each proteins function; and (3) the production of proteins for commercial applications.

Our strategy is threefold: (1) commercialize products and technologies in the field of human and animal healthcare, using proprietary methods to identify and
analyze genes and proteins associated with disease; (2) provide quick and cost-effective manufacturing of therapeutic proteins; and (3) capitalize on our leadership position with plant viral vector technology for product discovery applications in
agriculture and forestry.

Highlights of the Companys second quarter of 2002 include the following:

|                                                                                         |  | A new bioprocessing alliance with Phylogix, Inc. to develop and manufacture a therapeutic protein designed to protect normal tissues from the toxic effects of
chemotherapy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | Collaborative agreements with StemCell Technologies, Inc. and the National University of Singapore to explore applications of our Plurigen stem and progenitor cell cultivation product                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | A collaboration agreement with the Institute of Infectious Disease and Molecular Medicine at the University of Cape Town (South Africa) to develop and manufacture vaccines intended to protect against infectious
diseases, including human papillomavirus (HPV) and AIDS/HIV.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | In June 2002, we implemented a restructuring that is intended to conserve working capital and protect the timeframe required for the commercial development of our products. The restructuring included a 25% reduction
in headcount and a 10% reduction in future cash compensation for 24% of the Companys remaining employees. Three executive officers previously reduced their cash compensation by
10% effective December 1, 2001 and will receive a cumulative 20% reduction of their cash compensation. The reductions in cash compensation are effective July 1, 2002 and will be replaced in equal amounts by compensation in the form of the
Companys common stock. The stock compensation will be subject to vesting requirements and stock restrictions. Shares of common stock will be issued under the
Companys 2000 Stock Incentive Plan. We expect this stock-for-cash program will result in permanent cash savings to the Company but require the recognition of stock compensation
expense.
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | In July 2002, the National Institute of Environmental Health Sciences (NIEHS), on behalf of the National Center for Toxicogenomics (NCT), awarded a five year contract to the Company valued at approximately $12.3
million. The Companys proteomics division will work with the NCT to analyze protein reactions to various environmental exposures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                        
|The Companys recent operating results and financial position are summarized as follows:
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | In recent years, the Companys revenues were almost entirely earned from a research collaboration with The Dow Chemical Company and its subsidiary Dow AgroSciences LLC, or collectively,
Dow. Under our agreement with Dow, the Company received funding for sponsored genomics research and payments for technology access fees and milestone achievements. We earned over $52 million in revenue from this collaboration, representing at least
84% of our total revenues in each year between 1998 and 2001. This research collaboration was completed in August 2001. We have not replaced the revenues from the Dow collaboration either through new collaboration or other agreements or through
product sales. Our total revenues for the six months ended June 30, 2002 equaled $915,000.                                                                                                                                                                                                                
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | The Company incurred significant losses in the six months ended June 30, 2002 and in each year since inception in 1987. We expect to continue realizing material losses until such time as we
enter into large and/or numerous research or other agreements or earn significant revenues from sales of products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                         |  | The Company incurred negative operating cash flows of $14.6 million in the six months ended June 30, 2002, and $18.9 million and $13.0 million in the years ended December 31, 2001 and 2000,
respectively. The increasingly negative trend of operating cash flows is primarily attributable to the completion of the Dow collaboration in August 2001 and the lack of significant revenues from other collaborators or customers during the same
periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

For the Company to begin generating positive earnings and operating cash flows, we must generate
significant revenues and cash receipts from product sales or new research agreements. We have taken several steps to reduce our operating costs including headcount reductions, cancellation of certain consulting and outside research services, and the
delay or cancellation of certain capital expenditures. However, without near-term increases in revenue or cash inflows from other potential sources of working capital including partnerships, additional equity issuances or sales of assets, we will
likely need to force additional reductions in operating expenses and/or reduce the rate of investment or scope of product development activities. We are evaluating each of our core technologies (proteomics, functional genomics, and bioprocessing),
our internal research projects and our product development initiatives to emphasize near-term opportunities to generate revenue and cash flows. As a result of these evaluations, we may decide to exit or sell one or more of our lines of business or
cancel or delay one or more current projects or products under development.

Results of Operations

Revenues. Revenues decreased $5.5 million and $11.0 million in the three and six months ended June 30, 2002, respectively, compared to the prior year periods. These decreases are
primarily attributable to the completion of our research collaboration with Dow in August 2001. Revenues from Dow equaled $5.3 million and $10.5 million in the three and six months ended June 30, 2001, respectively. No revenues from Dow were
recognized subsequent to August 2001.

6



---

##### Table of Contents

Development agreement costs. Development agreement costs consist mainly of personnel expenses and
research materials related to activities performed under revenue generating research agreements or government grants. Development agreement costs decreased $939,000 and $2.2 million in the three and six months ended June 30, 2002, respectively,
compared to the prior year periods. These decreases are primarily attributable to the completion of our research collaboration with Dow in August 2001. Development agreement costs related to the Dow research collaboration equaled $817,000 and $2.0
million in the three and six months ended June 30, 2001, respectively. We expect future development agreement costs to fluctuate consistently with increases or decreases in revenues earned from any new research agreements or government grants we may
enter into.

Research and development expenses. Research and development expenses consist mainly of internal personnel,
consulting and outside research services and materials related to research activities. Research and development expenses increased $134,000, or 2%, and $1.7 million, or 16%, in the three and six months ended June 30, 2002, respectively, compared to
the prior year periods. These increases are primarily attributable to the reallocation of resources from activities associated with the Dow research collaboration to internally funded research projects. For reporting purposes, this reallocation of
resources resulted in increased research and development expenses and decreased development agreement costs (as noted above). The increases in research and development expenses in the three and six months ended June 30, 2002 are less than the
related decreases in development agreement costs primarily due to the headcount reductions implemented in June 2002 and reductions of consulting and outside research services. We expect research and development expenses in subsequent quarters to be
lower than the three months ended June 30, 2002 as the effect of the Companys restructuring in June 2002 is realized for a full quarter.

The Companys major research and development projects have included our initiatives in the areas of therapeutic vaccines, endothelial cell-derived growth factor, protein and vaccine
manufacturing, protein biochips, marker and target discovery, and plant functional genomics. We cannot estimate with reasonable certainty the cost to complete these projects. Although we believe that all of our projects are important, business
developments such as new collaborations may dictate the relative emphasis and resources we place on any given project which will affect the costs and completion dates of our other projects. Alternative technologies may supersede our technologies or
make them non-competitive, in which case we would shift our resources away from projects related to obsolete technologies. In addition, if we are unable to generate significant cash flows in the near future, we may have to delay, reduce the scope
of, or eliminate one or more of our research and development projects. Any delay in the completion of any one of our research and development projects would jeopardize the success of the product or service we expect to commercialize from that
project.

General, administrative and marketing expenses. General, administrative and marketing expenses largely consist of
non-research personnel. General, administrative and marketing expenses increased $543,000 and $1.1 million in the three and six months ended June 30, 2002, respectively, compared to the prior year periods. Excluding the restructuring expense of
approximately $900,000, general, administrative and marketing expenses decreased $328,000, or 9%, and increased $257,000, or 4%, in the three and six months ended June 30, 2002, respectively, compared to the prior year periods. The decrease in the
second quarter is primarily attributable to the headcount reductions implemented in June 2002 and reductions in incentive compensation. The increase for the six months ended June 30, 2002 is primarily attributable to legal fees and costs associated
with patent applications for the Companys products and technologies, partially offset by cost savings related to the restructuring in June 2002. We expect general, administrative and marketing expenses in subsequent quarters to be lower than
the three months ended June 30, 2002 as the effect of the Companys restructuring is realized for a full quarter.

Amortization of purchased intangibles. Amortization expense relates to the Companys purchase of Large Scale Proteomics Corporation in 1999. Amortization expense decreased
$169,000 and $338,000 in the three and six months ended June 30, 2002, respectively, compared to the prior year periods. These decreases are attributable to the discontinuance of amortizing goodwill effective January 1, 2002 in accordance with SFAS
No. 142. We expect amortization expense for subsequent quarters of 2002 to be consistent with the three months ended June 30, 2002.

Interest income. Interest income decreased $678,000, or 76%, and $1.7 million, or 79%, in the three and six months ended June 30, 2002, respectively, compared to the prior year
periods. These decreases are attributable to the Companys declining cash balance available for investment and the significant reduction in interest yields

7



---

##### Table of Contents

throughout 2001. Until the Companys cash position improves, we expect interest income to continue declining in subsequent quarters.

Liquidity and Capital Resources

|                                                                            | June 30, 2002 | December 31, 2001        
|--------------------------------------------------------------------------- | ------------- | -------------------------
|                                                                            |               |                          
|Cash, cash equivalents and marketable securities                            | $             | 33,453,000               
|                                                                            |               |                          
|                                                                            |               | Six Months Ended June 30,
|                                                                            |               |                          
|                                                                            |               | 2002                     
|                                                                            |               |                          
|Net cash used in operating activities                                       | $             | (14,625,000              
|Cash used in investing activities, excluding marketable securities activity |               | (666,000                 
|Net cash provided by (used in) financing activities                         |               | 127,000                  

We have historically funded
our working capital needs through payments received from research collaboration agreements and issuances of preferred and common stock, including our initial public offering of common stock in the third quarter of 2000. In the six months ended June
30, 2002, we received an insignificant amount of cash from new research agreements or government grants. As a result, our cash and marketable securities balance was used during this period at a rate that is unsustainable for a long-term period. The
preservation of our cash and marketable securities in subsequent quarters depends on the Companys ability to generate revenues and control operating costs. We believe the organizational restructuring implemented in June 2002 will significantly
reduce our operating costs in the immediate future and provide some financial cushion for the anticipated development period of our planned products and services. The estimated timeframe for certain of our products and services are as
follows:

- Non-Hodgkins Lymphoma vaccine  We estimate any revenue from sales of this product will not occur, if at all, for several years given the remaining regulatory approval
requirements. However, our strategy is to establish commercial collaborations for the development and marketing of this product and revenue could occur from such collaborations prior to approval of the product from the U.S. Food and Drug
Administration.
- Bioprocessing services  Our bioprocessing plant in Kentucky is operational. We expect that near-term revenue from bioprocessing services will be in the form
of supply agreements or feasibility studies with third parties. We may realize such revenues beginning in 2002.
- Growth factor technology  We have entered into several
collaboration agreements with educational institutions and commercial companies to explore potential applications of our growth factor technologies. Potential revenues from these technologies include sales of reagent product (e.g., Plurigen) or
income from license agreements. We expect the current feasibility studies with our collaborators will identify revenue opportunities, if any, for our growth factor technologies by the end of 2002 and any potential revenue may be realized beginning
in 2003. In addition, we are applying our proteomics and genomics technologies to the discovery and development of potential therapeutic products in this category. Success could lead to commercial collaboration revenues.
- Discovery and development services  We are pursuing commercial collaborations with other companies for the discovery and development of collaborators' products based upon access to our
proteomics and genomics technologies. We expect to generate fee-for-service revenue as well as revenue from license agreements. Our $12.3 million contract with the NIEHS will generate revenue for the Company beginning in 2002.

Based upon our current level of operating cash flows, in combination with ongoing steps to reduce operating costs, we expect that our cash and
marketable securities balance at June 30, 2002 is sufficient to meet our working capital and capital expenditure needs through the end of 2003. However, if the Company continues to experience significant negative operating cash flows, we may need to
implement additional organizational restructurings, sell additional equity or debt securities, obtain credit financing, enter into joint venture or partnership arrangements or sell all or a portion of certain assets or

8



---

##### Table of Contents

technologies in order to fund our product development activities through the estimated development periods. Given the Companys financial position, equity
or credit financing may not be available to the Company or on terms acceptable to the Company. Also, the sale of additional equity or convertible debt securities may result in significant dilution to our current stockholders.

Net cash used in operating activities. Net cash used in operating activities increased $6.9 million in the six months ended June 30, 2002
compared to the prior year period. This increase in cash usage is primarily attributable to reductions of $2.9 million and $2.1 million in cash received from research agreements and interest received from investments, respectively. Additionally, the
organizational restructuring in June 2002 resulted in a cash disbursement of $1.0 million.

Cash used in investing activities,
excluding marketable securities activities. Capital expenditures decreased $8.6 million in the six months ended June 30, 2002 compared to the prior year period. In the first six months of 2001, the Company invested $7.6 million, primarily for
leasehold improvements, at our proteomics research facility in Germantown, Maryland. The Companys planned capital expenditures for 2002 are less than $2.0 million. This planned amount may change based upon the requirements of any new research
agreements we may enter into during the third and fourth quarters of 2002.

Net cash provided by (used in) financing
activities. The improvement in cash flow from financing activities for the six months ended June 30, 2002 compared to the prior year period is primarily attributable to lower debt repayments.

Critical Accounting Policies

The Companys accounting policies are explained in Note 1
to the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. We consider the following accounting policies to be critical given they involve estimates and judgments made by
management and are important for our investors understanding of our operating results and financial condition.

Revenue
RecognitionWe earn revenues from research and collaboration agreements and government grants that consist of one or more revenue sources including technology access fees,
milestone payments and research funding. We recognize revenues for each of these components as follows:

Technology access fees are
typically up-front, non-refundable payments and represent consideration from our collaboration partners for access and rights to the Companys technologies for the term of the research agreement. The Companys technologies are normally
integral to the objectives of the research collaboration and, therefore, receipt of a technology access fee does not represent the culmination of an earnings process. Accordingly, we recognize revenue from technology access fees on a straight-line
basis over the original term of the agreement, not including renewal periods unless renewal is assured at the time the agreement is executed. The unrecognized portion of technology access fees is reported as deferred revenue.

Milestone payments are triggered by the Companys achievement of performance objectives that are defined in research agreements. Milestone
achievements typically require acceptance or approval by our collaboration partners. Also, our collaboration partners retain access to the technologies underlying the milestone achievement for the remaining term of the agreement. Accordingly, we
recognize revenue from milestone payments on a straight-line basis from the date of completion of the applicable performance objective to the end of the original term of the agreement, not including renewal periods unless renewal is assured at the
time the agreement is executed. The unrecognized portion of milestone payments is reported as deferred revenue.

We receive funding
for sponsored research or feasibility studies from commercial companies, government agencies and educational institutions. Funding for sponsored research or feasibility studies is typically non-refundable and not based upon performance objectives or
customer acceptance. Also, we may receive funding in the form of periodic payments or reimbursement of actual costs. Accordingly, revenue from sponsored research and feasibility studies is recognized using the percentage of completion method or
recognized as expenses are incurred depending on the form of funding. Under the percentage of completion method, the total

9



---

##### Table of Contents

contract value is multiplied by the percentage of actual research costs incurred to date compared to the estimated total costs to complete the contract as a
whole. If collection of any funding is not assured, revenue recognized is limited to the lesser of the percentage of completion calculation or actual cash received to date. Revenue received for equipment purchases is deferred and recognized as
revenue over the life of the agreement.

Intangible and Long Lived AssetsThe Companys intangible and long-lived assets include goodwill and other intangibles related to the Companys acquisition of Large Scale Proteomics Corporation, capitalized costs of filing patent
applications that relate to commercially viable technologies, capitalized license fees for rights to specified technologies, and property and equipment related to our bioprocessing facility in Kentucky. Except for goodwill, all intangible and long
lived assets are amortized or depreciated over the shorter of (1) their estimated useful lives, (2) the estimated period that the assets will generate revenue, or (3) the statutory or contractual term in the case of patents and intellectual property
licenses. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon managements judgment. Effective January 1, 2002, we discontinued amortizing goodwill in accordance
with Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. Instead, we will evaluate goodwill for possible impairment on an annual basis or sooner if warranted. We evaluate our other
intangible assets and our long-lived assets for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If any of our intangible assets, including goodwill, and long lived assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets.

Stock-Based Compensation  The Company normally grants stock options having fixed exercise prices
and a fixed number of shares of common stock that may be acquired. We account for stock options granted to employees and directors using the intrinsic value method of accounting. As such, we recognize compensation expense only if the quoted market
value of the Companys common stock exceeds the exercise price of the stock option on the grant date. Any compensation expense realized per the intrinsic value method is
amortized over the vesting period of the option. Stock options issued to non-employees as consideration for goods or services provided to the Company are accounted for under the fair value method which requires that compensation expense be
recognized for all such options.

Factors That May Affect Our Business

We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks, and other
risks are discussed elsewhere in this Report.

Risks Related To Our Business

We
are at an early stage of commercialization, and we may not be able to successfully develop and commercialize our products and technologies

We are in an early stage of commercialization, and we are subject to all the risks inherent in the development of a business enterprise, including the need for substantial capital to
support the development of our products and technologies. We have had limited revenue from contract research and development services and collaborations.

Our anticipated products, including our novel vaccines for the treatment of non-Hodgkins lymphoma, or NHL, most likely will require that we enter into new collaborations before we
can manufacture and/or market them. Vaccines are also subject to the governmental regulatory process. Because we are in new and developing fields, and our research focuses on new and unproven technologies, our therapeutic vaccines, proteins and
other therapeutics under development may not be effective in humans, or may not meet regulatory requirements for safety and efficacy. In addition, even if we successfully develop a product, there may not be a substantial commercial market for that
product.

We are in new and developing fields and there may not be a market for our products and technologies

Protein-based gene expression products and technologies, including our plant-derived proteins, plant-based protein bioprocessing, our ProGEx system and GENEWARE
technology, have limited commercial precedent. Much of our research is fundamentally unique and we cannot assure the acceptance of its scientific merit or the benefits of products produced by it, or that the public will react favorably to it. The
usefulness of the information and products generated by our proteomics, functional genomics and bioinformatics technologies is unproven, and our collaborators and potential collaborators may determine that they are not useful or cost-effective. We
generate large amounts of data from our research with genes and proteins and we may not be able to

10



---

##### Table of Contents

timely mine or integrate this data, or turn it into commercially viable information. In addition, we must complete development of our products and technologies
in time to meet market demand, if any. If we fail to do so, it is likely that other technologies and companies will predominate and we will not be able to earn a sufficient return on our investment.

In an environment of diminished revenue, we must take steps to preserve working capital and extend the viability of the Company

Because we are experiencing diminished revenue and cash flow, we are internally funding virtually all of our product development initiatives. At the same time,
because our cash flow is substantially reduced compared to the last three years, we are experiencing increasing pressure to curtail spending and otherwise reduce costs. We implemented a major reorganization in June 2002 to reduce costs. If we cannot
increase our cash flow in the very near term, we will likely be required to take one or more of the following actions: further reorganize our operations; delay, reduce the scope of, or eliminate one or more of our research and development programs;
significantly reduce patent-related expenses, effectively foregoing our rights to future technologies or products; obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products that we would otherwise seek to develop or commercialize on our own; or sell or license the rights to certain of our products or technologies on terms that may not be favorable to us.

We have a history of losses and cannot predict when we will become profitable, if at all

We have had net losses in each year since our inception in 1987. We sustained a net loss of $9.6 million in the three months ended June 30, 2002, and had an accumulated deficit of $134.8
million as of June 30, 2002. From September 1998 through August 2001, almost all of our revenues came from our research collaboration with Dow. The research collaboration with Dow ended on August 31, 2001 and we expect no additional revenues under
our contract with Dow for the foreseeable future. We have not yet entered into any new collaborations of the magnitude that could make up for the decrease in cash flow and revenues resulting from the completion of our research collaboration with
Dow. We expect to continue to spend significant amounts to develop products and to fund our operations. As a result we will need to generate significant additional revenues from collaborations and the commercialization of our products and
technologies to achieve profitability. We expect to incur substantial losses in the foreseeable future. If we are unable to enter into major new collaborations, control our operating expenses and successfully commercialize our products and
technologies, we may never become profitable and we may fail.

We may require additional capital

In order for us to develop profitable and cash-positive operations, we must generate revenue from our products under development and our technologies. Since our
inception, we have never generated enough cash to cover our expenses and we expect to continue to spend substantial funds to continue our product development programs. Changes in our business may occur that would consume available capital resources
significantly sooner than we expect. In addition, the risks inherent in developing innovative products, such as NHL vaccines, make it difficult to forecast with certainty the capital required to commercialize our products. If our capital resources
are insufficient to meet future capital requirements and expenses, we will have to raise additional funds. If we raise additional funds by issuing equity securities, our existing stockholders may be diluted. We may raise this capital through public
or private financings or additional collaborations, strategic partnerships or licensing arrangements. While we cannot predict our need for additional capital in the future, we expect that the amount required would be substantial. Our access to
capital markets may be restricted by depressed stock valuations over an extended period of time. We may be unsuccessful in entering into any new collaboration that results in significant revenues or cash flow. If we are unable to raise sufficient
additional capital or generate sufficient cash flows, we will have to curtail or cease operations.

General economic conditions result in uncertainty
with respect to other companies and entities collaborating with us or otherwise dealing with us, and this can have an adverse effect on our revenues and cash flows

11



---

##### Table of Contents

To a large extent, decisions by businesses and other entities to collaborate or otherwise do business
with us are discretionary, and the decision making process typically takes many months to complete. We believe that the prolonged slowdown in the U.S. economy and economies overseas has caused, and may continue to cause such potential collaborators
and customers to defer decisions to work with us or to access our technologies. As a result, we expect that revenues and cash flows will be uncertain for the remainder of 2002. Therefore, it is difficult to accurately assess and predict the future
demand for our products, technologies and services. If these general economic conditions continue, such conditions will likely have a continuing, adverse effect on our revenues and operating results.

Alternative technologies may supersede our technologies or make them non-competitive

Genomics, proteomics, bioprocessing and bioinformatics are fields that are intensely competitive. They are characterized by extensive research efforts, which result in rapid
technological progress which can render existing technologies obsolete or economically noncompetitive. If our competitors succeed in developing products or technologies that are more effective than ours or that render our products or technologies
obsolete or noncompetitive, our business will suffer. Many universities, public agencies and established pharmaceutical, biotechnology, chemical and other life sciences companies with substantially greater resources than we have are developing and
using technologies and are actively engaging in the development of products similar to or competitive with our products and technologies. Like us, our competitors are using proteomics and genomics technologies to identify potential drug targets,
therapeutic proteins and diagnostic marker proteins. In addition, our competitors have developed databases containing gene sequence, gene expression, genetic variation or other genomic information and are marketing or plan to market their data to
pharmaceutical, biotechnology, chemical and other life sciences companies. To remain competitive, we must continue to invest in new and existing technologies, expand our databases and improve our bioinformatics software. We may not have the
resources to continue such investment.

Our competitors may devise faster, more complete or more accurate methods to obtain
proteomic and functional genomic information than our technologies and systems, including our ProGEx and GENEWARE systems. There has been and continues to be substantial academic and commercial research effort devoted to the development of such
methods. If a successful competitive method is developed, it would undermine the commercial basis for the products and technologies we intend to provide.

We may not be able to enter into collaborations necessary to fully develop and commercialize our products and technologies, and we will be dependent on our collaborators if we do

We intend to independently pursue some therapeutic product applications into the development stage. However, we expect to develop and
commercialize most of our future products in collaboration with pharmaceutical, biotechnology, agricultural, chemical and other life sciences companies. We cannot guarantee that such collaborative arrangements will be available to us on acceptable
terms, or at all. Our success will depend in large part on our ability to enter into future collaborations with other companies for the research and development, pre-clinical and clinical testing and the regulatory approval and commercialization of
our products. Our reliance upon these companies for these capabilities will reduce our control over such activities and could make us dependent upon them. To date, we have entered into only a limited number of collaborations. Generally, the scope of
these collaborations has been to demonstrate the function of plant genes and the feasibility of using viral vectors to create proteins in plants and to identify marker proteins for drug development and diagnostics. Our existing agreements generally
provide us with rights to participate financially in the commercial development of products resulting from the use of our technologies. We may be unable to obtain such rights in future collaborations. In addition, unforeseen delays or complications
could arise and result in the breach of our contractual obligations with our collaborators and others, or render our technologies unable to perform at the quality and capacity levels required for success.

Conflicts with collaborators or licensees could harm our business

Conflicts with collaborators could have a negative impact on our relationships with them, including on our revenues to be derived from these relationships, and impair our ability to
enter into future collaborations, either of which could adversely affect our business. Collaborators could develop competing

12



---

##### Table of Contents

products, preclude us from entering into collaborations with their competitors or terminate their agreements with us prematurely. Moreover, disagreements could
arise with collaborators or licensees over rights to our intellectual property, our rights to share in any of the future revenues from products or technologies resulting from use of our technologies, our rights to payments for achievement of
milestones or our performance of research and development activities on behalf of collaborators, or our activities in separate fields may conflict with other business plans of our collaborators or licensees.

We must enter into agreements with third parties to provide sales and marketing services, or develop these capabilities on our own, if we are to successfully commercialize our products
and technologies

Although we plan to enter into sales and marketing arrangements with third parties, we may not be able to
enter into these arrangements on favorable terms, if at all. If we cannot enter into these arrangements, we must develop a sales and marketing force with sufficient technical expertise to generate demand for our products and technologies. Our
inability to develop or contract for effective sales and marketing capabilities would significantly impair our ability to develop and commercialize our products.

We may not be able to successfully manufacture products in commercial quantities or at acceptable costs

We have only produced proteins on a small, test scale. The failure of our technologies to provide safe, effective, useful or commercially viable approaches to the discovery and
development of drug targets and proteins which can be used as therapeutics would significantly limit our business plan and future growth.

We may be
unable to recruit and retain senior management and other key personnel on whom we are dependent

The loss of one or more of our
senior management or other key personnel could significantly harm our business and could inhibit our research and development and commercialization efforts. None of our key personnel are subject to employment agreements. There is currently a
shortage of skilled senior management in the biotechnology industry, which is likely to continue and intensify. In addition, we face competition for research scientists and technical staff from other companies, academic institutions, government
entities, nonprofit laboratories and other organizations. We have implemented significant salary reductions for over twenty of our highest paid employees to conserve cash, and we may not be able to otherwise incentivize key personnel adequately to
retain them. Failure to recruit and retain senior management and scientific personnel on acceptable terms would prevent us from achieving our business objectives.

Concentration of ownership among our existing executive officers, directors and principal stockholders may enable them to collectively control all significant corporate decisions

Our directors, our executive officers and entities affiliated with our directors and our executive officers beneficially own, in the aggregate,
approximately 28% of our outstanding common stock as of July 31, 2002. These stockholders as a group may be able to control our management and affairs and be able to control most matters requiring the approval of our stockholders, including any
merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The concentration of ownership will also prevent a change of control of our Company if these stockholders oppose it, and may
discourage third parties from making a proposal to cause a change of control in the first instance.

Our stockholder rights plan and provisions of our
charter documents and Delaware law may inhibit a takeover, which could adversely affect our stock price

We have adopted a
stockholder rights plan and declared a dividend distribution of one right for each outstanding share of common stock to stockholders of record as of May 4, 2001. Subject to certain specified exceptions and limitations under the rights plan, we will
continue to issue one right for each share of common stock that becomes outstanding after May 4, 2001. Each right entitles the holder to purchase one unit consisting of one one-hundredth of a share of our Series A Junior Participating Preferred
Stock for $45 per unit. Under certain circumstances, if a person or group acquires 15% or more of our outstanding shares of common stock, holders of

13



---

##### Table of Contents

the rights (other than the person or group causing their exercisability) will be able to purchase, in exchange for the $45 exercise price, shares of our common
stock or of any company into which we are merged having a value of $90. In addition, the board of directors has the option, under certain circumstances, to exchange each right (other than rights held by the person or group triggering the board of
directors option) for a share of common stock for no additional consideration on the part of the holder of the right. The rights expire on April 27, 2011. Our rights plan could make it more difficult for a third party to acquire us (or a
significant percentage of our outstanding capital stock) by causing substantial dilution of the stock ownership of a person or group attempting to acquire control of us. Our rights plan may have the effect of discouraging takeover attempts because a
potential acquirer would have to negotiate with our board of directors to avoid suffering dilution.

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

Risks Related to Our Industry

If companies in the pharmaceutical, biotechnology, agricultural, chemical and life
sciences industries do not succeed or their demand for our products and technologies decreases, then our revenues could be reduced

We expect to derive our revenues primarily from products and technologies provided to the pharmaceutical, biotechnology, agricultural, chemical and life sciences industries. Accordingly,
our success will depend directly on the success of companies in these industries and their demand for our products, services and technologies. Our operating results may fluctuate substantially due to reductions and delays in research and development
expenditures by companies in those industries, or their unwillingness or inability to use our products and technologies. These reductions and delays may result from factors which are not within our control, such as:

| | changes in economic conditions generally;                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                        
| | the extent to which companies in these industries conduct research and development involving proteomics and functional genomics in-house or through industry consortia;
|  |                                                                                                                                                                        
| | the extent to which genomic information is or is not made publicly available;                                                                                          
|  |                                                                                                                                                                        
| | consolidation within one or more of these industries;                                                                                                                  
|  |                                                                                                                                                                        
| | changes in the regulatory environment affecting these industries;                                                                                                      
|  |                                                                                                                                                                        
| | pricing pressures;                                                                                                                                                     
|  |                                                                                                                                                                        
| | market-driven pressures on companies to consolidate and reduce costs; and/or                                                                                           
|  |                                                                                                                                                                        
| | other factors affecting research and development spending in these industries.                                                                                         

If
competitive products are better than our products, then our business may fail

The markets for protein development and
production, including human and veterinary therapeutics and vaccines like the ones we are developing, are highly competitive. Virtually all of the genes in the human genome have been sequenced and have been substantially identified. We face
significant competition in our protein product development and production efforts from entities using alternative, and in some cases higher volume and larger scale, approaches for the same purpose. Competitors with substantially greater resources
are actively developing products similar to or competitive with our products and potential products. Our competitors may succeed in developing products or obtaining regulatory approval before we do or in developing products that are

14



---

##### Table of Contents

more effective than those we develop or propose to develop. A large number of universities and other not-for-profit institutions, many of which are funded by
the U.S. and foreign governments, are also conducting research to discover genes and their functions. Any one or more of these entities may discover and establish a patent position in one or more of the genes or proteins that we wish to
commercialize.

In addition, several pharmaceutical, biotechnology, chemical and other life sciences companies engage in research
and development in the use of unique gene expression systems to produce therapeutic proteins. These competitors may develop products earlier or obtain regulatory approvals faster than we may be able to, or develop products that are more effective
than ours. At least one of our major competitors, Oxford Glycosciences, Plc., is located in Europe, and our ability to use our patent rights to prevent competition in the creation and use of proteomics-driven products and technologies is more
limited outside of the United States. New developments are expected to continue, and discoveries by others may render our products and technologies noncompetitive, which could lead to the failure of our business.

We may not have access to sufficiently complete, accurate or defect-free data from outside sources, including genome sequence data, which would increase our costs and could affect our
product development efforts

The efforts of the Human Genome Project and private companies to create a complete catalog of the
human genome may not enable us to fully integrate that data with our proprietary protein databases. In addition, we obtain our data from other sources, including our academic collaborators and our sources of cell and tissue samples. This data could
contain errors or other defects which could corrupt our databases or increase our costs by requiring us to use alternative methods or sources to obtain such data. In addition, these data sources may have acquired this information in a manner that
violates various applicable legal requirements.

We and our collaborators may not obtain FDA and other approvals for our products in a timely manner, or
at all

Drugs and diagnostic products are subject to an extensive and uncertain regulatory approval process by the FDA and
comparable agencies in other countries. The regulation of new products is extensive, and the required process of laboratory testing and human studies is lengthy, expensive and uncertain. The burden of these regulations will fall on us to the extent
we are developing proprietary products on our own, such as our vaccines for the treatment of non-Hodgkins lymphoma. We may not be able to obtain the clearances and approvals necessary for the clinical testing, field-testing, manufacturing or
marketing of our products. If the products are the result of a collaborative effort, these burdens may fall on our collaborators or we may share these burdens with them. We may not obtain FDA or other approvals for those products in a timely manner,
or at all. We may encounter significant delays or excessive costs in our efforts to secure necessary approvals or licenses. Even if we obtain FDA regulatory approvals, the FDA extensively regulates manufacturing, labeling, marketing, promotion and
advertising after product approval. Further, once a manufacturer obtains regulatory approval, a marketed product and its manufacturer are subject to continual review, and discovery of previously unknown problems with a product or manufacturer may
result in restrictions on the product, manufacturer or manufacturing facility, including withdrawal of the product from the market. In some countries, regulatory agencies also set or approve the sale prices for drug products. Additionally, several
of our product development areas may involve relatively new technology that has not been the subject of extensive product testing in humans. The regulatory requirements governing these products and related clinical procedures remain uncertain and
the products themselves may be subject to substantial review by the FDA and foreign governmental regulatory authorities that could prevent or delay approval. Regulatory requirements ultimately imposed on our products could limit our ability to test,
manufacture and commercialize our products.

If new rules issued by the USDA adversely affect us or our collaborators ability to commercialize
genetically modified products, then our ability to sell certain products and technologies will be severely impaired

We must
comply with USDA regulations for outdoor releases of genetically engineered organisms as well as other products designed for use on or with agricultural products. The USDA has released regulations that prohibit the inclusion of genetically modified
ingredients in products labeled as organic. The USDA regulations also prohibit the use of genetically modified fibers in clothing labeled as organic. These regulations ultimately could make any products that may be developed with our collaborators,
including Dow, unattractive to or too

15



---

##### Table of Contents

expensive for consumers, or could cause the government to prohibit their sale or use. In addition, the USDA prohibits growing and transporting genetically
modified plants except pursuant to an exemption or under special permits. We may use genetically modified plants as screening or production hosts. Changes in USDA policy regarding the movement or field release of genetically modified plant hosts
could adversely affect our business by increasing the cost of our products and technologies or decreasing consumer demand for those products and technologies or causing the government to prohibit their sale or use.

Future legal and regulatory requirements may limit or discourage the use of certain genetically engineered organisms and products, which could negatively impact revenues

The FDA currently applies the same regulatory standards to foods developed through genetic engineering as it applies to foods developed
through traditional plant breeding. However, genetically engineered food products will be subject to pre-market review if these products raise safety questions or if the FDA considers these products to be food additives. Our products and the
products of our collaborators that contain genes that we identify or determine to have a particular function may be subject to lengthy FDA reviews and unfavorable FDA determinations if the FDA considers them to be food additives or if the FDA
changes its policy. Also, we believe the FDAs policy is that it will not require that genetically engineered agricultural products be labeled as such, provided that these products are as safe and have the same nutritional characteristics as
conventionally developed products. The FDA may reconsider or change its labeling policies, or local or state authorities may enact labeling requirements. Any such labeling requirements could reduce the demand for genetically engineered products. In
those products where production must be performed outdoors, the USDA prohibits manufacturers from growing and transporting genetically engineered plants except pursuant to an exemption or a permit under strict controls. If our future products are
not exempted or covered by permits by the USDA, it may be impossible to sell such products.

If there is negative public reaction to the use of
genetically engineered products and technologies, then the market for certain products and technologies we develop will be adversely affected

Future commercial success of some of our products and of the products of some of our collaborators, will depend in part on public acceptance of the use of genetically engineered products
including drugs, plants and plant products. Claims that genetically engineered products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Negative public reaction to genetically modified organisms and
products could result in greater government regulation of genetic research and resultant products, including stricter labeling requirements, and could cause a decrease in the demand for our products.

We may be sued for product liability and our product liability insurance may not be adequate

The testing, marketing and sale of our and our collaborators products will entail a risk of allegations of product liability, and third parties may assert substantial product
liability claims against us. While we have limited product liability insurance to protect against this risk, adequate insurance coverage may not be available at an acceptable cost, if at all, in the future and a product liability claim or product
recall could materially and adversely affect our business. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of
the products we or our collaborators develop. If we are sued for any injury allegedly caused by our products or our collaborators products, our liability could exceed our total assets and our ability to pay the liability.

If we use hazardous materials in our business in a manner that causes injury or violates laws, we may be liable for substantial damages

Our research and development processes involve the use of hazardous materials, including chemicals and radioactive and biological materials. Our
operations also produce hazardous waste products. 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 several radioisotopes including phosphorous-32, carbon-14, sulfur-35, phosphorous-33, iodine-125 and hydrogen-3. We cannot eliminate the risk of accidental
contamination or discharge and any resultant injury from these materials. Federal, state and local laws and

16



---

##### Table of Contents

regulations govern the use, manufacture, storage, handling and disposal of these materials. We could be subject to civil damages and criminal penalties in the
event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. Further, it is possible that the materials we use could contaminate another partys property. In addition, claimants may sue us for injury or
contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets and our ability to pay the liability. In addition, compliance with environmental laws and regulations is expensive,
and current or future environmental regulations may impair our research and development and production efforts. Although we have general liability insurance, these policies do not cover claims arising from pollution from chemical, radioactive or
biological materials. Our collaborators may also be working with various types of hazardous materials in connection with our collaborations. In the event of a lawsuit or investigation, we could be held responsible for any injury we or our
collaborators cause to persons or property by exposure to, or release of, any hazardous materials.

Healthcare reform and restrictions on reimbursements
may limit the financial returns from our products

Our ability and that of our collaborators to commercialize therapeutics and
diagnostic products may depend in part on the extent to which government health administration authorities, private health insurers and other organizations will pay the cost of these products. These third parties are increasingly challenging both
the need for and the price of new medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics and diagnostics, and adequate third party reimbursement may not be available for any
product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in research and product development.

Risks Related to Our Intellectual
Property

Patent protection in the biotechnology industry is uncertain, which may result in a decrease in the value of our products and
technologies

We are involved in overlapping and rapidly evolving areas of biotechnology, pharmaceutical development and basic
research involving viral vectors, plant transgenics, proteomics, functional genomics, protein transformation, and immunotherapy. Each of these areas has been the subject of intense research and patenting activity throughout the world by our
commercial competitors, actual and potential collaborators, academic institutions and government researchers. We cannot determine whether or not there are patents currently pending which, if issued, would prevent us from practicing our core
technologies, commercializing them or developing commercially viable products based upon them.

The patent positions of
biotechnology firms generally are highly uncertain and involve complex legal and factual questions that will determine who has the right to develop a particular product. No clear policy has emerged regarding the breadth of claims covered in
biotechnology patents in general and those relating to gene sequences in particular. In addition, recently there has been public debate questioning the patentable scope of genomic sequence data. The biotechnology patent situation outside the United
States is even more uncertain and is currently undergoing review and revision in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries might allow others to use our discoveries or to
develop and commercialize products and technologies similar to our products and technologies without any compensation to us. Our potential collaborators or customers may conclude that uncertainties about patent protection decrease the value of our
databases, products and services.

Throughout the world there are numerous issued patents, as well as published foreign patent
applications which may issue as patents, many of which relate to our current operations, our anticipated future operations and the products we are likely to develop. The scope of these patents is a matter of legal interpretation and is subject to
uncertainty. We have not obtained, but we may in the future obtain, opinions from our patent counsel that we have freedom to conduct our commercial activities free of claims of patent infringement from third parties. For example, we are aware of one
company, Enzon, Inc., that through its subsidiary, SCA Ventures, Inc., owns or has licensed a broad portfolio of patents to single-chain antigen binding proteins. Enzon, in a letter mailed to numerous companies including us, has stated that it would
like to discuss providing a license under these patents. In addition, Dow owns or controls certain patent rights in the field of viral vectors covering the infection of plant

17



---

##### Table of Contents

cells and the expression of foreign genes in plant cells, and has informed us that it believes that some of our plant viral activities may fall within the
scope of its patents. Two patents issued to us in October, 2001, reference the Dow-controlled patents and conclude that they do not constitute prior art. If we are unable to resolve this matter, and are found to have infringed upon Dows
rights, our product development and research activities related to plant viruses which fall within the scope of Dows patents may be delayed or terminated. These kinds of disagreements could result in costly and time-consuming litigation and
divert our financial and managerial resources.

Our patent applications may not result in issued patents that are enforceable

Our disclosures in our patent applications may not be sufficient to meet the statutory requirements for patentability in all cases. As a result,
we do not know which of our patent applications will result in enforceable patents. Our patent applications may not issue as patents, and any patents that are issued to us may not provide commercially meaningful protection against competitors. Any
issued patent may not provide us with competitive advantages. Others may challenge our patents or independently develop similar products which could result in an interference proceeding in the U.S. Patent and Trademark Office. Others may be able to
design around our issued patents or develop products similar to our products. In addition, others may discover uses for genes or proteins other than those uses covered in our patents, and these other uses may be separately patentable.

Public disclosure and patents relating to genes and gene sequences held by others may limit our proprietary rights

The Human Genome Project and many companies and institutions have identified genes and deposited those sequences in public databases and are continuing to do so.
These public disclosures might limit the scope of our claims or make unpatentable subsequent patent applications on full-length gene sequences. We are aware of issued patents and patent applications containing subject matter such that we or our
licensees or collaborators may require a license or rights in order to research, develop or commercialize some of our products and technologies. We may find that licenses relating to such subject matter will not be available on acceptable terms, or
at all.

Patent infringement or enforcement litigation or interference proceedings could be costly and disrupt our business and may prevent us from
commercializing our products

The technology that we use to develop our products and key resources, and those that we
incorporate in our products and technologies, may be subject to claims by third parties, including our collaborators, that they infringe the patents or proprietary rights of others. Technologies of our collaborators may also be subject to
infringement or similar claims which could impair our collaborative product development and commercialization efforts. We also may need to enforce our patent rights in actions against others, which could be expensive. The risk of such events
occurring will tend to increase as the fields of proteomics, genomics and the biotechnology industry expand, more patents are issued and other companies attempt to discover genes and proteins and engage in other proteomics, genomics and
biotechnology-related businesses.

With respect to identifying proteins uniquely associated with disease states or as targets for
drug therapy, we are aware that companies have published patent applications relating to nucleic acids encoding specific proteins. If the U.S. Patent and Trademark Office issues patents to these companies, their patents may limit our ability and the
ability of our collaborators to practice under any patents that may be issued to us. Also, even if the U.S. Patent and Trademark office issues us a patent, the scope of coverage or protection afforded to the patent may be limited.

We may not be able to protect our know-how and trade secrets

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

| | Some or all confidentiality agreements will not be honored;
|- | -----------------------------------------------------------

18



---

##### Table of Contents



| | Third parties will independently develop equivalent technology;                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                            
| | Disputes will arise with our consultants, collaborators or others concerning the ownership of intellectual property; and/or
|  |                                                                                                                            
| | Unauthorized disclosure of our know-how or trade secrets will occur.                                                       

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

The Companys exposures to market risks are fully explained in our Annual Report on Form 10-K for the year ended December 31, 2001. No material changes to the information provided in our Annual Report have occurred subsequent to December 31, 2001
through June 30, 2002.

19



---

##### Table of Contents

PART II  OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

(c) Recent Sales of Unregistered Securities. Effective December 1,
2001, four executive officers elected to take a portion of their salary, normally paid in cash, in shares of common stock. One of the executive officers terminated his employment in June 2002. The amount of stock compensation that each individual
elected to take in lieu of cash ranged from $20,000 - $30,000 annually and is payable in quarterly installments beginning February 28, 2002. In the three and six months ended June 30, 2002, the Company issued a total of 12,314 and 17,216
unregistered shares of common stock among the four individuals. No additional shares are planned to be issued under this program as these salary reductions will be included in a separate stock compensation program issued under the Company's 2000
Stock Incentive Plan. See further discussion of the stock compensation plan in Management's Discussion and Analysis of Financial Condition and Results of Operations.

The issuance of the above unregistered securities were made in reliance upon Section 4(2) of the Securities Act of 1933 and were made without general solicitation or advertising. The
applicable individuals are sophisticated investors and have access to all relevant information to evaluate their investment and represented to us that the shares were being acquired for personal investment.

(d) Use of Proceeds. During the third quarter of 2000, the Company received net proceeds of approximately $89 million from an initial public offering of the Companys common
stock. Provided below is a reasonable estimate of the amount of IPO net proceeds used in each of the following categories, through June 30, 2002:

|Construction of plant, building and facilities       | $ | 2,183,000 
|---------------------------------------------------- | - | ----------
|Purchase and installation of machinery and equipment |   | 7,336,000 
|Construction of leasehold improvements               |   | 5,993,000 
|Repayment of indebtedness                            |   | 3,641,000 
|Purchase of intellectual property licenses           |   | 2,650,000 
|Capitalized patent costs                             |   | 1,462,000 
|Working capital                                      |   | 32,038,000
|Cash and investments                                 |   | 33,453,000

The use of proceeds for working capital
includes expenses for research and development and general and administrative activities. Cash and investments consist of money market funds, commercial paper, corporate and U.S. government agency notes, and bank certificates of deposit.

None of the IPO net proceeds were paid directly or indirectly to directors, officers, or their associates, persons owning 10 percent (10%) or
more of any class of our equity securities, or our affiliates. The use of IPO net proceeds set forth above does not represent a material change from the anticipated use of proceeds described in the prospectus contained in our Registration Statement
on Form S-1 (SEC Registration No. 333-34198), declared effective on August 9, 2000.

Item 4. Submission of Matters to a Vote of Security Holders

On May 13, 2002, we held our Annual
Meeting of Stockholders to submit the following matters to a vote of the Companys security holders.

(1) Election of the
entire board of seven (7) directors of the Company, to hold office until the 2003 Annual Meeting of Stockholders or until their successors are duly elected:

|                         | Director        | Votes For  | Votes Withheld
|------------------------ | --------------- | ---------- | --------------
|                         | Robert L. Erwin | 20,446,084 | 680,079       
|John D. Fowler Jr.       | 20,446,088      | 680,075   
|N. Leigh Anderson, Ph.D. | 20,396,278      | 729,885   
|Marvyn Carton            | 20,931,714      | 194,449   
|Bernard I. Grosser, M.D. | 20,890,208      | 235,955   
|Sol Levine               | 20,863,868      | 262,295   

| | Kevin J. Ryan | 20,880,467 | 245,696
| | ------------- | ---------- | -------

20



---

##### Table of Contents

There were no abstentions, votes against or broker non-votes with respect to this proposal.

(2) Ratification of the appointment of Deloitte & Touche LLP as the Companys independent auditors for the year ending December 31,
2002:

|Votes For  | Votes Against | Abstentions
|---------- | ------------- | -----------
|21,009,694 | 101,798       | 14,671     

There were no votes withheld or broker
non-votes with respect to this proposal.

Item 5. Other Information

On July 24, 2002, N. Leigh Anderson, Ph.D., a former corporate officer of the
Company, resigned as a Company director. On July 31, 2002, Charles D. Nash was appointed to the Companys board of directors as Mr. Andersons replacement.

Item 6. Exhibits and Reports on Form 8-K

(a)  List of Exhibits:

|Exhibit No. | Description                                                           
|----------- | ----------------------------------------------------------------------
|            |                                                                       
|10.1        | Letter Agreement between registrant and N. Leigh Anderson, Ph.D.      
|10.2        | Consultancy Agreement between registrant and N. Leigh Anderson, Ph.D. 
|10.3        | Letter Agreement between registrant and Norman G. Anderson, Ph.D.     
|10.4        | Consultancy Agreement between registrant and Norman G. Anderson, Ph.D.

(b)  Reports on Form 8-K:          No reports on Form 8-K were filed during the period covered by this Report.

21



---

##### Table of Contents

SIGNATURES

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

|Date: August 14, 2002 | Large Scale Biology Corporation
|--------------------- | -------------------------------

| | By: /s/ Ronald J. Artale
| | ------------------------
| |                         

22



---

##### Table of Contents

EXHIBIT INDEX

|Exhibit No. | Description                                                           
|----------- | ----------------------------------------------------------------------
|            |                                                                       
|10.1        | Letter Agreement between registrant and N. Leigh Anderson, Ph.D.      
|10.2        | Consultancy Agreement between registrant and N. Leigh Anderson, Ph.D. 
|10.3        | Letter Agreement between registrant and Norman G. Anderson, Ph.D.     
|10.4        | Consultancy Agreement between registrant and Norman G. Anderson, Ph.D.