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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, 2004



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)



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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 5, 2004: 31,348,269



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This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The words may, will, expect, plan, anticipate, believe,
forecast, project, or continue and variations of these words or comparable words identify forward-looking statements. In addition, any statements, which refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking statements. Our Managements Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and situations that may cause our or our industrys actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these statements. The risk factors contained in this report, under the heading Factors That May Affect Our Business, as well as any other cautionary language in this report, provide examples of
risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.



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



Large Scale Biology Corporation, LSBC, our logo, GENEWARE®, BAMF, GRAMMR 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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Large Scale Biology Corporation

Form 10-Q

For the Quarter Ended September 30, 2004

Table of Contents



|                               |  |         |  |                                                                                                                             |  |     
|------------------------------ |  | ------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |         |  |                                                                                                                             |  | Page
|PART I 
FINANCIAL INFORMATION |  |        
|                               |  |         | 
|                               |  | Item 1. |  | Financial Statements                                                                                                        |  |     
|                               |  |         | 
|                               |  |         |  | Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (Unaudited)                            |  | 1   
|                               |  |         | 
|                               |  |         |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (Unaudited) |  | 2   
|                               |  |         | 
|                               |  |         |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (Unaudited)           |  | 3   
|                               |  |         | 
|                               |  |         |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                            |  | 4   
|                               |  |         | 
|                               |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 7   
|                               |  |         | 
|                               |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |  | 18  
|                               |  |         | 
|                               |  | Item 4. |  | Controls and Procedures                                                                                                     |  | 18  
|                               | 
|PART II 
OTHER INFORMATION    |  |        
|                               |  |         | 
|                               |  | Item 6. |  | Exhibits                                                                                                                    |  | 18  
|                               | 
|SIGNATURE                      |  | 19     





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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 30,2004 |              |   | December 31,2003 |  
|Assets                                    |  |                   |              |   |                  |   |              |  
|Current assets:                           |  |                   |              |   |                  |   |              |  
|Cash and cash equivalents                 |  | $                 | 3,886,000    |   |                  | $ | 7,737,000    |  
|Accounts receivable, net                  |  |                   | 325,000      |   |                  |   | 265,000      |  
|Prepaid expenses and other current assets |  |                   | 928,000      |   |                  |   | 706,000      |  
|                                          |  |                   |              |   |                  |   |              |  
|Total current assets                      |  |                   | 5,139,000    |   |                  |   | 8,708,000    |  
|Property, plant, and equipment, net       |  |                   | 8,140,000    |   |                  |   | 8,628,000    |  
|Intangible assets, net                    |  |                   | 2,688,000    |   |                  |   | 3,074,000    |  
|Other assets                              |  |                   | 663,000      |   |                  |   | 570,000      |  
|                                          |  |                   |              |   |                  |   |              |  
|                                          |  | $                 | 16,630,000   |   |                  | $ | 20,980,000   |  
|                                          |  |                   |              |   |                  |   |              |  
|Liabilities and Stockholders Equity      |  |                   |              |   |                  |   |              |  
|Current liabilities:                      |  |                   |              |   |                  |   |              |  
|Accounts payable                          |  | $                 | 939,000      |   |                  | $ | 592,000      |  
|Accrued expenses                          |  |                   | 537,000      |   |                  |   | 953,000      |  
|Current portion of long-term debt         |  |                   | 54,000       |   |                  |   | 52,000       |  
|Deferred revenue and customer advances    |  |                   | 101,000      |   |                  |   | 147,000      |  
|                                          |  |                   |              |   |                  |   |              |  
|Total current liabilities                 |  |                   | 1,631,000    |   |                  |   | 1,744,000    |  
|Long-term debt                            |  |                   | 168,000      |   |                  |   | 209,000      |  
|Accrued stock compensation                |  |                   | 854,000      |   |                  |   | 708,000      |  
|                                          |  |                   |              |   |                  |   |              |  
|Total liabilities                         |  |                   | 2,653,000    |   |                  |   | 2,661,000    |  
|                                          |  |                   |              |   |                  |   |              |  
|Stockholders equity:                     |  |                   |              |   |                  |   |              |  
|Common stock; issued and outstanding:     |  |                   |              |   |                  |   |              |  
|September 30, 2004  31,297,743 shares;   |  |                   |              |   |                  |   |              |  
|December 31, 2003  25,901,273 shares     |  |                   | 200,761,000  |   |                  |   | 192,541,000  |  
|Stockholders notes receivable            |  |                   | (20,000      | ) |                  |   | (24,000      | )
|Accumulated deficit                       |  |                   | (186,764,000 | ) |                  |   | (174,198,000 | )
|                                          |  |                   |              |   |                  |   |              |  
|Total stockholders equity                |  |                   | 13,977,000   |   |                  |   | 18,319,000   |  
|                                          |  |                   |              |   |                  |   |              |  
|                                          |  | $                 | 16,630,000   |   |                  | $ | 20,980,000   |  
|                                          |  |                   |              |   |                  |   |              |  



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, |  
|                                                        |  | 2004                            |            |   | 2003                            |   |            | 2004 |  |   | 2003        |  
|Revenues                                                |  | $                               | 523,000    |   |                                 | $ | 1,192,000  |      |  | $ | 1,204,000   |   |  | $ | 2,949,000   |  
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Costs and expenses:                                     |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Development agreements                                  |  |                                 | 647,000    |   |                                 |   | 1,265,000  |      |  |   | 1,669,000   |   |  |   | 3,445,000   |  
|Research and development                                |  |                                 | 2,304,000  |   |                                 |   | 2,755,000  |      |  |   | 6,823,000   |   |  |   | 8,761,000   |  
|General and administrative                              |  |                                 | 1,761,000  |   |                                 |   | 1,511,000  |      |  |   | 5,325,000   |   |  |   | 7,292,000   |  
|Impairment of property                                  |  |                                 |           |   |                                 |   |           |      |  |   |            |   |  |   | 1,698,000   |  
|Amortization of purchased intangibles                   |  |                                 |           |   |                                 |   |           |      |  |   |            |   |  |   | 52,000      |  
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Total costs and expenses                                |  |                                 | 4,712,000  |   |                                 |   | 5,531,000  |      |  |   | 13,817,000  |   |  |   | 21,248,000  |  
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Loss from operations                                    |  |                                 | (4,189,000 | ) |                                 |   | (4,339,000 | )    |  |   | (12,613,000 | ) |  |   | (18,299,000 | )
|Interest income, net                                    |  |                                 | 18,000     |   |                                 |   | 33,000     |      |  |   | 47,000      |   |  |   | 151,000     |  
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss                                                |  | $                               | (4,171,000 | ) |                                 | $ | (4,306,000 | )    |  | $ | (12,566,000 | ) |  | $ | (18,148,000 | )
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss per share - basic and diluted                  |  | $                               | (0.13      | ) |                                 | $ | (0.17      | )    |  | $ | (0.42       | ) |  | $ | (0.71       | )
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Weighted average shares outstanding - basic and diluted |  |                                 | 31,243,854 |   |                                 |   | 25,789,815 |      |  |   | 29,921,779  |   |  |   | 25,538,719  |  
|                                                        |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  



See accompanying notes
to condensed consolidated financial statements.



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Large Scale Biology Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)



|                                                                            |  |                                 |             |   |      |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                            |  | Nine Months Ended September 30, |            
|                                                                            |  | 2004                            |             |   | 2003 |  
|Cash flows from operating activities:                                       |  |                                 |             |   |      |   |             |  
|Net loss                                                                    |  | $                               | (12,566,000 | ) |      | $ | (18,148,000 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |             |   |      |   |             |  
|Depreciation of property, plant and equipment                               |  |                                 | 1,107,000   |   |      |   | 2,101,000   |  
|Amortization of intangible assets                                           |  |                                 | 398,000     |   |      |   | 944,000     |  
|Stock compensation expense                                                  |  |                                 | 749,000     |   |      |   | 1,050,000   |  
|Impairment of property                                                      |  |                                 |            |   |      |   | 1,698,000   |  
|Write-off of capitalized patent costs                                       |  |                                 |            |   |      |   | 239,000     |  
|Loss on sale of equipment                                                   |  |                                 | 18,000      |   |      |   | 156,000     |  
|Provision for doubtful accounts receivable                                  |  |                                 |            |   |      |   | 154,000     |  
|Interest received in excess of interest accrued                             |  |                                 |            |   |      |   | 159,000     |  
|Changes in assets and liabilities:                                          |  |                                 |             |   |      |   |             |  
|Accounts receivable                                                         |  |                                 | (35,000     | ) |      |   | (273,000    | )
|Prepaid expenses and other current assets                                   |  |                                 | (222,000    | ) |      |   | 306,000     |  
|Other assets                                                                |  |                                 | (237,000    | ) |      |   | 65,000      |  
|Accounts payable                                                            |  |                                 | (37,000     | ) |      |   | (311,000    | )
|Accrued expenses                                                            |  |                                 | (416,000    | ) |      |   | 254,000     |  
|Deferred revenue and customer advances                                      |  |                                 | (46,000     | ) |      |   | (121,000    | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash used in operating activities                                       |  |                                 | (11,287,000 | ) |      |   | (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                                                        |  |                                 | (434,000    | ) |      |   | (50,000     | )
|Proceeds from sale of assets                                                |  |                                 | 156,000     |   |      |   |            |  
|Increase in patents and intellectual property licenses                      |  |                                 | (12,000     | ) |      |   |            |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash provided by (used in) investing activities                         |  |                                 | (290,000    | ) |      |   | 10,063,000  |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Cash flows from financing activities:                                       |  |                                 |             |   |      |   |             |  
|Proceeds from issuance of common stock                                      |  |                                 | 7,617,000   |   |      |   | 27,000      |  
|Proceeds from stockholder loan payments                                     |  |                                 | 4,000       |   |      |   | 20,000      |  
|Change in restricted cash                                                   |  |                                 | 144,000     |   |      |   | 143,000     |  
|Principal payments on long-term debt                                        |  |                                 | (39,000     | ) |      |   | (37,000     | )
|                                                                            |  |                                 |             |   |      |   |             |  
|Net cash provided by financing activities                                   |  |                                 | 7,726,000   |   |      |   | 153,000     |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Net decrease in cash and cash equivalents                                   |  |                                 | (3,851,000  | ) |      |   | (1,511,000  | )
|Cash and cash equivalents at beginning of period                            |  |                                 | 7,737,000   |   |      |   | 8,238,000   |  
|                                                                            |  |                                 |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                  |  | $                               | 3,886,000   |   |      | $ | 6,727,000   |  
|                                                                            |  |                                 |             |   |      |   |             |  



See accompanying notes
to condensed consolidated financial statements.



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Large Scale Biology Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)



1. The Company and Summary of Significant Accounting Policies



Large Scale Biology Corporation and its subsidiaries (collectively, the Company, we or our) is a product-focused
biotechnology company using proprietary technologies to develop and manufacture recombinant biologics. Our biomanufacturing opportunities include vaccines, complex proteins and follow-on off-patent therapeutics. We are focusing our efforts on the
following products:



| |  | Recombinant Aprotinin, a protease inhibitor used in medical, research and manufacturing applications
| | - | ----------------------------------------------------------------------------------------------------



| |  | Vaccines for human and animal healthcare, including antiviral and anticancer applications
| | - | -----------------------------------------------------------------------------------------



| |  | Certain follow-on off-patent biologics and proprietary products, including Interferon alpha 2a and 2b, Granulocyte colony stimulating factor, Alpha-galactosidase A for treatment of
Fabry disease and Lysosomal acid lipase for the reduction of plaque in arteries
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The technology employed in our product development and biomanufacturing operations includes our proprietary Geneware transient gene expression system and GRAMMR system to shuffle and improve gene sequences. Our
manufacturing processes can be used to produce follow-on therapeutic products. We believe that our combination of proprietary technologies and existing manufacturing infrastructure enables us to rapidly and economically develop partner-specified
products and to participate in market opportunities in major disease categories.



Our subsidiary company, Predictive Diagnostics, Inc. (PDI) is a new diagnostics company established for the commercial development of a new and proprietary approach to early diagnosis of life-threatening
diseases. PDIs products are supported by our technology developed in the course of our past genomics and medical product development programs. PDIs initial product focus is in the field of oncology. The Companys BAMF Technology (Biomarker Amplification Filter) is a core
component of PDIs capability and potentially provides low-cost and rapid analysis of multiple biomarkers derived from profiling thousands of individual proteins, peptides and other metabolites found in clinical blood samples. Current typical
diagnostic tests rely on measuring the over- or under-abundance of a single protein or biomarker. Our BAMF Technology finds multiple proteins or biomarkers in blood samples and creates a disease fingerprint, potentially leading to an
accurate and early detection of disease.



The Companys
proprietary systems are supported by patents and patent applications. The Companys corporate offices, research and development and Predictive Diagnostics, Inc. are headquartered in Vacaville, California. The Companys biomanufacturing
operation is located in Owensboro, Kentucky.



The Company
incurred net losses of $12,566,000 and $25,293,000, and negative operating cash flows of $11,287,000 and $15,207,000 in the nine months ended September 30, 2004 and the year ended December 31, 2003, respectively. These negative cash flows were
financed primarily by proceeds from the Companys IPO in 2000 and a private placement of our common stock during the first quarter of 2004. The Companys history of negative cash flows and its cash and cash equivalent balance of $3,886,000
at September 30, 2004, raise substantial doubt about the Companys ability to continue as a going concern, absent any new sources of significant cash flows. In an effort to mitigate this near-term concern, the Company is seeking to obtain loan
financing as part of a broader investment initiative involving the Companys biomanufacturing operations in Owensboro, Kentucky. However, obtaining this financing is subject to factors beyond our control and we cannot assure you that we will
successfully obtain it. In addition, we are in the process of financing our subsidiary, PDI and negotiating to secure funds for the Company through a sale of PDI stock held by the Company or a sale of assets by the Company to PDI. In addition, we
are seeking to obtain a loan for the Company in connection with the PDI financing. A successful PDI-related financing may not only improve our balance sheet, but also reduce ongoing expenses as PDI becomes a separate operation. We cannot assure you
that these transactions involving PDI will be consummated or that they will result in short or long-term cash flow to the Company. The Company is also pursuing opportunities for significant revenue growth and concurrent sources of working capital
with other companies for the joint development and commercialization of recombinant Aprotinin and Interferon alpha 2a and 2b 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 regulations. 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.



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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, 2003 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 ended
December 31, 2004.



Segment Reporting  The Company
operates in one reportable segment.



Workforce
Reductions  In connection with our 2003 restructuring plans and staff reductions, we accrued $1,401,000 for severance payments and other related termination benefits provided to employees. Of this amount, $860,000 was paid during 2003,
resulting in $541,000 in accrued expenses at December 31, 2003. We accrue for these benefits in the period when benefits are communicated to the terminated employees. Typically, terminated employees are not required to provide continued service to
receive termination benefits. In general, we use a formula based on the number of years of service to calculate the termination benefits to be provided to affected employees. During the nine months ended September 30, 2004, former employees were
paid $470,000 under the 2003 workforce reduction programs, resulting in $71,000 in accrued expenses at September 30, 2004. This amount is expected to be paid during the remainder of 2004.



Intangible Assets  The following table presents the carrying values and accumulated amortization of intangible
assets as of September 30, 2004:



|                               |  |   |            |  
|------------------------------ |  | - | ---------- | -
|Capitalized patent costs       |  | $ | 2,195,000  |  
|Intellectual property licenses |  |   | 3,264,000  |  
|                               |  |   |            |  
|                               |  |   | 5,459,000  |  
|Accumulated amortization       |  |   | (2,771,000 | )
|                               |  |   |            |  
|                               |  | $ | 2,688,000  |  
|                               |  |   |            |  



Stock-Based
Compensation  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, the Company recognized compensation expense for those issuances under our stock-based employee
compensation plans. For stock awards granted prior to January 1, 2003, compensation expense has not been recognized under SFAS 123, unless those stock awards were modified after January 1, 2003.



Prior to January 1, 2003, the Company accounted 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 (APB 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.



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The following table presents the effect on net loss and net loss per share if we had applied the fair
value recognition provisions of SFAS 123 to all stock-based awards to employees:



|                                                                                                |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|----------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                |  | Three Months EndedSeptember 30, |            |   | Nine Months Ended September 30, |  
|                                                                                                |  | 2004                            |            |   | 2003                            |   |            | 2004 |  |   | 2003        |  
|Net loss as reported                                                                            |  | $                               | (4,171,000 | ) |                                 | $ | (4,306,000 | )    |  | $ | (12,566,000 | ) |  | $ | (18,148,000 | )
|Stock-based employee compensation expense included in reported net loss                         |  |                                 | 307,000    |   |                                 |   | 247,000    |      |  |   | 698,000     |   |  |   | 816,000     |  
|Stock-based employee compensation expense determined using the fair value method for all awards |  |                                 | (630,000   | ) |                                 |   | (702,000   | )    |  |   | (1,749,000  | ) |  |   | (4,142,000  | )
|                                                                                                |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Pro forma net loss                                                                              |  | $                               | (4,494,000 | ) |                                 | $ | (4,761,000 | )    |  | $ | (13,617,000 | ) |  | $ | (21,474,000 | )
|                                                                                                |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Net loss per share:                                                                             |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Basic and diluted  as reported                                                                 |  | $                               | (0.13      | ) |                                 | $ | (0.17      | )    |  | $ | (0.42       | ) |  | $ | (0.71       | )
|                                                                                                |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  
|Basic and diluted  pro forma                                                                   |  | $                               | (0.14      | ) |                                 | $ | (0.18      | )    |  | $ | (0.46       | ) |  | $ | (0.84       | )
|                                                                                                |  |                                 |            |   |                                 |   |            |      |  |   |             |   |  |   |             |  



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 or 4 years for the calculation of stock-based employee compensation in the above table. The Company
granted 539,000 and 1,259,500 stock options to employees and directors during the nine months ended September 30, 2004 and 2003, 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 309 and 27,026 for the three months ended September 30, 2004 and 2003,
respectively, and 551,484 and 16,974 for the nine months ended September 30, 2004 and 2003, respectively. These shares are excluded from diluted net loss per share because of their anti-dilutive effect.



2. Operating Leases



The following table presents future non-cancelable minimum payments under all of the Companys operating leases as of
September 30, 2004:



|                    |  |                |           |                 |   |            |                    |  |   |          
|------------------- |  | -------------- | --------- | --------------- | - | ---------- | ------------------ |  | - | ---------
|                    |  | Minimum Rental |           | Sublease Rental |   |            | Net Rental Expense
|2004 (three months) |  | $              | 370,000   |                 | $ |           |                    |  | $ | 370,000  
|2005                |  |                | 1,525,000 |                 |   | (649,000   | )                  |  |   | 876,000  
|2006                |  |                | 1,578,000 |                 |   | (830,000   | )                  |  |   | 748,000  
|2007                |  |                | 1,633,000 |                 |   | (855,000   | )                  |  |   | 778,000  
|2008                |  |                | 1,690,000 |                 |   | (881,000   | )                  |  |   | 809,000  
|Thereafter          |  |                | 1,985,000 |                 |   | (1,842,000 | )                  |  |   | 143,000  
|                    |  |                |           |                 |   |            |                    |  |   |          
|                    |  | $              | 8,781,000 |                 | $ | (5,057,000 | )                  |  | $ | 3,724,000
|                    |  |                |           |                 |   |            |                    |  |   |          



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##### Table of Contents

During August 2004 the Company entered into a sublease of its entire Germantown, Maryland facility to the
end of the lease term in 2010 that will reduce the Companys operating lease commitments. Associated facility operating expenses were reduced by approximately $16,000 per month starting during August 2004. In addition, the sublease receipts
will be greater than the lease payments by $9,000 per month starting on March 11, 2005. Theses expected sublease receipts are reflected in the table above to the extent that they offset the Germantown, Maryland minimum rental payments.



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, 2003 included in our Annual Report on Form 10-K.



Introduction



Our current efforts are focused on improving cash flows, developing and manufacturing products and entering into
relationships to market and sell our products. Managements objective is to manufacture and sell products in order to generate sufficient cash flows to sustain our operations. Our cash balance was $3.9 million at September 30, 2004. We have
incurred negative operating cash flows of $11.3 million during the first nine months of 2004 and $15.2 million during the full year of 2003. The current rate of cash usage is not sustainable into 2005 without additional funding through
collaborations, debt or equity financing, or disposition of assets. In an effort to mitigate this near-term concern, we are seeking to obtain loan financing as part of a broader investment initiative involving our biomanufacturing operations in
Owensboro, Kentucky. However, obtaining this financing is subject to factors beyond our control and we cannot assure you that we will successfully obtain it. In addition, we are in the process of financing our subsidiary, PDI and negotiating to
secure funds for the Company through a sale of PDI stock held by the Company or a sale of assets by the Company to PDI. In addition, we are seeking to obtain a loan for the Company in connection with the PDI financing. A successful PDI related
financing may not only improve our balance sheet, but also reduce ongoing expenses as PDI becomes a separate operation. We cannot assure you that these transactions involving PDI will be consummated or that they will result in short or long-term
cash flow to the Company. We are also pursuing opportunities for revenue growth and concurrent sources of working capital with other companies for the joint development and commercialization of recombinant Aprotinin and Interferon alpha 2a and 2b
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 regulations. We cannot assure you that we will be able to secure such opportunities or that such opportunities will generate sufficient revenues to sustain our operations.



Recent Developments



We have completed the feasibility phase of the research collaboration with Schering-Plough Animal Health Corporation
(Schering-Plough) producing three biological active vaccines in sufficient quantities for animal testing. We expect to expand the commercial program during the next several quarters. If Schering-Plough decides to proceed with any of
these potential products, after testing and regulatory approval that is expected to take approximately two years, we may have product sales.



We closed our Germantown, Maryland facility and equipment located at this facility was redeployed, disposed of or sold. Equipment with a net book value of
$0.2 million and a gross book value of $2.8 million, was disposed of or sold, generating $0.2 million of cash. During August 2004 we entered into a sublease of our entire Germantown, Maryland facility to the end of the lease term in 2010. Associated
facility operating expenses were reduced by approximately $16,000 per month starting during August 2004. In addition, the sublease receipts will be greater than the lease payments by $9,000 per month starting on March 11, 2005.



We shipped our first plant-produced recombinant product, research-grade
Aprotinin, to Sigma-Aldrich Fine Chemicals Corporation, a division of Sigma-Aldrich Corporation. Aprotinin is a protease inhibitor commercially marketed for medical, research and biomanufacturing applications. We believe that this is the initial
step for meeting our objective to manufacture and sell products and generate sufficient cash flows to sustain our operations. We expect limited 2004 results from our efforts to sell research-grade Aprotinin as end-users evaluate our product. Also,
the market for non-pharmaceutical applications of aprotinin is significantly smaller than our ultimate target market, aprotinin for injection used in surgical applications.



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Results of Operations



Revenues The following table presents the changes in revenues from 2003 to 2004:



|         |  |                                  |         |      |                                 |                      |  |   |          |   |      |     |                      |  |   |           |  |   |           |  |   |            |   |  |     |   
|-------- |  | -------------------------------- | ------- | ---- | ------------------------------- | -------------------- |  | - | -------- | - | ---- | --- | -------------------- |  | - | --------- |  | - | --------- |  | - | ---------- | - |  | --- | --
|         |  | Three Months Ended September 30, |         |      | Nine Months Ended September 30, |                     
|         |  | 2004                             |         | 2003 |                                 | (Decrease) from 2003 |  |   | 2004     |   | 2003 |     | (Decrease) from 2003 | 
|Revenues |  | $                                | 523,000 |      | $                               | 1,192,000            |  | $ | (669,000 | ) |      | (56 | )%                   |  | $ | 1,204,000 |  | $ | 2,949,000 |  | $ | (1,745,000 | ) |  | (59 | )%



The revenue decrease
is a result of exiting the fee-for-service proteomics business and winding down our contract with The National Institute of Environmental Health Services (NIEHS) that was completed on December 31, 2003. We expect modest quarterly
increases in sales of our research-grade Aprotinin product continuing through the first quarter of 2005. However, we believe that the revenue increases from this source alone will not be sufficient to significantly offset our current losses and
negative cash flows.



Development agreementsandresearch and development costs  The following table presents the changes in total research activities from 2003 to 2004:



|                          |  |                                  |           |      |                                 |                      |  |   |            |   |      |     |                      |  |   |           |  |   |            |  |   |            |   |  |     |   
|------------------------- |  | -------------------------------- | --------- | ---- | ------------------------------- | -------------------- |  | - | ---------- | - | ---- | --- | -------------------- |  | - | --------- |  | - | ---------- |  | - | ---------- | - |  | --- | --
|                          |  | Three Months Ended September 30, |           |      | Nine Months Ended September 30, |                     
|                          |  | 2004                             |           | 2003 |                                 | (Decrease) from 2003 |  |   | 2004       |   | 2003 |     | (Decrease) from 2003 | 
|Development agreements    |  | $                                | 647,000   |      | $                               | 1,265,000            |  | $ | (618,000   | ) |      | (49 | )%                   |  | $ | 1,669,000 |  | $ | 3,445,000  |  | $ | (1,776,000 | ) |  | (52 | )%
|Research & development    |  |                                  | 2,304,000 |      |                                 | 2,755,000            |  |   | (451,000   | ) |      | (16 | )%                   |  |   | 6,823,000 |  |   | 8,761,000  |  |   | (1,938,000 | ) |  | (22 | )%
|                          |  |                                  |           |      |                                 |                      |  |   |            |   |      |     |                      |  |   |           |  |   |            |  |   |            |   |  |     |   
|Total research activities |  | $                                | 2,951,000 |      | $                               | 4,020,000            |  | $ | (1,069,000 | ) |      | (27 | )%                   |  | $ | 8,492,000 |  | $ | 12,206,000 |  | $ | (3,714,000 | ) |  | (30 | )%
|                          |  |                                  |           |      |                                 |                      |  |   |            |   |      |     |                      |  |   |           |  |   |            |  |   |            |   |  |     |   



Development agreements
and research and development costs consist mainly of personnel expenses, outside research services, research materials and laboratory overhead costs. Development agreement costs, as they related to activities performed under revenue
generating research agreements and grants, have and are expected to fluctuate consistently with increases or decreases in revenues earned from research agreements and grants. The decrease in development agreement expense from 2003 to 2004 is
attributed to a $0.8 million and $2.3 million decrease in development agreement activities during the three and nine months ended September 30, respectively, related to the wind down of the NIEHS contract that was completed on December 31, 2003,
partially offset by increased efforts performed under other commercial contracts and grants. We expect development agreement expense in the fourth quarter of 2004 to be materially consistent with the third quarter of 2004.



The decrease in research and development expense from 2003 to 2004 is
primarily attributable to our cost reduction efforts that were implemented in June and December 2003. For the three months ended September 30, employee compensation and benefits expenses decreased by $0.1 million as a result of headcount reductions,
and outside consulting expense decreased by $0.1 million. In addition, non-cash depreciation and amortization expenses for capital and intangible assets decreased by $0.2 million. For the nine months ended September 30, cost reduction efforts
resulted in decreases of employee compensation and benefit expense by $0.8 million, outside consulting expense by $0.2 million and material purchases by $0.1 million. In addition, non-cash depreciation and amortization expenses for capital and
intangible assets decreased by $0.8 million. We expect research and development expense in the fourth quarter of 2004 to be materially consistent with the third quarter of 2004.



General and administrative The following table presents the changes in general and administrative expenses
from 2003 to 2004:



|                           |  |                                  |           |      |                                 |                    |  |   |         |  |      |   |                      |   |           |  |   |           |  |   |            |   |  |     |   
|-------------------------- |  | -------------------------------- | --------- | ---- | ------------------------------- | ------------------ |  | - | ------- |  | ---- | - | -------------------- | - | --------- |  | - | --------- |  | - | ---------- | - |  | --- | --
|                           |  | Three Months Ended September 30, |           |      | Nine Months Ended September 30, |                   
|                           |  | 2004                             |           | 2003 |                                 | Increase from 2003 |  |   | 2004    |  | 2003 |   | (Decrease) from 2003 |  
|General and administrative |  | $                                | 1,761,000 |      | $                               | 1,511,000          |  | $ | 250,000 |  | 17   | % |                      | $ | 5,325,000 |  | $ | 7,292,000 |  | $ | (1,967,000 | ) |  | (27 | )%



The increase in
general and administrative expense for the three months ended September 30 is attributable to $0.4 million of costs related to our Germantown, Maryland facility being recorded as general and administrative expense in 2004, rather than cost of
development agreements as in 2003. This was the result of exiting the fee-for-service proteomics business at the end of 2003 and closing the Germantown, Maryland facility. This increase in general and administrative expense was partially offset by
$0.1 million of decreased non-cash compensation costs.



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For the nine months ended September 30, $0.7 million of costs related to our Germantown, Maryland
facility were recorded as general and administrative expense in 2004, rather than cost of development agreements as in 2003. However, decreases in general and administrative costs attributable to cost reduction efforts and certain charges incurred
during 2003 offset this increase in expense. Cost reduction efforts resulted in decreases of employee compensation and benefit expense by $0.2 million, outside consulting expense by $0.1 million and travel and entertainment expense by $0.1 million.
In addition, insurance costs decreased by $0.1 million, non-cash depreciation expense decreased by $0.1 million and employee non-cash compensation costs decreased by $0.3 million. Charges incurred only during 2003 included $1.1 million for severance
benefits related to headcount reductions, $0.2 million for the write-off of capitalized patent costs, $0.2 million for loss on sale of equipment and $0.2 million for a provision for doubtful accounts receivable.



We expect general and administrative expense in the fourth quarter of 2004 to
be approximately the same as the third quarter of 2004. The remaining operating costs of our Germantown, Maryland facility are expected to be approximately $0.2 million in each of the fourth quarter of 2004 and first quarter of 2005. The sublease
receipts will offset the Germantown, Maryland rent expense starting in the second quarter of 2005 to the end of the lease term in 2010.



Impairment of property During the first quarter of 2003, the carrying value of leasehold improvements at our Germantown, Maryland operations
was written-down. 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. We did not incur any impairment charges during the first nine months of 2004.



Liquidity and Capital Resources



Net cash
used in operating activities  The following table presents cash flows from operating activities for the first nine months of 2004 and 2003:



|                                           |  |                                 |             |   |      |   |             |  
|------------------------------------------ |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                           |  | Nine Months Ended September 30, |            
|                                           |  | 2004                            |             |   | 2003 |  
|Cash paid to employees                     |  | $                               | (5,204,000  | ) |      | $ | (7,282,000  | )
|Cash paid to suppliers                     |  |                                 | (7,253,000  | ) |      |   | (7,310,000  | )
|                                           |  |                                 |             |   |      |   |             |  
|Total cash paid to employees and suppliers |  |                                 | (12,457,000 | ) |      |   | (14,592,000 | )
|Cash received from customers               |  |                                 | 1,123,000   |   |      |   | 2,555,000   |  
|Net interest received                      |  |                                 | 47,000      |   |      |   | 310,000     |  
|                                           |  |                                 |             |   |      |   |             |  
|Net cash used in operating activities      |  | $                               | (11,287,000 | ) |      | $ | (11,727,000 | )
|                                           |  |                                 |             |   |      |   |             |  



The decrease innet
cash used in operating activities for the first nine months of 2004 compared to 2003 is the result of the decrease in total cash paid to employees and suppliers.This decreased usage of cash exceeded the decrease in cash received from
customers, which decreased primarily because of the wind down of the NIEHS contract that was completed on December 31, 2003. The decrease in total cash paid to employees and suppliers is the result of our 2003 cost reduction program and
reorganizations. Specifically, workforce reductions decreasedcash paid to employees by $2.1 million.



We expect our negative operating cash flows to continue throughout 2004 at a similar quarterly rate as over the first nine months of 2004. However, the
current rate of cash usage is not sustainable into 2005 without additional funding through collaborations, debt or equity financing, or disposition of assets. Our ability to continue as a going concern and develop our products will depend on
obtaining funding in the fourth quarter of 2004. In an effort to mitigate this near-term concern, we are seeking to obtain loan financing as part of a broader investment initiative involving our biomanufacturing operations in Owensboro, Kentucky.
However, obtaining this financing is subject to factors beyond our control and we cannot assure you that we will successfully obtain it. In addition, we are in the process of financing our subsidiary, PDI and negotiating to secure funds for the
Company through a sale of PDI stock held by the Company or a sale of assets by the Company to PDI. In addition, we are seeking to obtain a loan for the Company in connection with the PDI financing. A successful PDI related financing may not only
improve our balance sheet, but also reduce ongoing expenses as PDI becomes a separate operation. We cannot assure you that these transactions involving PDI will be consummated or that they will result in short or long-term cash flow to the Company.
We are also pursuing opportunities for revenue growth and concurrent sources of working capital with other companies for the joint development and commercialization of recombinant Aprotinin and Interferon alpha 2a and 2b 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
regulations.



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##### Table of Contents

Net cash used in investing activities We purchased $0.8 million of equipment during the
first nine months of 2004, of which $0.4 million had not been paid and recorded in accounts payable at September 30, 2004. Additional capital expenditures may be required upon entering into new collaborative agreements. Such requirements will be
funded from the proceeds of corporate financing and/or partnering collaboration sources.



Net cash provided by financing activities In 2000 we received net proceeds of $88.8 million from our initial public offering, which has sustained our operations since that time. On March 8, 2004, we
received net proceeds of approximately $7.5 million from a private placement of our common stock. These funds combined with our existing resources and anticipated revenues and financings, are expected to sustain our operations through 2004. Although
we are seeking to obtain loan financing as part of a broader investment initiative involving our biomanufacturing operations in Owensboro, Kentucky to sustain operations in 2005, we will require substantial additional working capital to continue our
product development programs and to fund our future operations. In addition, we are in the process of financing our subsidiary, PDI and negotiating to secure funds for the Company through a sale of PDI stock held by the Company or a sale of assets
by the Company to PDI. In addition, we are seeking to obtain a loan for the Company in connection with the PDI financing. We cannot assure you that these transactions involving PDI will be consummated or that they will result in short or long-term
cash flow to the Company. Further, we cannot assure you that our efforts to obtain additional funding to sustain our future operations or product development programs will be successful.



Commitments



During August 2004 we entered into a sublease of our entire Germantown, Maryland facility to the end of the lease term in 2010 that will reduce our
operating lease commitments starting on March 11, 2005. We are still legally obligated for lease payments if the subtenant should default upon its payments to us. The following table presents future non-cancelable minimum payments under operating
leases, the portion of sublease rental receipts that offset the Germantown, Maryland facility lease obligation and the net rental expense obligation as of September 30, 2004:



|                              |  |                 |  |               |   |  |               |   |  |            |   |  |            |  
|----------------------------- |  | --------------- |  | ------------- | - |  | ------------- | - |  | ---------- | - |  | ---------- | -
|                              |  | Payments Due    | 
|                              |  | 2004 (3 months) |  | 2005 and 2006 |   |  | 2007 and 2008 |   |  | Thereafter |   |  | Total      |  
|Minimum rental obligation     |  | 370,000         |  | 3,103,000     |   |  | 3,323,000     |   |  | 1,985,000  |   |  | 8,781,000  |  
|Sublease rental               |  |                |  | (1,479,000    | ) |  | (1,736,000    | ) |  | (1,842,000 | ) |  | (5,057,000 | )
|                              |  |                 |  |               |   |  |               |   |  |            |   |  |            |  
|Net rental expense obligation |  | 370,000         |  | 1,624,000     |   |  | 1,587,000     |   |  | 143,000    |   |  | 3,724,000  |  
|                              |  |                 |  |               |   |  |               |   |  |            |   |  |            |  



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.



Long-Lived Assets  Our long-lived assets include capitalized costs of filing patent applications, capitalized
licenses and property and equipment. We evaluate 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. Estimates of future cash flows and timing of events for evaluating long-lived assets for impairment are based upon managements judgment. If any of our intangible or long-lived
assets are considered to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value.



All long-lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate
revenue, or 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.



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Stock-Based Compensation We adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation effective as of January 1, 2003 for our 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, we recognized compensation expense for those issuances under our stock-based employee compensation plans. Methodologies used for calculations such as the Black-Scholes option-pricing model and variables
such as volatility and expected life are based upon managements judgment. Such methodologies and variables are reviewed and updated periodically for appropriateness and affect the amount of recorded charges.



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 not sufficient to fund our operations or all of our product development initiatives.



We have realized significant net losses and negative operating cash flows in recent years and in the nine months ended September 30, 2004. Our working
capital balance at September 30, 2004 was $3.5 million. Based upon our current working capital balance, our current rate of negative operating cash flows and the expected cost to complete the development of our products, we cannot assure you that
the Company will be able to continue as a going concern.



Our
revenues for the nine months ended September 30, 2004 and for the year ended December 31, 2003 were not significant. We may be required to further reduce our operating costs by further restructuring our operations or reducing the scope of our
development programs. These actions would adversely affect our ability to generate new sources of revenue. If we are unable to significantly increase our revenues and cash received from customers, 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 need to continue funding our product development programs. Our recombinant Aprotinin, Alpha-galactosidase A, and Interferon alpha 2a and 2b products
require clinical trials to prove their efficacy and safety for pharmaceutical applications. We do not have sufficient working capital to complete all phases of clinical trials. Our PDI subsidiary requires funding for its start-up activities. If we
are unable to raise sufficient financing or collaborative funding, we may delay or abandon some of our product development initiatives, which would likely harm our business.



We require additional capital to continue as a going concern.



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 or platforms, such as recombinant Aprotinin, Alpha-galactosidase A, and Interferon alpha 2a and 2b and our BAMF technology-based diagnostic tests
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. We cannot assure you that we
will be able to obtain additional financing on commercially reasonable terms, if at all. Our recent operating results and our current stock price may limit our ability to raise capital by selling and issuing additional equity securities. If
additional funds are raised through the issuance of equity securities or convertible debt securities, the percentage ownership of our then-current stockholders would be reduced and the value of their investments might decline. In addition, any new
securities issued might have rights, preferences or privileges senior to those securities held by our existing stockholders. If we raise additional funds through the issuance of debt, we might become subject to restrictive covenants or high rates of
interest, and our assets could become encumbered, which would limit our ability to borrow in the future. We may be unsuccessful in entering into any new collaboration or strategic partnership that results in significant working capital or revenue.
Further, any significant revenues we generate from such collaborations or partnerships may not be realized for several quarters or years, as regulatory approval and other matters could impede commercialization of these products. If we are unable to
raise sufficient additional capital, we may have to curtail or cease operations.



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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,
biotechnology and other companies. For example, our strategy concerning our recombinant Aprotinin, Alpha-galactosidase A, Interferon alpha 2a and 2b and our BAMF technology-based diagnostic tests involves seeking partners to complete the development
and commercialization 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 our rights to certain technologies, product candidates or products that we
would otherwise seek to develop or commercialize on our own, or to sell or license our rights to certain 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. 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 us not being able 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 a number of our senior management or other key scientific personnel could significantly harm our business, cause collaborators to cease doing business with us, cause potential collaborators to decline to
do business with us, or inhibit our research and development and commercialization efforts. None of our key personnel are subject to employment agreements that prevent them from leaving our employment. 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. Our compensation practices may be less attractive compared to our competition. Failure to recruit and retain senior management and scientific personnel on acceptable terms may prevent us from achieving our business objectives.



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. For instance, we believe that our NHL vaccine, which is ready for Phase II trials, cannot be further developed without collaboration. The prospects for development of our
Alpha-galactosidase A, recombinant Aprotinin, Interferon alpha 2a and 2b products and our BAMF technology-based diagnostic tests are limited without collaboration or partnering support. Because we are in new and developing fields such as diagnostic
tests for disease, 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 GENEWARE and BAMF 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, health care, 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 GENEWARE systems and BAMF technology. 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 may 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 previous slowdown in the U.S. and global economies, and the biotechnology and pharmaceutical industries in particular, has caused potential collaborators and customers to defer
decisions to work with us or to access our technologies. As a result, revenues and cash flows have been uncertain. Future results are difficult to predict, as it is difficult to accurately assess and predict the future demand for our products,
technologies and services. General economic conditions are expected to improve as the economy grows. However, we cannot assure you that any such improvement will cause our results of operations to improve. If economic conditions decline or stagnate,
our revenues and operating results could be adversely affected.



Conflicts with collaborators or licensees could harm our business.



Conflicts with collaborators could have a negative impact on our relationships with them, and our revenues to be derived from these relationships, and impair our ability to enter into future collaborations, all 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 expand our business development force with sufficient technical expertise to generate demand for our products and technologies. Our possible inability to hire business development personnel, or contract for effective
sales and marketing capabilities would significantly impair our ability to 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 and diagnostic tests for diseases, such as cancer, 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 22% of our outstanding common stock as of November 5, 2004. 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.



Risks Related to Our Industry



If companies in the pharmaceutical, biotechnology, healthcare, 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, healthcare 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 diagnostics, 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.
| | - | -----------------------------------------------------



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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.



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.



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



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



Drugs and certain
diagnostic products and tests are subject to an extensive and uncertain regulatory approval process by the FDA and comparable agencies in other countries. The regulation of new products and certain diagnostic products and tests 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 or diagnostic tests 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 or tests 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, test or manufacturer may result in restrictions on the product, test, manufacturer or manufacturing facility, including withdrawal of the product or test from
the market. In some countries, regulatory agencies also set or approve the sale prices for drug and diagnostic products and tests. 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 drug and diagnostic products, tests, and related clinical procedures remain uncertain and the products and tests 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 and tests.



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.



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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 and diagnostic tests 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 and diagnostic tests 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; 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 and diagnostic tests.



Our ability and that of our collaborators to commercialize therapeutics and diagnostic products and tests 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 and tests. These third parties are increasingly challenging both the need for and the price of new medical products, tests and services. Significant uncertainty exists as to the
reimbursement status of newly approved therapeutics and diagnostics, and adequate third party reimbursement may not be available for any product to enable us to maintain price levels sufficient to realize an appropriate return on our investment in
research and product development.



Risks Related to Our Intellectual
Property



Patent protection in the biotechnology,
pharmaceutical, and healthcare industries 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, healthcare, and diagnostics 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 and diagnostic tests 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.



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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 offering to negotiate a license to LSBC based on a perception that our processes or products might infringe a patent owned by the third party. Disagreements could arise from these letters, and could result in costly and
time-consuming litigation and divert 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 file
patent applications 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 our proprietary products, processes, and diagnostic products and tests held by others may limit our
proprietary rights.



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, diagnostic tests 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 and diagnostic tests.



The
technology that we use to develop our products, diagnostic tests and key resources, and those that we incorporate into our products, diagnostic tests 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 and diagnostic test 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 generic drug, vaccine, diagnostic, health care and the biotechnology industry
expand, more patents are issued and other companies engage in other generic drug, vaccine, diagnostics and biotechnology-related businesses.



With respect to identifying proteins uniquely associated with disease states or as targets for drug therapy, we are aware that companies have published
patent applications relating to nucleic acids encoding specific proteins. We are also aware of issued and pending patent applications covering certain aspects of bioinformatic-based diagnostic testing. The issued patents by the U.S. Patent and
Trademark Office to these companies, 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.
| | - | --------------------------------------------------------------------



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



Information regarding our exposures to market risks is provided in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2003. There
have been no material changes to our exposures to market risk since December 31, 2003.



Item 4. Controls and Procedures



(a) Disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report on Form 10-Q, have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were adequate and designed to ensure that information
related to us and our consolidated subsidiaries would be made known to them by others within these entities.



(b) Changes in internal controls over financial reporting. During the second quarter of fiscal year 2004, there were no changes in our internal
controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.



PART II  OTHER INFORMATION



Item 6. Exhibits



List of
Exhibits:



|              |  |                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title or Description                                                                                                                          
|10.1          |  | Agreement of Sublease between Registrant and Advancis Pharmaceutical Corporation, dated August 4, 2004 and related agreements.                        
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.                                                   
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.                                                   
|              | 
|32.1          |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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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 15, 2004 |  | By:                             |  | /s/ Ronald J. Artale                                                                                    
|                        |  |                                 |  | Ronald J. Artale                                                                                        
|                        |  |                                 |  | Senior Vice President, Chief Operating Officer and
Chief Financial Officer (Principal Financial Officer)



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Exhibit Index



|              |  |                                                                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Title or Description                                                                                                                          
|10.1          |  | Agreement of Sublease between Registrant and Advancis Pharmaceutical Corporation, dated August 4, 2004 and related agreements.                        
|              | 
|31.1          |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.                                                   
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.                                                   
|              | 
|32.1          |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



20