##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended September 30, 2003



or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to
.



Commission File Number: 000-31275



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LARGE SCALE BIOLOGY CORPORATION

(Exact name of registrant as specified in its charter)



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|Delaware                                                       |  | 77-0154648                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. employer identification number)



3333 Vaca Valley
Parkway, Vacaville, CA 95688

(Address of principal executive offices and zip code)



(707) 446-5501

(Registrants telephone number, including area code)



---



Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) 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 ̈



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



The number of shares outstanding of registrants common stock, $0.001 par value, as of November 9, 2003: 25,856,836



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##### 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, expect, plan, anticipate, believe, 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 Business
section and 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 and trade names are trademarks of or registered trademarks of Large Scale Biology Corporation in the United States and/or other countries. Other product and trade names mentioned herein may be
trademarks and/or registered trademarks of their respective companies. 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.



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##### Table of Contents

Large Scale Biology Corporation

Form 10-Q

For the Quarter Ended September 30, 2003

Table of Contents



|                               |  |         |  |                                                                                                                             |  | Page
|------------------------------ |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               | 
|PART I  FINANCIAL INFORMATION |  |        
|                               |  |         | 
|                               |  | Item 1. |  | Financial Statements                                                                                                        |  |     
|                               |  |         | 
|                               |  |         |  | Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 (Unaudited)                            |  | 1   
|                               |  |         | 
|                               |  |         |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 (Unaudited) |  | 2   
|                               |  |         | 
|                               |  |         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (Unaudited)           |  | 3   
|                               |  |         | 
|                               |  |         |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                            |  | 4   
|                               |  |         | 
|                               |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 6   
|                               |  |         | 
|                               |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |  | 16  
|                               |  |         | 
|                               |  | Item 4. |  | Controls and Procedures                                                                                                     |  | 16  
|                               | 
|PART II  OTHER INFORMATION    |  |        
|                               |  |         | 
|                               |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                                   |  | 17  
|                               |  |         | 
|                               |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                            |  | 17  
|                               | 
|SIGNATURE                      |  | 18     



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. Financial Statements



Large Scale Biology Corporation

Condensed Consolidated Balance Sheets

(Unaudited)



|                                                                              |  | September 30, 2003 |              |   | December 31, 2002 |  
|----------------------------------------------------------------------------- |  | ------------------ | ------------ | - | ----------------- | -
|Assets                                                                        |  |                    |              |   |                   |  
|Current assets:                                                               |  |                    |              |   |                   |  
|Cash and cash equivalents                                                     |  | $                  | 6,727,000    |   |                   | $
|Marketable securities                                                         |  |                    | 4,568,000    |   |                   |  
|Prepaid expenses and other current assets                                     |  |                    | 1,186,000    |   |                   |  
|                                                                              |  |                    |              |   |                   |  
|Total current assets                                                          |  |                    | 12,481,000   |   |                   |  
|Property, plant, and equipment, net                                           |  |                    | 11,116,000   |   |                   |  
|Patents and intellectual property licenses, net                               |  |                    | 3,303,000    |   |                   |  
|Other intangible assets, net                                                  |  |                    |             |   |                   |  
|Other assets                                                                  |  |                    | 575,000      |   |                   |  
|                                                                              |  |                    |              |   |                   |  
|                                                                              |  | $                  | 27,475,000   |   |                   | $
|                                                                              |  |                    |              |   |                   |  
|Liabilities and Stockholders Equity                                          |  |                    |              |   |                   |  
|Current liabilities:                                                          |  |                    |              |   |                   |  
|Accounts payable                                                              |  | $                  | 645,000      |   |                   | $
|Accrued expenses                                                              |  |                    | 814,000      |   |                   |  
|Current portion of long-term debt                                             |  |                    | 151,000      |   |                   |  
|Deferred revenue and customer advances                                        |  |                    | 124,000      |   |                   |  
|                                                                              |  |                    |              |   |                   |  
|Total current liabilities                                                     |  |                    | 1,734,000    |   |                   |  
|Long-term debt                                                                |  |                    | 122,000      |   |                   |  
|Accrued stock compensation                                                    |  |                    | 275,000      |   |                   |  
|                                                                              |  |                    |              |   |                   |  
|Total liabilities                                                             |  |                    | 2,131,000    |   |                   |  
|                                                                              |  |                    |              |   |                   |  
|Stockholders equity:                                                         |  |                    |              |   |                   |  
|Common stock; issued and outstanding:                                         |  |                    |              |   |                   |  
|September 30, 2003  25,852,711 shares; December 31, 2002  25,223,753 shares |  |                    | 192,601,000  |   |                   |  
|Stockholders notes receivable                                                |  |                    | (26,000      | ) |                   |  
|Deferred compensation                                                         |  |                    | (178,000     | ) |                   |  
|Accumulated deficit                                                           |  |                    | (167,053,000 | ) |                   |  
|                                                                              |  |                    |              |   |                   |  
|Total stockholders equity                                                    |  |                    | 25,344,000   |   |                   |  
|                                                                              |  |                    |              |   |                   |  
|                                                                              |  | $                  | 27,475,000   |   |                   | $
|                                                                              |  |                    |              |   |                   |  



See accompanying notes
to condensed consolidated financial statements.



1



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##### Table of Contents

Large Scale Biology Corporation

Condensed Consolidated Statements of Operations

(Unaudited)



|                                                        |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | -
|                                                        |  | 2003                            |            |   | 2002                            |  
|Revenues                                                |  | $                               | 1,192,000  |   |                                 | $
|                                                        |  |                                 |            |   |                                 |  
|Costs and expenses:                                     |  |                                 |            |   |                                 |  
|Development agreements                                  |  |                                 | 1,265,000  |   |                                 |  
|Research and development                                |  |                                 | 2,755,000  |   |                                 |  
|General and administrative                              |  |                                 | 1,511,000  |   |                                 |  
|Impairment of property                                  |  |                                 |           |   |                                 |  
|Amortization of purchased intangibles                   |  |                                 |           |   |                                 |  
|                                                        |  |                                 |            |   |                                 |  
|Total costs and expenses                                |  |                                 | 5,531,000  |   |                                 |  
|                                                        |  |                                 |            |   |                                 |  
|Loss from operations                                    |  |                                 | (4,339,000 | ) |                                 |  
|Interest income, net                                    |  |                                 | 33,000     |   |                                 |  
|                                                        |  |                                 |            |   |                                 |  
|Net loss                                                |  | $                               | (4,306,000 | ) |                                 | $
|                                                        |  |                                 |            |   |                                 |  
|Net loss per share - basic and diluted                  |  | $                               | (0.17      | ) |                                 | $
|                                                        |  |                                 |            |   |                                 |  
|Weighted average shares outstanding - basic and diluted |  |                                 | 25,789,815 |   |                                 |  
|                                                        |  |                                 |            |   |                                 |  



See accompanying notes
to condensed consolidated financial statements.



2



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##### Table of Contents

Large Scale Biology Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |  | Nine Months Ended September 30, |            
|--------------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                            |  | 2003                            |            
|Cash flows from operating activities:                                       |  |                                 |            
|Net loss                                                                    |  | $                               | (18,148,000
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |            
|Depreciation of property, plant and equipment                               |  |                                 | 2,101,000  
|Amortization of intangible assets                                           |  |                                 | 944,000    
|Stock compensation expense                                                  |  |                                 | 1,050,000  
|Impairment of property                                                      |  |                                 | 1,698,000  
|Write-off of capitalized patent costs                                       |  |                                 | 239,000    
|Loss on sale of equipment                                                   |  |                                 | 156,000    
|Provision for doubtful accounts receivable                                  |  |                                 | 154,000    
|Interest received in excess of interest accrued                             |  |                                 | 159,000    
|Changes in assets and liabilities:                                          |  |                                 |            
|Prepaid expenses and other current assets                                   |  |                                 | 33,000     
|Other assets                                                                |  |                                 | 65,000     
|Accounts payable                                                            |  |                                 | (311,000   
|Accrued expenses                                                            |  |                                 | 254,000    
|Deferred revenue and customer advances                                      |  |                                 | (121,000   
|                                                                            |  |                                 |            
|Net cash used in operating activities                                       |  |                                 | (11,727,000
|                                                                            |  |                                 |            
|Cash flows from investing activities:                                       |  |                                 |            
|Purchases of marketable securities                                          |  |                                 | (8,984,000 
|Proceeds from matured marketable securities                                 |  |                                 | 19,097,000 
|Capital expenditures                                                        |  |                                 | (50,000    
|Increase in patents and intellectual property licenses                      |  |                                 |           
|                                                                            |  |                                 |            
|Net cash provided by investing activities                                   |  |                                 | 10,063,000 
|                                                                            |  |                                 |            
|Cash flows from financing activities:                                       |  |                                 |            
|Proceeds from issuance of common stock                                      |  |                                 | 27,000     
|Proceeds from stockholder loan payments                                     |  |                                 | 20,000     
|Change in restricted cash                                                   |  |                                 | 143,000    
|Principal payments on long-term debt                                        |  |                                 | (37,000    
|                                                                            |  |                                 |            
|Net cash provided by financing activities                                   |  |                                 | 153,000    
|                                                                            |  |                                 |            
|Net decrease in cash and cash equivalents                                   |  |                                 | (1,511,000 
|Cash and cash equivalents at beginning of period                            |  |                                 | 8,238,000  
|                                                                            |  |                                 |            
|Cash and cash equivalents at end of period                                  |  | $                               | 6,727,000  
|                                                                            |  |                                 |            



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

Large Scale Biology Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)



1. Subsequent Event



Subsequent to September 30, 2003, the National Institute of Environmental Health Services (NIEHS) has notified us that its contract with the
Company is terminated for the Governments convenience after an agreed upon wind-down period ending on December 15, 2003. Over the last several months, the Company has been accelerating execution of a therapeutic protein and vaccine product
strategy while concurrently de-emphasizing diagnostic tools and services. As a result of the NIEHS action and consistent with the corporate refocus and change in direction, the Companys Proteomics Division will conclude its toxicoproteomics
project with the NIEHS by the end of 2003. Revenues attributable to NIEHS during the three and nine months ended September 30, 2003 were $0.6 million and $1.7 million, respectively.



The Companys performance under the contract including sample analysis, reports and data deliverables has been in
strict conformance with contract specified research protocols and timetables. The Company is reviewing other proteomics business, pending prospects and its internal needs for proteomics tools in support of its research and development programs
during the fourth quarter of 2003.



2. The Company and Summary of
Significant Accounting Policies



Large Scale Biology
Corporation is an integrated biotechnology company focusing on product development and biomanufacturing of protein and peptide therapeutics and vaccines. Examples of therapeutic products we are developing include:



| |  | Recombinant bovine aprotinin, a protease inhibitor used in cardiac surgery
| | - | --------------------------------------------------------------------------



| |  | Proprietary human alpha-galactosidase A for the treatment of Fabry disease, a lysosomal storage disorder
| | - | --------------------------------------------------------------------------------------------------------



| |  | Stem cells products to stimulate human bone marrow recovery and expansion following chemotherapy or radiation treatment
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | Vaccines for human and animal healthcare
| | - | ----------------------------------------



The Companys proprietary systems are supported by patents and patent applications. The Companys corporate offices and research and development
are headquartered in Vacaville, California. The Companys Biomanufacturing Division is located in Owensboro, Kentucky, and the Companys Proteomics Division is located in Germantown, Maryland.



The Company incurred net losses of $18.1 million, $33.2 million and $20.7
million and negative operating cash flows of $11.7 million, $23.9 million and $18.5 million in the nine months ended September 30, 2003 and the years ended December 31, 2002 and 2001, respectively. These negative cash flows have been financed
primarily by proceeds from the Companys initial public offering in 2000. The Companys history of negative cash flows and its cash and marketable securities balance of $11.3 million at September 30, 2003, raise substantial doubt about the
Companys ability to continue as a going concern, absent any new sources of significant cash flows. We believe that the Companys best near-term opportunity for significant revenue growth and concurrent source of working capital is
agreements with other companies for the joint development and commercialization of our alpha-galactosidase and aprotinin products. We are currently in discussions with pharmaceutical companies capable of marketing these products. The
commercialization of both products for therapeutic applications will require approval by the FDA and product scale-up at our biomanufacturing facility under FDA requirements. In addition, we are pursuing other potential sources of working capital
including a public or private equity offering, partnerships, mergers or sales of assets or technologies. The financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and
classification of recorded liabilities that might be necessary should the Company be unable to continue as a going concern.



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 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, 2002 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, 2003.



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##### Table of Contents

Segment Reporting  The Company operates in one reportable segment.



Stock-Based Compensation  During the third quarter of 2003, the
Company adopted Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation effective as of January 1, 2003 for its stock-based employee compensation plans using the prospective
recognition method under Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS 123. This method applies the recognition
provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, recognized compensation expense for those issuances under stock-based employee compensation plans. The fair values of stock
options were estimated at the date of grant using the Black-Scholes option-pricing model and are being amortized over the vesting period of generally 3 years. The adoption of SFAS 123 has not had a material effect on expenses previously reported
during the first and second quarters of 2003. For stock awards granted prior to January 1, 2003, compensation expense has not been recognized under SFAS 123.



Prior to January 1, 2003, the Company account for stock options granted to employees and directors and other stock-based employee compensation plans using
the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, the Company recognized compensation expense for stock
options only if the quoted market value of the Companys common stock exceeded the exercise price of the option on the grant date. Any compensation expense realized using this intrinsic value method is being amortized over the vesting period of
the option.



The following table presents the pro forma effect
on the Companys reported net loss and net loss per share if the SFAS 123 fair value method was applied to stock-based employee compensation plans for awards granted prior to January 1, 2003:



|                                                                                                                                    |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | -
|                                                                                                                                    |  | 2003                            |            |   | 2002                            |  
|Net loss as reported                                                                                                                |  | $                               | (4,306,000 | ) |                                 | $
|Deduct: Stock-based employee compensation expense determined using the fair value method for awards issued prior to January 1,
2003 |  |                                 | (455,000   | ) |                                 |  
|                                                                                                                                    |  |                                 |            |   |                                 |  
|Pro forma net loss                                                                                                                  |  | $                               | (4,761,000 | ) |                                 | $
|                                                                                                                                    |  |                                 |            |   |                                 |  
|Net loss per share:                                                                                                                 |  |                                 |            |   |                                 |  
|Basic and diluted  as reported                                                                                                     |  | $                               | (0.17      | ) |                                 | $
|                                                                                                                                    |  |                                 |            |   |                                 |  
|Basic and diluted  pro forma                                                                                                       |  | $                               | (0.18      | ) |                                 | $
|                                                                                                                                    |  |                                 |            |   |                                 |  



The fair values of
stock options are estimated at the date of grant using the Black-Scholes option-pricing model and amortized over the vesting period of typically 3 to 4 years for the pro forma adjustments in the above table. The Company granted 1,259,500 and
1,397,250 stock options to employees and directors in the nine months ended September 30, 2003 and 2002, respectively.



Stock options issued to non-employees as consideration for services provided to the Company have been and continue to be accounted for under the fair
value method in accordance with SFAS 123, which requires that compensation expense be recognized for all such options.



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 were 27,026 and 318,431 for the three months ended September 30, 2003 and 2002,
respectively, and 16,974 and 697,421 for the nine months ended September 30, 2003 and 2002, respectively. These shares are excluded from diluted net loss per share because of their anti-dilutive effect.



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##### Table of Contents

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, 2002 included in our Annual Report on Form 10-K.



Overview



We are an integrated biotechnology company focusing on product development and biomanufacturing of protein and peptide
therapeutics and vaccines. Examples of therapeutic products we are developing include:



| |  | Recombinant bovine aprotinin, a protease inhibitor used in cardiac surgery
| | - | --------------------------------------------------------------------------



| |  | Proprietary human alpha-galactosidase A for the treatment of Fabry disease, a lysosomal storage disorder
| | - | --------------------------------------------------------------------------------------------------------



| |  | Stem cells products to stimulate human bone marrow recovery and expansion following chemotherapy or radiation treatment
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | Vaccines for human and animal healthcare
| | - | ----------------------------------------



Our corporate offices and research and development are headquartered in Vacaville, California. Our Biomanufacturing Division is located in Owensboro,
Kentucky, and our Proteomics Division is located in Germantown, Maryland.



In the nine months ended September 30, 2003, we continued to realize material negative operating cash flows. Our negative cash flows in this period were significantly lower than the prior year period as a result of
cost saving initiatives including employee headcount reductions and the canceling or delaying certain internally funded research projects. The history of negative cash flows and the cash and marketable securities balance of $11.3 million at
September 30, 2003, raise substantial doubt about the Companys ability to continue as a going concern, absent any new sources of significant cash flows. We believe that our best near-term opportunity for significant revenue growth and
concurrent source of working capital is agreements with other companies for the joint development and commercialization of our alpha-galactosidase and aprotinin products. We are currently in discussions with pharmaceutical companies capable of
marketing these products. The commercialization of both products for therapeutic applications will require approval by the FDA and product scale-up at our biomanufacturing facility under FDA requirements. In addition, we are pursuing other potential
sources of working capital including a public or private equity offering, partnerships, mergers or sales of assets or technologies.



Subsequent Event



Subsequent to September 30, 2003, NIEHS has notified us that its contract with the Company is terminated for the Governments convenience after an
agreed upon wind-down period ending on December 15, 2003. Over the last several months, we have been accelerating execution of a therapeutic protein and vaccine product strategy while concurrently de-emphasizing diagnostic tools and services. As a
result of the NIEHS action and consistent with the corporate refocus and change in direction, our Proteomics Division will conclude its toxicoproteomics project with the NIEHS by the end of 2003. Revenues attributable to NIEHS during the three and
nine months ended September 30, 2003 were $0.6 million and $1.7 million, respectively.



Our performance under the contract including sample analysis, reports and data deliverables has been in strict conformance with contract specified research protocols and timetables. We are reviewing other proteomics
business, pending prospects and its internal needs for proteomics tools in support of its research and development programs during the fourth quarter of 2003.



Recent Developments



During the third quarter of 2003, we adopted SFAS 123 effective as of January 1, 2003 for our stock-based employee compensation plans using the
prospective recognition method under SFAS 148. This method applies the recognition provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, recognized compensation expense for those
issuances under our stock-based employee compensation plans. This change will increase our future employee-related expenses for development agreements, research and development, and general and administrative expenses. For stock awards granted prior
to January 1, 2003, compensation expense has not been recognized under SFAS 123.



6



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##### Table of Contents

Results of Operations



Revenues increased $0.5 million and $1.3 million in the three and nine months ended September 30, 2003, respectively, compared to the prior year
periods. These increases are primarily attributable to the research contracts or grants with NIEHS, Growers Research Group and the National Institute of Standards and Technology (NIST) that were started during the third quarter of 2002
through the first quarter of 2003. Revenues in the fourth quarter of 2003 are expected to be less than the third quarter because of $0.3 million of non-recurring deferred revenue recognized during the third quarter of 2003. Recently signed contracts
and awarded grants are not expected to provide sufficient revenues in 2004 to offset the loss of NIEHS revenues. Accordingly, we expect that quarterly revenues will be lower in the first half of 2004 than 2003, absent any new sources of significant
revenues.



Development agreement costs consist mainly of
personnel expenses, outside research services, research materials and lab overhead costs related to activities performed under revenue generating research agreements and grants. Development agreement costs increased $0.7 million and $2.6 million in
the three and nine months ended September 30, 2003, respectively, compared to the prior year periods. These increases are due to the increased revenues and related research with NIEHS, Growers Research Group and NIST.



Research and development expenses consist mainly of personnel
expenses, outside research services, research materials and lab overhead costs related to internally funded research activities. Research and development expenses decreased $1.8 million and $8.0 million in the three and nine months ended September
30, 2003, respectively, compared to the prior year periods. These decreases are primarily attributable to employee headcount reductions (through restructurings and attrition), the elimination of outside research services and the increased allocation
of resources from internally funded research activities to revenue generating projects.



General and administrative expenses largely consist of personnel expenses of non-research personnel, external legal and accounting costs, and insurance costs. General and administrative expenses decreased $0.9
million and $2.7 million in the three and nine months ended September 30, 2003, respectively, compared to the prior year periods. These decreases are primarily attributable to employee headcount reductions (through restructurings and attrition) and
a reduction of outside legal costs due to the internalization of patent application processes and the abandonment of certain patent applications. We expect general and administrative expenses in the fourth quarter of 2003 to be approximately the
same as the third quarter.



Impairment of property
represents a write-down of the carrying value of leasehold improvements at our proteomics division. We concluded that such property was impaired as of March 31, 2003 based upon a comparison of the carrying value of the leasehold improvements with
the fair market value of similarly improved office and laboratory space in the local area.



Liquidity and Capital Resources



|                                                                                |  | Nine Months Ended September 30, |            
|------------------------------------------------------------------------------- |  | ------------------------------- | -----------
|                                                                                |  | 2003                            |            
|Net cash used in operating activities, excluding marketable securities activity |  | $                               | (11,886,000
|Cash used in investing activities, excluding marketable securities activity     |  |                                 | (50,000    
|Net cash provided by financing activities                                       |  |                                 | 153,000    
|                                                                                |  |                                 |            
|Net decrease in cash, cash equivalents and marketable securities                |  |                                 | (11,783,000
|                                                                                |  |                                 |            
|Cash, cash equivalents and marketable securities at December 31, 2002           |  |                                 | 23,078,000 
|                                                                                |  |                                 |            
|Cash, cash equivalents and marketable securities at September 30, 2003          |  | $                               | 11,295,000 
|                                                                                |  |                                 |            



In the nine months
ended September 30, 2003, we continued to realize material negative operating cash flows. The reduction of cash used in operating and investing activities in the nine months ended September 30, 2003 compared to the prior year period is primarily
attributable to cost saving initiatives implemented throughout 2002 and 2003. The history of negative cash flows and the cash and marketable securities balance of $11.3 million at September 30, 2003, raises substantial doubt about the Companys
ability to continue as a going concern, absent any new sources of significant cash flows. We believe that our best near-term opportunity for significant revenue growth and concurrent source of working capital is agreements with other companies for
the joint development and commercialization of our alpha-galactosidase and aprotinin products. In addition, we are pursuing other potential sources of working capital including a public or private equity offering, partnerships, mergers or sales of
assets or technologies.



We have spent nominal amounts on
capital expenditures in the nine months ended September 30, 2003 and expect no significant capital expenditures during the fourth quarter of 2003.



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Critical Accounting Policies



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 currently receive revenues for sponsored research from commercial companies and government agencies. Funds received
for sponsored research is typically non-refundable and not based upon performance objectives or customer acceptance. During the nine months ended September 30, 2003, 80% of revenues were for the reimbursement of research activities and recognized as
the costs were incurred.



Intangible and Long-Lived
Assets  The Companys intangible and long-lived assets include capitalized costs of filing patent applications that relate to commercially viable technologies, capitalized license fees for rights to specified intellectual property,
and property and equipment related to our research facilities in California and Maryland and our biomanufacturing facility in Kentucky. 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. We evaluate our 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 or long-lived assets are considered to be impaired, the amount of impairment
to be recognized is equal to the excess of the carrying amount of the assets over the fair value of the assets.



Stock-Based Compensation  During the third quarter of 2003, we adopted SFAS 123 effective as of January 1, 2003 for our stock-based employee
compensation plans using the prospective recognition method under SFAS 148. This method applies the recognition provisions of SFAS 123 to all employee stock awards granted, modified, or settled after January 1, 2003 and accordingly, recognized
compensation expense for those issuances under our stock-based employee compensation plans. The fair values of stock options were estimated at the date of grant using the Black-Scholes option-pricing model and are being amortized over the vesting
period of generally 3 years. The adoption of SFAS 123 has not had a material effect on expenses previously reported during the first and second quarters of 2003. For stock awards granted prior to January 1, 2003, compensation expense has not been
recognized under SFAS 123.



Prior to January 1, 2003, we
account for stock options granted to employees and directors and other stock-based employee compensation plans using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 and related interpretations.
As such, we recognize compensation expense for stock options only if the quoted market value of the Companys common stock exceeded the exercise price of the option on the grant date.



Stock options issued to non-employees as consideration for services provided
to the Company have been and continue to be accounted for under the fair value method in accordance with SFAS 123, which requires that compensation expense be recognized for all such options.



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Factors That May Affect Our Business



Risks Related To Our Business



We have a history of significant net losses and negative cash flows. Our working capital is declining rapidly and we may not have sufficient cash to
fund our product development initiatives or to continue operations.



We have realized significant net losses and negative operating cash flows in recent years and in the nine months ended September 30, 2003. Our working capital balance at September 30, 2003 was $10.7 million. Based
upon our current rate of negative operating cash flows, we cannot assure you that the Company will be able to continue as a going concern.



Our future capital requirements depend upon many factors, including:



| |  | our ability to raise capital through a public or private equity offering;
| | - | -------------------------------------------------------------------------



| |  | our ability to increase revenues;
| | - | ---------------------------------



| |  | our ability to control operating costs;
| | - | ---------------------------------------



| |  | the cost and timeline for development of potential products, including unanticipated development, technological or regulatory challenges;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to successfully transfer liability for, or restructure, facility leases that exceed our present capacity needs; and
| | - | -------------------------------------------------------------------------------------------------------------------------------



| |  | the willingness of companies to partner with us.
| | - | ------------------------------------------------



Given our current working capital balance and the expected cost to complete the development of our products including our alpha-galactosidase and
aprotinin products, we require additional working capital. The amount of additional capital we require is substantial. Our recent operating results and our current stock price may limit our opportunity for issuance of additional equity securities.
Further, if we raise additional working capital by issuing equity securities, existing stockholders could experience significant dilution.



Our revenues in the nine months ended September 30, 2003 and for the year ended December 31, 2002 were not significant. If we are unable to significantly
increase our revenues, we will not be able to achieve profitability or positive operating cash flows, our working capital will continue to erode, and our business will suffer.



We are experiencing increasing pressure to curtail spending and reduce costs. We implemented several cost saving initiatives
in 2002 and 2003 to reduce costs. If we cannot increase our cash flow in the very near term, we will be required to further reduce our operating costs by, among other things, further restructure our operations and potentially incur significant
charges or delay, reduce the scope of, or eliminate one or more of our research and development programs. These actions may adversely affect our ability to generate new sources of revenue.



We will need to continue to spend substantial funds to continue our product
development programs. Certain of our potential products including our NHL vaccine and our alpha-galactosidase and aprotinin products require clinical trials to prove their efficacy and safety. We may not have sufficient working capital to initiate
Phase I and/or secondary clinical trials for these products. We are dependent on funding from a potential collaborator or partner to fund these trials. If we are unable to raise sufficient funding to initiate and/or complete the development of these
products, we might be required to delay or abandon some of our product development initiatives, any of which actions would likely harm our business.



We currently lease excess office and lab space at our proteomics facility in Germantown, Maryland. Our facility lease in Germantown expires in 2010. We
are attempting to sublease approximately 75% of our Germantown facility for the remainder of the lease term. If we are unable to sublease this excess space, we will not realize all of our planned cost saving for 2004.



Given our financial position and operating results, potential collaborators
or partners may question our ability to continue as a going concern and choose not to do business with us. If we are unable to enter into collaborations to fund the development of certain of our products, we might be required to delay or abandon
some of our product development initiatives, any of which actions would likely harm our business.



We require additional capital



We require substantial working capital to continue our product development programs and to fund our operations. In addition, the risks inherent in
developing innovative products, such as aprotinin and alpha-galactosidase, make it difficult to forecast with certainty the capital required to commercialize our products. We may raise this capital through public or private equity financings or
through collaborations or strategic partnerships. Our access to equity markets may be restricted by depressed stock valuations or other factors. Also, if we raise additional funds by issuing equity securities, existing stockholders



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may be significantly diluted. We may be unsuccessful in entering into any new collaboration or strategic partnership that results in significant working
capital or revenue. If we are unable to raise sufficient additional capital, we may have to curtail or cease operations.



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 are independently pursuing
some therapeutic product applications into the development stage. However, we expect to develop and commercialize most of our future products in collaboration with pharmaceutical and biotechnology companies. For example, our strategy concerning our
aprotinin and alpha-galactosidase involves seeking partners to complete the development of these products. We cannot assure you that such collaborative arrangements will be available to us on acceptable terms, or at all. If our cash flows continue
to deteriorate or we take significant steps to reduce our expenses, potential partners may question our ability to perform and choose not to do business with us, which would make it harder for us to find a partner and would harm our ability to
commercialize our products. Our success will depend in large part on our ability to enter into future collaborations with other companies for the financing of development and/or 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. Furthermore, obtaining funds through arrangements with collaborative partners or others 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 to sell or license the rights to certain of our products or technologies on terms that are worse than we
might have been able to obtain in a different environment. 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. Some of our existing agreements 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.



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



The loss of one or more of our senior management or other key scientific
personnel could significantly harm our business, cause collaborators to cease dong business with us or potential collaborators to decline to do business with us, and could otherwise inhibit our research and development and commercialization efforts.
None of our key personnel are subject to employment agreements. We face competition for research scientists and technical staff from other companies, academic institutions, government entities, nonprofit laboratories and other organizations. We have
implemented 10% cash salary reductions substituting non-cash stock compensation for our highest paid employees to conserve cash. Failure to recruit and retain senior management and scientific personnel on acceptable terms may prevent us from
achieving our business objectives.



Our previous or future workforce
reductions and management restructurings may hurt the performance of our continuing personnel, and make it more difficult to retain the services of key personnel.



We restructured our operations in both 2002 and 2003, resulting in substantial workforce reductions. These reductions
affected all functional areas including a change in top management. Future changes and reductions may create concerns in our employee base about job security, our direction or focus, and the continued viability of the Company. Such concerns could
lower productivity, make it more likely that some of our key employees will seek new employment and require us to hire replacements, and cause concerns among collaborators or potential collaborators about doing business with us. These factors also
may make the management of our business more difficult and make it harder for us to attract employees in the future.



We are at an early or middle stage of product commercialization, and we may not be able to successfully develop our products and technologies nor
sustain commercial use of our technology.



We are in an
early or middle stage of commercialization, and we are subject to all of 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.



Our anticipated products most likely will require that we
enter into new collaborations before we can manufacture and/or market them. Our NHL vaccine cannot be further developed without a collaboration in the foreseeable future. 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 products, our therapeutic vaccines, proteins and other therapeutics under development may not be effective for their intended purpose, 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 at commercially viable prices.



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



Our technologies, including 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, nor 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,
cost-effective, or otherwise unacceptable to them. We generate large amounts of data from our research with genes and proteins and we may not be able to mine or integrate this data in a timely manner, or turn it into commercially viable information.
In addition, because our fields are characterized by rapid innovation, we must complete development of our 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.



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



Genomics, proteomics, biomanufacturing and bioinformatics are intensely competitive fields. They are characterized by extensive research efforts, which
result in rapid technological progress that can render existing technologies obsolete or economically noncompetitive. If our competitors succeed in developing more effective technologies or render our 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. To remain competitive, we must continue to invest in new technologies and improve existing technologies. If our revenues and cash flows do not improve significantly, we will 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 successful competitive methods were developed, it would undermine the commercial basis for the products and technologies we intend to provide.



General economic conditions cause 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.



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. and global economies generally, and the biotechnology and pharmaceutical industries in particular, has caused, and may continue to cause 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 next several quarters. Therefore, it is difficult to accurately assess and
predict the future demand for our products, technologies and services. If these economic conditions continue, such conditions will likely have a continuing, adverse effect on our revenues and operating results.



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 certain of these relationships, and impair our ability to enter into future collaborations, either of which could adversely affect our business. Collaborators could develop
competing 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. We must also continue to develop a business development force with
sufficient technical expertise to generate demand for our products and technologies. Our possible inability to develop business development personnel, or contract for effective sales and marketing capabilities would significantly impair our ability
to develop and commercialize our products and technologies.



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



The failure of our technologies to provide safe,
effective, useful or commercially viable approaches to the discovery, development and/or production of drug targets and proteins which can be used as therapeutics would significantly limit our business plan and future growth.



Concentration of ownership among our existing executive officers,
directors and principal stockholders may enable them to collectively influence significant corporate transactions that require stockholder approval.



Our directors, our executive officers and principal stockholders affiliated with our directors and executive officers beneficially own, in the aggregate,
approximately 36% of our outstanding common stock as of October 31, 2003. The concentration of ownership in combination with other common stockholders may collectively influence significant corporate transactions such as mergers, changes in control,
consolidation or sale of some or all of our assets, and other significant corporate transactions requiring shareholder approval.



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 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.



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Risks Related to Our Industry



If companies in the pharmaceutical, biotechnology 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 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 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 that 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 spending in these industries.
| | - | -----------------------------------------------------



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



Our human and veterinary therapeutics and vaccines are included in the highly competitive markets for protein development
and production. 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 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. 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 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. 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.



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USDA rules could adversely affect us or our collaborators.



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. 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. If we fail to comply with such rules or policies, we may be subject to financial loss or be liable for costs
incurred as a result of non-compliance.



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, even if such products do not result from GMO organisms.



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 developed by our collaborators or us. 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, and 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 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.



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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 that, 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. 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 be issued 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. From time to time, we receive letters from third parties that allege patent infringement on our part. Disagreements arising from these letters could result in costly and time-consuming litigation and divert our financial and
managerial resources. In addition, if we are ever determined to infringe the patent of any third party, we may be required to obtain a license to use this patent, which would increase our cost of doing business.



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 be issued 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 that
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.



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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;
| | - | -----------------------------------------------------------



| |  | Third parties will independently develop equivalent technology;
| | - | ---------------------------------------------------------------



| |  | Disputes might 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, 2002. No material
changes to the information provided in our Annual Report have occurred subsequent to December 31, 2002 through September 30, 2003.



Item 4. Controls and Procedures



(a) Evaluation of disclosure controls and procedures. We have carried out an evaluation as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered by this report are effective in timely alerting them to material information relating to the Company required to be included in periodic SEC filings.



(b) Changes in internal controlsover financial reporting.
There has been no change in our internal controls over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



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PART II  OTHER INFORMATION



Item 2. Changes in Securities and Use of Proceeds



(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 September 30, 2003:



|Construction of plant, building and facilities |  | $ | 2,329,000 
|---------------------------------------------- |  | - | ----------
|Purchase of machinery and equipment            |  |   | 7,751,000 
|Construction of leasehold improvements         |  |   | 5,993,000 
|Repayment of indebtedness                      |  |   | 3,701,000 
|Purchase of intellectual property licenses     |  |   | 3,264,000 
|Capitalized patent costs                       |  |   | 1,680,000 
|Working capital                                |  |   | 57,436,000
|Cash and investments                           |  |   | 6,602,000 



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 % 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 6. Exhibits and Reports on Form 8-K



(a) List of Exhibits:



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



(b) Reports on Form
8-K:



None.



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SIGNATURE



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.





|                        |  | Large Scale Biology Corporation
|----------------------- |  | -------------------------------
|                        |  |                                
|Date: November 14, 2003 |  | By:                            
|                        |  |                                
|                        |  |                                
|                        |  |                                





18



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##### Table of Contents

Exhibit Index



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